Nobel Prize Economist Not Qualified For Fed Board?
Is Peter Diamond qualified to be a Fed governor?
James Joyner · Monday, June 6, 2011 · 32 comments
Peter Diamond, last year's co-awardee of a Nobel Prize in economics, has withdrawn from his nomination for a seat as a Federal Reserve Board governor after Senate Republicans, most notably Richard Shelby, blocked confirmation on the grounds that he's a theorist with no practical experience. Diamond left a parting shot in the form of a NYT op-ed. He closes:
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.
Now, like Ezra Klein, I'm strongly inclined to think that a Nobel Prize makes the holder qualified for positions in related fields. But Tyler Cowen isn't so sure and thinks the op-ed actually weakens Diamond's case.
There should be no doubt about Diamond's qualifications as an economist, but oddly his parting statement makes him sound less qualified as a Fed candidate rather than more qualified. It is not so much the case that further analytical expertise is needed, which is what Diamond seems to suggest. What is needed is someone who can help push some fairly simple and already well-understood ideas through Congress. Was Diamond that person? From a distance it's hard to say, and of course "parting shots" are strategic in their own right. Still, the piece seems overly focused on technocratic issues and it is not obvious that he is the ideal ambassador to, say, Ron Paul. In other words, there is a reasonable chance that this not unexpected development is a blessing in disguise.
Cowen, and thus Shelby, has a point here. Diamond is doubtless a brilliant academic thinker but, with the exception of two years spent teaching at Berkley upon finishing his PhD, he's been at MIT since 1960! Ben Bernanke, the Fed Chairman to whom he would report, was one of his students–thirty years ago.
Then again, Bernanke's sole experience at the time he was appointed to the Fed board in 2004 was . . . as an academic economist. He subsequently served as head of President Bush's Council of Economic Advisors before being elevated to Chairman. But he had no practical governing or business experience at the time he was confirmed for the job Diamond was seeking.
I'm rather skeptical that the precise nature of academic specialization much matters here. A PhD economist with years experience at an elite institution will, I think it's fair to say, have sufficiently broad expertise on economics and business to function as a Fed governor regardless of where their research interests were.
FILED UNDER: Economics and Business, US Politics
Franklin says:
Monday, 6 June 2011 at 09:02
Are you just saying that because you have a PhD?
Dave Schuler says:
It seems to me that the most important qualification for Fed governor is to have the ability to get approved by the Senate.
EddieInCA says:
Shorter James Joyner…
"The whackjobs I support are doing something stupid… again. But, no matter, I'll still vote for them regardless because they're still better than Democrats."
In fact, most posts by Doug and James can be summarized as such.
Loviatar says:
No, no, the most important qualification for Fed governor is to be appointed by a Republican president.
jwest says:
Paul Krugman was awarded the Nobel Prize in economics – and who would want someone like him in a position of responsibility?
john personna says:
You know, I had a job where I gave good advice, the boss ignored it. So I explained it a different way, and the boss ignored it. I kept trying for about six months, before deciding that I'd been marginalized by my dissent. At that point I just did my job.
About a year later, it all blew up. The company had to unwind and throw away 18 months work.
You know what a co-worker told me? He said we needed someone who could explain things to the boss.
I was silent. At some point, it's the boss's fault for not getting it.
(I think Cowen might be making the same desperate plea as my former co-worker, that if we could just find someone smart enough, he could convince these idiots … and I think that might be putting the shoe on the wrong foot.)
The interesting thing jwest, is that Krugman called this economic cycle better than anyone.
He said the stimuli were not big enough to matter.
Now, it might be a different question whether we ever had stomach for a Krugman-sized stimulus … but his record is certainly better than those who said we needed none, or that these were plenty big.
Steven L. Taylor says:
@James:
Cowen appears (from the excerpt) to be arguing the Diamond lacks political skills. But, I am unaware of members of the Fed, apart from the Chair, doing much in way of communicating with Congress, so I am not sure his point is valid or even makes sense (but then, perhaps I am missing something). Shelby's argument, such as it is, seems be of the variety that working in the academy isn't working and that business experience is needed for the post.
This is, of course, ultimately correct. It reminds me of debates in the late 90s over the definition of "high crimes and misdemeanors" with the ultimate answer being: whatever the House says they are.
