By Nell Henderson Washington Post Staff Writer Tuesday, September 21, 2004; Page E01
WANTED: Brilliant economist. Must be politically savvy, trusted by Wall Street, a strong leader and consensus builder, cool in a crisis, able to calm world markets with a few words and likely to guide the economy into robust health in time for the 2008 presidential election.
In other words, someone to succeed Federal Reserve Chairman Alan Greenspan, who indicated at a recent Capitol Hill hearing -- for the first time publicly -- that he intends to step down from one of Washington's most powerful jobs when his Fed board term expires in late January 2006.
The 78-year-old chairman's silent, affirmative nod to a lawmaker's question instantly elevated "Who Will Succeed Greenspan?" from a longtime Washington parlor game to among the most important outcomes of the presidential race.
The succession issue may land on the next president's desk soon after Inauguration Day on Jan. 20, one year and 11 days before Greenspan's term ends. With the stakes so high, the next administration will want to plan early for a smooth transition, according to people close to the campaigns and candidates. President Bush's administration started compiling names of possible successors more than two years ago.
In interviews with more than a dozen people who follow the Fed closely, a virtually unanimous consensus existed about the leading contenders. The sources -- economists and political operatives on Wall Street and in Washington -- generally spoke on condition that they not be named because they know one or more of the candidates and expect to work in the future with whoever is chosen.
Bush's list of candidates is likely to start with Harvard economist Martin S. Feldstein, 64, and Columbia Business School Dean R. Glenn Hubbard, 46, both of whom are highly respected within academic circles and the White House, these observers say.
Feldstein served in the Reagan administration as chairman of the White House Council of Economic Advisers and is considered the father of "supply side" economics -- the belief that cutting taxes stimulates economic growth -- because of his pioneering research on how taxes affect business and consumer behavior.
Hubbard was CEA chair in the first years of the current Bush administration and is described by colleagues as the architect of many of the president's tax cut policies, particularly the proposal to eliminate taxes on many stock dividends.
A Kerry victory would likely mean Robert E. Rubin, 66, chairman of Citigroup Inc.'s executive committee and Treasury secretary during the Clinton administration, gets the right of first refusal, say several people close to Rubin and the Kerry campaign. Rubin, who was prominently seated next to Kerry's wife at the Democratic convention, has been a frequent critic of Bush's economic policies. If he didn't want the Fed job himself, he would have a strong say over whom Kerry considers, these observers said.
After Rubin, the next likely Democrat is Harvard President Lawrence H. Summers, 49, a top economist who worked closely with Rubin in the Clinton Treasury Department before succeeding him as secretary.
Feldstein, Hubbard, Rubin and Summers were either unavailable or declined to comment for this article about their interest in the Fed chairmanship.
Because of the Fed chairman's enormous influence on the U.S. economy and global financial markets, the selection will be among the most far-reaching decisions to be made by the next president. Greenspan's tenure, now in its 18th year, illustrates how a successful chairman can outlast several presidents, leaving a large imprint on the nation's history.
Members of both parties also are well aware of the Fed chairman's potential impact on economic policy beyond the Fed's official responsibilities. Greenspan's support helped win passage of the 1993 Clinton deficit-reduction plan, while his call for a tax cut in 2001 helped the Bush tax package sail through Congress.
"The Fed is so important," said Kevin A. Hassett, a GOP economist at the American Enterprise Institute. Any president would know "it's in his own best interest to have the best possible Fed chairman because when the economy is doing well, incumbents win."
Yet the job requires more than a dazzling economic brain. "This is a political appointment with a capital P," said Carl B. Weinberg, chief economist with High Frequency Economics, a research firm in Valhalla, N.Y. "The person who makes Fed policy will determine the reelection prospects [of the president]. . . . You'll want someone who is tested in the halls of politics and whose allegiance is unquestioned."
The Fed's chief responsibility, by law, is to achieve low inflation and maximum employment through the use of monetary policy -- essentially determining the economy's money supply by raising or lowering short-term interest rates to adjust the availability of credit.
Although it sounds arcane, good monetary policy is critical to Americans' well-being, influencing prices, the cost of borrowing and even the unemployment rate. And because the U.S. economy is the world's largest, its health affects the rest of the world.
