When a Nobel Prize Isn’t Enough

Peter Diamond fights back with some parting shots:

When a Nobel Prize Isn’t Enough, by Peter Diamond, Commentary, NY Times: 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...: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy. ...

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 market theory.”

But understanding the labor market ... is critical to devising an effective monetary policy. ... The Fed has to properly assess the nature of that unemployment... 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..., 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...

Senator Shelby also questioned my qualifications, asking: “Does Dr. Diamond have any experience in crisis management? No.” ... 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.,... 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. ...

Skilled analytical thinking should not be drowned out by mistaken, ideologically driven views... I had hoped to bring some of my own expertise and experience to the Fed. Now I hope someone else can.

Diamond should have been appointed. It's clear he's qualified, and there's no excuse for leaving the Fed short-handed while we are trying to battle the worst crisis in recent memory. In any case, Obama needs to get the open positions on the Fed filled as soon as possible.