It's apparently easier to win a Nobel Prize in economics than it is to navigate the perilous partisan waters of Washington politics.
That's one lesson to draw from the case of Peter Diamond, the Nobel laureate and Massachusetts Institute of Technology professor who President Obama nominated to be a Federal Reserve Board governor but who won't be coming to Washington, after all.
Republicans on the Senate Banking Committee soured on Diamond after several had initially seemed supportive.
As Diamond explained in a New York Times op-ed piece, the top Republican on the panel, Sen. Richard Shelby of Alabama, questioned Diamond's qualifications for the job and the other Republicans on the panel lined up behind him. When that happens, a nomination isn't going anywhere.
So Diamond, who has worked on trying to understand the interactions between the unemployed and employers, withdrew his nomination but not before suggesting that Washington partisanship might be getting in the way of good fiscal policy.
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 monetary policy.
In other words, Diamond was a fan of quantitative easing or QE, the Fed's program of keeping interest rates close to zero by pumping money into the economy. It creates the money essentially out of thin air and then buys U.S. Treasury securities with the cash.
The Fed is completing its second round of QE (dubbed QE2) which have been controversial, particularly with conservatives and inflation hawks who believe these actions could ignite rising prices and wages.
Of course, when Ben Bernanke started pumping money into the economy, the concern was that deflation, not inflation, would overtake the economy. And for many economists and policymakers, falling prices and wages is even scarier than inflation since economists don't really have a good way to contend with inflation. That's what happened to Japan from 1990 to 2010, the so-called "lost decades."
Diamond goes on to say:
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...
But shed no tears for Diamond:
... 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.
Diamond argues the real loser is sound monetary policy based on rigorous thinking:
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.
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