January 25, 2001, was a turning point in the history of modern U.S. economic policy. That was the day Federal Reserve Chairman Alan Greenspan gave his thumbs-up to President George W. Bush's ambitious tax-cutting agenda. When Greenspan spoke, Bush had been President for all of five days. And many lawmakers, especially Senate moderates, were waiting to take their cue from the chairman on this critical fiscal-policy choice.
Greenspan gave the go-ahead to huge tax reductions, admittedly with a handful of caveats and concerns. Lawmakers took his endorsement and ran with it -- conveniently ignoring his warnings about a potential return to floods of red ink. And three giant tax cuts, a recession, and a spending binge later, a projected 10-year surplus of more than $5 trillion has turned into an expected $3.6 trillion 10-year deficit.
ABOVE THE FRAY? Don't expect such a watershed moment any time soon from Ben Bernanke, Bush's choice to replace Greenspan at the top Fed job [see "Bernanke Gets His Chance"]. Bernanke, a former Fed governor who's currently chairman of Bush's Council of Economic Advisers, is a monetary-policy expert by both training and temperament. And he'll be much more likely to stick to his knitting at the Fed than Greenspan has been in recent years [see "Greenspan's Signature Achievement"].
Of course, Bernanke will issue the standard central-banker warnings about deficits, should they again get uncomfortably high. But he's no more likely to jump into Congress' tax-and-spending debates than he is to try to work out the ongoing labor dispute between General Motors (GM) and the United Autoworkers Union.
Make no mistake: Like most mainstream economists, Bernanke believes lower taxes are better than higher taxes, with all else equal. He also believes the government's long-run unfunded obligations for Social Security, Medicare, and Medicaid present a major policy challenge for the Fed as well as Congress and the President [see "Answers About Ben Bernanke"].
DIFFERENT ROLE. But unlike the oracular Greenspan -- who in recent years increasingly was willing to mix it up over everything from Social Security reform to the regulation of Fannie Mae (FNM) to the need for investment-oriented tax cuts -- the low-key Bernanke will leave fiscal wars to the politicians.
Some on the Left worry that because Bernanke promoted tax cuts as Bush's CEA chief, he'll do the same at the Fed. But flogging the President's economic policy is the CEA chairman's job. At the same time, anti-tax conservatives fear he won't be a strong enough voice for big tax reductions. They're likely to be more disappointed than the liberals.
Bernanke is known to feel strongly that it's critical to maintain the Fed's independence from the White House. Once he's settled in the job, don't expect him to do Bush any favors.
MAYBE LATER. Widely considered a data-driven guy who belongs to no "school" of economics, Bernanke has no fiscal-policy axe to grind. And he emphatically considers himself no politician. Indeed, he's far less comfortable with the political give-and-take than are many of his predecessors at the Fed or even many of those who served in the CEA job in recent years [see "Economists' Take on Bernanke"].
Perhaps after his first decade on the job, Bernanke will become more outspoken on fiscal policy and other matters. After all, there was a time when even the Washington-savvy Greenspan demurred when asked about tax-and-spending policy. But at least for a while, Bernanke's pronouncements are more likely to focus on inflation than the pros and cons of the alternative minimum tax.