It reminds me of debates in the late 90s over the definition of "high crimes and misdemeanors" with the ultimate answer being: whatever the House says they are.
That was the position I took at the time and have repeated since.
Let me help our liberal friends advance their credentials with this handy form.
Doctoral Dissertation:
How Everything Would Be Better If We Just Spent More – a study and Nobel Prize submission by ______(fill in name)________________.
Despite all evidence to the contrary, my research reveals that the world's troubles are attributable to the lack of adequate funding in ill-conceived programs.
mantis says:
@Franklin: I don't have the economics background to qualify me for the Fed. But, yeah, I suspect that your average PhD–and especially PhD at the truly elite schools–have the expertise to perform on oversight and advisory boards related to their expertise. Running a major bureaucracy is a different story.
@Steven: The Chairman does most of the public parts of the job but the other governors have political duties. So, the ability to talk to Congress without the condescending "I have a Nobel so you must listen to me" attitude is helpful.
@EddieInCA: This is just the political norm in DC post-Bork. Lots of nominally qualified people are held up for a variety of reasons.
The problem, jwest, is that things don't just get better if you spend less, either.
Austerity Isn't Working; It's Time for a Plan B
So, what are you saying, that we should just spend less and suffer? That makes a kind of sense I suppose. As long as you can stand the suffering.
… but I hope you aren't going to make the "tax cut, magic, full employment" claim.
I think you're going too far James, in your 10:25 post.
We might actually have too much of the Fed pretending to be stupid, acting stupid, to please politicians.
Hell's bells, do you remember the Greenspan cycle, and the long-term damage of too-low interest rates?
@john personna: The Fed has ceased being what it was supposed to be: a truly independent body outside the political process. There's enormous political pressure to keep inflation down–which it's done successfully for decades now–and to do everything it can to stimulate the economy absent significant inflation.
The Fed has [long since] ceased being what it was supposed to be: a truly independent body outside the political process.
True, which is why this hurdle, that it is the economists job to "explain" things seems kind of off.
There's enormous political pressure to keep inflation down–which it's done successfully for decades now–and to do everything it can to stimulate the economy absent significant inflation.
I think that's the wrong end of the telescope.
Within some constraints the Fed can play games with perceived "growth" and perceived "inflation." We don't need to go all the way around the bend, to complete CPI rejection, to note that "the house" controls both of these numbers. And they are both small enough, growth and inflation both being "about" 3% per year, that being wrong about either one, just a little, really matters.
Now, do you remember the 00's?
That was when interest rates where low, inflation rate was "low", and house prices were booming.
Until the early 1980s, the CPI used what is called the asset price method to measure the change in the costs of owner-occupied housing.
The asset price method treats the purchase of an asset, such as a house, as it does the purchase of any consumer good. Because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons, the CPI implemented the rental equivalence approach to measuring price change for owner-occupied housing. It was implemented for the CPI-U in January 1983 and for the CPI for Urban Wage Earners and Clerical Workers (CPI-W) in January 1985.
That the Fed "controlled" inflation isn't really such firm ground.
(Note: The money created by the fed's low interest rates "escaped" into a housing bubble which they weren't watching, because they were watching an artificial construction, the Owner's Equivalent Rent.)
Andre Kenji says:
No, that´s more complicated because it´s the same thing that happens with Judicial Nominations: we are talking about *political* appointments. There is a compelling case that political and nonjudicial considerations should be made when choosing a Supreme Court nominee..
A very well qualified nominee may not have the temper for the job, for instance. But we all know that Mr. Shelby opposition to Peter Diamond is pure politics, and we all remember what Republicans said when Democrats filibustered Bush´s judicial nominations.
I'm actually not sure what qualifies Tyler Cowen to express an opinion about this that anyone should listen to.
I mean, anyone can pull an opinion out of one's butt and post it on the internets, but people are wise to be judicious about the expertise of those who would influence their views. And Tyler effin' Cowen ain't one of them. Neither is Ezra Klein.
Now James Fallows and Krugman, sure.
@James: Tyler effin' Cowen is among the more prominent economists on the planet. Klein's views on this don't influence my own; I just agree with his sentiment.
I really like Tyler, but there is no doubt that he has a unique perspective.
He is not "prominent" in the sense of being conventional, nor even having the desire to be so.
In fact, the dedicated Marginal Revolution reader will know that he is sly about the relationship between what he believes and what he posts.
