In a move that is sure to send the infamous Fed "economist" (Ph.D., never forget) Kartik Athreya over the edge, Obama's nominee for the Fed Board, after unsuccessfully trying to enter the one circle that is just less exclusive than the Goldman partnership ranks for over a year, has decided to pen an Op-Ed in the NYT titled "When a Nobel Prize Isn't Enough", and disgusted with the fact that his utterly worthless Nobel prize in something or another can't even buy him one seat with those who decide the price of money, has pulled his nomination in utter disgust. "Last October, I won the Nobel Prize in economics for my work on unemployment and the labor market. But I am unqualified to serve on the board of the Federal Reserve — at least according to the Republican senators who have blocked my nomination. How can this be? " How indeed: could it be that, gasp, Nobel awards are merely a honorary award in groupthink, presented to anyone who perpetuates the status quo with little regard for actual merit-based contribution (one needs only recall Obama's Peace prize just as the President is contemplating opening up a 4th, or is that 5th, war front?). Most importantly: nobody tell Krugman his one validation of his life's work, has just been downgraded to junk.
When a Nobel Prize Isn’t Enough
By PETER A. DIAMOND
LAST October, I won the Nobel Prize in economics for my work on
unemployment and the labor market. But I am unqualified to serve on the
board of the Federal Reserve — at least according to the Republican
senators who have blocked my nomination. How can this be?
The easy answer is to point to shortcomings in our confirmation process
and to partisan polarization in Washington. The more troubling answer,
though, points to a fundamental misunderstanding: a failure to recognize
that analysis of unemployment is crucial to conducting monetary policy.
In April 2010, President Obama nominated me to be one of the seven
governors of the Fed. He renominated me in September, and again in
January, after Senate Republicans blocked a floor vote on my
confirmation. When the Senate Banking Committee took up my nomination in
July and again in November, three Republican senators voted for me
each time. But the third time around, the Republicans on the committee
voted in lockstep against my appointment, making it extremely unlikely
that the opposition to a full Senate vote can be overcome. It is time
for me to withdraw, as I plan to inform the White House.
The leading opponent to my appointment, Richard C. Shelby of Alabama, the ranking Republican on the committee, has questioned the relevance of my expertise.
“Does Dr. Diamond have any experience in conducting monetary policy?
No,” he said in March. “His academic work has been on pensions and labor
But understanding the labor market — and the process by which workers
and jobs come together and separate — is critical to devising an
effective monetary policy. The financial crisis has led to continuing
high unemployment. The Fed has to properly assess the nature of that
unemployment to be able to lower it as much as possible while avoiding
inflation. If much of the unemployment is related to the business cycle —
caused by a lack of adequate demand — the Fed can act to reduce it
without touching off inflation. If instead the unemployment is primarily
structural — caused by mismatches between the skills that companies
need and the skills that workers have — aggressive Fed action to reduce
it could be misguided.
In my Nobel acceptance speech in December, I discussed in detail the
patterns of hiring in the American economy, and concluded that
structural unemployment and issues of mismatch were not important in the
slow recovery we have been experiencing, and thus not a reason to stop
an accommodative monetary policy — a policy of keeping short-term
interest rates exceptionally low and buying Treasury securities to keep
long-term rates down. Analysis of the labor market is in fact central to
Senator Shelby also questioned my qualifications, asking: “Does Dr.
Diamond have any experience in crisis management? No.” In addition to
setting monetary policy in light of a proper understanding of
unemployment, the Fed is responsible for avoiding banking crises, not
just trying to mop up afterward.
Among the issues being debated now is how much we should increase
capital requirements for banks. Selecting the proper size of the
increase requires a balance between reducing the risk of a future crisis
and ensuring the effective functioning of financial firms in ordinary
times. My experience analyzing the properties of capital markets and how
economic risks are and should be shared is directly relevant for
designing policies to reduce the risk of future banking crises.
Instead of going to the Fed, however, I will go about my congenial
professional existence as a professor at M.I.T., where I have taught and
researched since 1966, and I will take advantage of some of the many
opportunities that come to a Nobel laureate. So don’t worry about me.
But we should all worry about how distorted the confirmation process has
become, and how little understanding of monetary policy there is among
some of those responsible for its Congressional oversight. We need to
preserve the independence of the Fed from efforts to politicize monetary
policy and to limit the Fed’s ability to regulate financial firms.
Concern about the (seemingly low) current risk of future inflation
should not erase concern about the large costs of continuing high
unemployment. Concern about the distant risk of a genuine inability to
handle our national debt should not erase concern about the risk to the
economy from too much short-run fiscal tightening.
To the public, the Washington debate is often about more versus less —
in both spending and regulation. There is too little public awareness of
the real consequences of some of these decisions. In reality, we need
more spending on some programs and less spending on others, and we need
more good regulations and fewer bad ones.
Analytical expertise is needed to accomplish this, to make government more effective and efficient. Skilled
analytical thinking should not be drowned out by mistaken,
ideologically driven views that more is always better or less is always
better. I had hoped to bring some of my own expertise and experience to the Fed. Now I hope someone else can.