Who is Gregory Mankiw, the 44-year-old Harvard professor nominated this week as U.S. President George W. Bush's new chairman of his Council of Economic Advisers?
The key facts seem to be these. He is highly intelligent, wide-ranging in his economic expertise, and an excellent writer. He is a "New Keynesian" and named his dog Keynes. (This we see as very important.) His mentors have been bright and prominent economists, such as Larry Summers, former treasury secretary, and Alan Blinder, formerly of the Federal Reserve. From his early 20s, Mankiw has been close to the powerful. "Choose your mentors well," is advice he himself gives in an essay on his life. In his research, he has kind words for Bush's great friend, President Bill Clinton, while, on Federal Reserve Chairman Alan Greenspan, Mankiw's words are as opaque as those of the (perhaps) great helmsman himself.
Bush would appear to have turned to Mankiw for a number of reasons. One reason is that Mankiw's "new Keynesian" approach to economic policy-making may make him a good fit with Bush's current policies. New Keynesians believe in using fiscal policy flexibly to help smooth trends in growth. Thus, at a time of recession, new Keynesians would be comfortable with a widening government deficit if the deficit spending helped to alleviate the downturn in the economy. That has been Bush's policy.
Mankiw's opinions on the impact of a government deficit may also have evolved in a manner pleasing to Bush.
In "Principles of Economics," one of the two lucrative textbooks Mankiw has written, he writes, following standard economic theory, that high government deficits generate rising interest rates. But in more recent research he has found that high government deficits do not necessarily drive interest rates up.
The current evidence for that is quite strong. In Japan and, more recently, in the United States, a rising government deficit has not so far pushed long-term interest rates up; on the contrary rates have fallen in an environment of weakening growth and soft equity markets. As the U.S. fiscal deficit climbs, both Bush and Mankiw will be hoping that empirical evidence continues to suggest Mankiw's textbooks need rewriting. For if Bush's spiraling deficit --- predicted at over $300 billion this year by the administration itself and likely to go far higher in our view, especially in the event of war with Iraq -- does drive long-term interest rates up, U.S. economic prospects will be dire indeed.
But perhaps the more important reason that explains why Bush has turned to Mankiw is the latter's communications skills. Bush's original economics team, the former Treasury Secretary Paul O'Neill, the White House economic adviser Larry Lindsey and Glenn Hubbard, who is resigning now to be replaced, it would seem, by Mankiw, were criticized above all as poor advocates of the administration's economic policies. Mankiw on the other hand is seen as being not only a powerful economist -- he achieved professorship at Harvard before he was 30 -- but also someone who speaks and writes with clarity and can communicate and persuade. These communication skills come across in some of Mankiw's very well-written and accessible research.
How does Mankiw view the U.S. economy and the role played by policy-makers? A May 2001 essay on "U.S. monetary policy during the 1990s" offers some insights.
First of all, Bush will be delighted to see that Mankiw praises Clinton. The latter's willingness to reappoint "conservative" Greenspan to the Fed chair was wise. It "might seem a no-brainer now," Mankiw writes, but "at the time it was less obvious." "To the extent that Greenspan's Fed has been a success, the Clinton administration deserves some of the credit," Mankiw concludes.
We see in these politically impartial comments an aptitude for working with both sides of the United States' pronounced (and often ridiculous) political divide. That is all to the good.
More profoundly, the influence of Larry Summers is evident in Mankiw's paper. Mankiw tells us that "long before he was U.S. Treasury secretary Laurence Summers wrote 'the optimal inflation rate is surely positive, perhaps as high as 2 to 3 percent.' In his analysis Mankiw finds that "Fed monetary policy of the 1990s might well be described as 'covert inflation targeting' at a rate of about 3 percent. So he argues that -- unconsciously, one supposes -- Greenspan has followed a Summers line on monetary policy.
And Mankiw appears at times to give Greenspan full marks. "Our conclusion is that the Greenspan Fed would likely have averted the Great Inflation of the 1970s," he writes, because, under Greenspan, the Fed has reacted more vigorously than in the past to inflation, raising interest rates by more than the rise in inflation and thereby helping to curb inflation.
Mankiw also concludes "that the Greenspan Fed would have been much more expansionary in the early 1980s," and would therefore have brought inflation down more gradually with less loss of growth and jobs.
Thus Mankiw writes that Greenspan's policy-making has been "hailed as a success by conservatives and liberals alike." He refers to the "amazing success" of the Greenspan Fed yet also writes, "Perhaps they (Greenspan and his board) were just lucky."
Mankiw also appears less in awe of Greenspan when he refers to a 1964 Journal of Finance paper by "a young economist named Alan Greenspan." The paper showed "a lack of dogma and nimbleness of mind." But "the paper was cited in the subsequent literature exactly zero times."
Most of us might think that this matters little. So what if academic economists paid little attention to a promising young economist? But Mankiw sees it as a harbinger. "This raises the question of whether the monetary policy of the 1990s faces a similar fate. Will Greenspan's tenure as Fed chairman leave a legacy for future monetary policy-makers, or will the successful policy of the Greenspan era leave office with the man himself?"
"If a successor tries to emulate the Greenspan Fed, he won't have any idea how," Mankiw writes. "The only consistent policy seems to be: Study all the data carefully and then set rates at the appropriate level."
Many would judge that the Greenspan method has worked well. Mankiw himself seems to. His article therefore leaves the reader asking himself: What more does Mankiw expect of Greenspan?
What he appears to find fault with is Greenspan's lack of dogma; his lack of a rule. Greenspan just got lucky, appears to be his implicit message, and happened by chance on the right way to run policy -- which happens to be the rule Summers, Mankiw's mentor, devised.
It is a curious conclusion. And the article, too, has a large omission: which is also Greenspan's omission.
By May 2001 the stock market that had been so much a part of the happy 1990s had tumbled and the U.S. economy was in recession. The economy is still in difficulty, almost two years on. Our own view, familiar to regular readers, is that this is in no small measure due to the fact that monetary policy was far too loose in the 1990s. Yet on this Mankiw's analysis is almost silent. He writes that "monetary policy-makers might react to a rise in the stock market by setting interest rates higher than they otherwise would," but does not suggest Greenspan got it wrong by failing to do so.
Is this because Mankiw does not think Greenspan got it wrong or because the young, ambitious academic did not want to offend the powerful Fed chief?
Readers can form their own conclusion. We give Mankiw's paper only five out of 10 but wish him the very best in his new job.