I think Krugman would be great as one governor on the Fed board.
"This is just the political norm in DC post-Bork. Lots of nominally qualified people are held up for a variety of reasons."
This seems disingenuous. Given that we have had numerous Obama appointments held up for reasons unrelated to their conduct (including last week's proposed Commerce Secretary, whom enough Republicans to sustain a filibuster imemdiately said they would not permit to be confirmed until action is taking on trade treaties), the political norm has been ratcheded upwards since 1/20/09.
@James
Fair enough. I personally have no respect for the man or his writings or his views, which are known to be overly ideological and untethered from reality, despite his purported "prominence" as you put it.
Tsar Nicholas says:
Arafat was awarded the Nobel Peace Prize. He was the biggest mass terrorist of his generation. Krugman was awarded the Nobel Prize in Economics. He would need a team of forensic psychiatrists and large doses of psychotropic drugs just to be considered sentient. Rambobama was awarded the Nobel Peace Prize. Since then he's escalated one war, started another war, sent an execution squad across a foreign border without permission of the sovereign to murder a foreign national and continued the process of drone strikes on civilians in foreign lands. So, ergo, I think it's pretty safe to say that winning a Nobel Prize ain't all it's cracked up to be.
As previously stated in this thread, the key qualification of any nominee to the Fed Board is the ability to be confirmed by the Senate. If the Senate doesn't want to confirm you to that position then you could have Nobel Prizes dangling out of every orifice and still you wouldn't be qualified in the sense that you won't be seated.
On the merits Sen. Shelby is spot-on correct. We're in the midst of a catastrophic economic slump; one that will have ripple effects literally for decades. We have high unemployment, slow growth, ghastly deficits, a horrible housing market and staggering imbalances in such not-well-known but crucial items as base money held per GDP and the leverage of the Fed's balance sheet. All that and despite trillions of dollars having been thrown at the economy over the past few years we've gone nowhere. In fact by many measures things have gotten worse.
With that as the backdrop we needed a pure academic on the Fed Board the same way we needed a community organizer as president.
Class dismissed, Skippy.
So Tsar, why isn't austerity working in Europe?
OzarkHillbilly (used to be tom p) says:
Krugman was awarded the Nobel Prize in Economics. He would need a team of forensic psychiatrists and large doses of psychotropic drugs just to be considered sentient.
Tsar, I wonder how you would fare in a debate on economic policy with the good Doctor? My bet is that about 95% of the time you would not even be able to get your head around the terminology.
Ebenezer Arvigenius says:
That sneer would work much better if you displayed any knowledge about the way Nobel prizes are awarded. Here have a link:
And if reading is not your strong suit: here's some bold text:
The Royal Swedish Academy of Sciences awards the […] Nobel Memorial Prize in Economic Sciences. […] The Nobel Peace Prize is not awarded by a Swedish organisation but by the Norwegian Nobel Committee.
So to make it clearer: the one is a political prize, the other one a scientific prize. See any difference?
"Class dismissed" indeed.
charles austin says:
This is, of course, ultimately correct. It reminds me of debates in the late 90s over the definition of "high crimes and misdemeanors" with the ultimate answer being: whatever the House says they are
This and its corollaries are about the clearest statement yet that we have lapsed into Orwellian tyranny.
I have no doubt that Dr. Diamond is qualified to be on the Fed. Whether he should be is still a debatable point, is it not? The Obama administration is quite famous for having very few people with ny experience whatsoever in meeting a payroll and we see how well that has worked out.
André Kenji says:
Because they are only adopting austerity because they were forced to do, with the exception of Germany.
Austerity doesn't work overnight, but at some point you must deal with reality before it deals with you, because reality always wins if you play long enough..
Tuesday, 7 June 2011 at 06:16
Help me understand these austerity defenses. Wouldn't we, also, be adopting it because we need to? And what exactly is the light at the end of the tunnel? What makes it work as a solution?
Or is it, as I say, just that we should just spend less and suffer?
Diamonds Are The World's Biggest Scam?
Canadian Scientist Died Three Days Before Winning Nobel Prize In Medicine
Donald Trump's Unqualified Judges
Ethiopian Prime Minister Abiy Ahmed Wins Nobel Peace Prize
Former Secretary Of Nobel Committee Says Obama's Peace Prize Was A Mistake