Clearly, Alan Greenspan departs the Fed with a strong economic legacy intact. During his 18-year tenure, yearly real economic growth averaged 3.1 percent, inflation 2.5 percent, and unemployment 5.5 percent. Inflation is the cruelest tax of all on an economy. Paul Volcker broke the back of inflation in the 1980s, and Greenspan held to that tradition for almost two decades more.
Under Ben Bernanke, the central bank is likely to hold to the idea that price stability is the cornerstone of solid economic growth. Look for Bernanke to keep the Fed focused on forward-looking commodity and bond-market indicators in order to contain money-supply growth and steady monetary value in pursuit of domestic price stability.
With a firm monetary foundation, Reagan-like policies of low tax rates and free-market deregulation will afford American entrepreneurs the freedom and rewards that are necessary to maximize economic growth. Without question, the private sector must be liberated so it can effectively function as the engine of prosperity. This capitalist model was restored and rejuvenated by President Reagan 25 years ago and its success has been copied worldwide. Through numerous presidential and congressional cycles, the Reagan model -- if anything -- has been strengthened. Bush’s appointments to the Fed and the Supreme Court are the latest testament to this. Which leads me to say: If Bush is to complete the golden circle of free-market economic growth, he must follow up his excellent appointments to the Supreme Court and the Fed by pressing Congress to make the 2003 tax cuts permanent.
Interestingly, recent polling by the Pew Research Center shows much stronger support for the free-enterprise model than doom-and-gloom pessimists in the mainstream media would have us believe. Fifty percent of those polled by Pew approve of major cuts in federal income-tax rates, with only 38 percent disapproving. Regarding the Bush tax cuts on capital gains and investor stock dividends, 50 percent believe they should be extended, with only 35 percent opposed. It would seem that not only do most folks want higher after-tax rewards and the chance to keep more of what they earn, but that the tax cuts themselves symbolize a move to a free-enterprise economy.
In order to meet this challenge, the earmark-happy Republican Congress and an overspending White House must change their budgetary stripes and show the nation they are capable of free-market reforms that will preserve the Reagan legacy of economic growth and optimism for the future. Hopefully this will be a key theme in the president’s State of the Union message.