Although the four top candidates have broad economic experience, none has focused his career on monetary policy, so it is hard to gauge their likely approach to the job. Party affiliation is not a good predictor: Fed officials of both parties are closely aligned these days in a consensus, developed over the past two decades, that the best way to foster economic growth and lower unemployment is to keep inflation very low. That buried the argument made by many economists and politicians until the late 1980s that the Fed could reduce unemployment by letting inflation creep higher.
Feldstein is one of the most influential economists in the country. He has taught at Harvard for decades and runs the National Bureau of Economic Research, which publishes working papers on economic topics. His former students include Hubbard, Summers and Fed Vice Chairman Roger W. Ferguson Jr., 52, a Democrat who is also mentioned frequently as a potential Fed chief.
Some Republicans remain wary of Feldstein because of his rocky experience as Reagan's CEA chairman, when he favored temporary tax increases to reduce the budget deficit. That was considered by some on the economic right as a betrayal at the time, and blasphemy to this day. But Feldstein has mended fences with many GOP critics over time, most recently by publicly supporting the Bush tax cuts and agreeing with the administration that the current budget deficits are less worrisome than those of the 1980s.
Hubbard has focused most of his research on tax policy and, like Feldstein, helped design many features of Bush's three tax cuts. But he also took on a broad portfolio of economic policy issues as CEA chairman, impressing White House colleagues with his organizational abilities, communications skills and political effectiveness, according to Hassett, a former Columbia colleague.
Hubbard was so successful in the CEA job that several observers in Washington and on Wall Street said he may have vaulted ahead of Feldstein as a likely pick, particularly by a White House that prizes loyalty and political skill.
Rubin and Summers oversaw a range of economic policy issues at Treasury, including the U.S. responses to financial crises in Mexico, Asia and Russia in the 1990s.
Rubin is an investment banker, not an economist. He enjoys widespread respect on Wall Street, where he spent most of his career, rising to serve as co-senior partner of Goldman Sachs before joining the Clinton administration.
Summers is regarded as a stellar economist. At age 28 he became one of Harvard's youngest-ever tenured professors. Like Feldstein, his thesis adviser, he won the John Bates Clark Medal, which is awarded every two years to the nation's outstanding economist under age 40. He worked for Feldstein on the CEA, served as chief economist at the World Bank and did a stint as Treasury undersecretary for international affairs.
There are many other well-regarded economists at the Fed, in business and in academia who would be considered after the top four. On the Democratic side they include Ferguson and Stanley Fischer, 60, Citigroup vice chairman and former deputy managing director at the International Monetary Fund. Other Republicans are Stanford economist John B. Taylor, 57, Treasury undersecretary for international affairs, and Fed board member and Princeton economist Ben S. Bernanke, 50. A popular choice among Fed staff would be Fed board member Donald L. Kohn, 61, who is not registered with either party.
But Rubin, Summers, Feldstein and Hubbard have emerged as the favorites partly because of the non-economic requirements of the job. Greenspan showed that a strong, politically adept Fed chairman can lead the central bank in the direction he wants, while protecting the institution from White House and congressional pressure, observers agree.
"A good chairman is politically savvy enough to build good relationships so politicians don't try to infringe on the Fed's independence," said former Fed board member Laurence H. Meyer, a Democrat. "Greenspan did that. . . . Republicans, Democrats, they love him. He forged great relationships with the presidents and Treasury secretaries" with whom he served.
When Greenspan succeeded Paul A. Volcker, many in the markets and academia were not sure the new Fed chief would live up to the departing legend. Volcker, a Democrat, withstood private pressure from the Reagan administration to cut interest rates, and was subsequently eased out of the job. Reagan appointed Greenspan, a Republican, to the chairman's job in 1987.
Greenspan resisted similar public pressure in 1992 from President George H.W. Bush. The elder Bush later blamed Greenspan for contributing to his electoral defeat that year.
Over time, Greenspan worked closely with the Clinton administration, the second Bush administration and Congress on a wide variety of economic issues.
Ultimately, the success of the next Fed chief "will depend on his ability to build and preserve bipartisan credibility," said Nicolas Checa, a managing director at Kissinger McLarty Associates, an international advisory firm. "Only if you are able to transcend partisanship, are you able to be a source of confidence for investors and markets."