- The Washington Times - Thursday, November 11, 2004

At Arthur Laffer’s postelection conference in New York, a couple hundred supply-side optimists spontaneously decided to support Glenn Hubbard for the Federal Reserve chairmanship in the post-Greenspan period that begins in 2006.

Bush administration insiders believe the choice will boil down to Mr. Hubbard or Martin Feldstein. Two smart guys with tremendous credentials.

However, many recall Mr. Feldstein’s mixed tenure as chairman of the Council of Economic Advisers under President Reagan. After writing many fine articles about the benefits of lower tax rates, and after pointing out flaws in the Social Security system and health-care entitlements, Mr. Feldstein, upon taking office, started crusading for higher taxes to narrow the budget deficit.

Mr. Feldstein worked with Office of Management and Budget Director David Stockman, White House bigwig Richard Darman, and New York banker Pete Peterson to press for a tax-increase “solution.” It was virtually a fifth column in 1982.

Mr. Reagan refused to budge on tax rates, though he did allow some tax-loophole closers in return for spending cuts that never materialized. In 1986, however, he signed tax-reform legislation that designated only two tax brackets, at 15 percent and 28 percent. (That’s not a bad model for George W. Bush’s second-term tax-reform quest.)

Mr. Feldstein is a Harvard economics professor and president of the prestigious National Bureau of Economic Research. His writings over the years have been terrific. Yet suspicion lingers that his work out-of-office is more reliable than in-office.

Nowadays, when Fed chairmen testify on Capitol Hill, they are forced to talk at length about fiscal policy, especially budget deficits. House or Senate members seldom provide much ammunition for restraint of spending. The conversation almost always concerns raising taxes.

Fed Chairman Alan Greenspan has generally done a good job fending off proposed tax-increases that would curb economic growth and actually widen the deficit. As a rule, this is poorly reported in the press. The maestro has also strongly supported President Bush’s lower marginal tax rates on personal income, capital gains and dividends. No one doubts Glenn Hubbard would similarly defend pro-growth tax reform as Fed chairman.

While Mr. Bush’s top economic adviser, Mr. Hubbard was an unyielding proponent of the incentive power of lower tax rates to grow the economy. Mr. Hubbard pressed harder than anyone in the White House for cutting the multiple taxation of investment. This made excellent sense. The stock market and business investment were hit hard by the recession Mr. Bush inherited. With the Mr. Hubbard’s help, Vice President Dick Cheney, and a number of economic advisers outside the administration, lower taxes on individual income, small business, investor dividends and capital gains were embraced by the president and signed in the tax bill of June 2003. The results have been stellar.

In a recent Wall Street Journal op-ed article, Mr. Hubbard emphasized the positive results of lower marginal tax rates on work, saving, and risk-taking, linking lower “success taxes” to entrepreneurship and innovation. Once again, his steadfast and unyielding support of supply-side tax reform commends him strongly for the Fed job.

As for the deficit problem, Mr. Hubbard agrees with Mr. Bush that the solution lies in maximizing economic growth, restraining discretionary domestic spending and reforming major entitlement programs. While little is known about Mr. Hubbard’s monetary views, he certainly would not be tolerant of rising inflation. As a pro-market economist, Mr. Hubbard would probably make ample use of financial- and commodity-market price signals to guide his monetary strategy.

According to people close to the White House, current Council of Economic Advisers Chairman Greg Mankiw will return to teaching at Harvard in January. This leaves a key slot open in the Bush economic high command. The president would be well served by appointing Art Laffer to that post. Formerly a close adviser to President Reagan, Mr. Laffer has been a senior adviser to businesses and financial institutions for more than three decades. His hands-on real-world experience would greatly benefit the White House staff as it tackles tough questions on tax and Social Security reform. Mr. Laffer would also be a key liaison to Wall Street, where he is highly regarded as a prescient forecaster and strong communicator.

Washington insiders also believe Treasury Secretary John Snow will remain in his post at least through mid-2005, and maybe longer. Mr. Snow was a senior member of Jack Kemp’s tax-reform commission in the ‘90s and has detailed knowledge of the subject. He has long argued for lower tax burdens on saving and investment, thereby agreeing with Mr. Bush’s view that the double-taxation of capital is just plain bad for economic growth and job creation. As a former railroad chief executive officer, Mr. Snow would likely press for reform of the increasingly uncompetitive U.S. corporate tax code.

With Messrs. Hubbard, Laffer and Snow in the mix, Mr. Bush’s ambitious second-term economic agenda will have a much greater chance of success than most inside-the-Beltway pundits believe possible.

Lawrence Kudlow is a nationally syndicated columnist and is chief executive officer of Kudlow & Co., LLC, and CNBC’s economics commentator.

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