We have at least 14 million Americans out of work, and millions more who have either left the job market altogether or who are involuntarily unemployed. There’s an economist who won a Nobel Prize on unemployment and labor markets who the President wants to bring into the discussion as a member of the Federal Reserve Board of Governors. Given that unemployment is the most pressing problem the nation faces, and given that the Federal Reserve has a mandate to maximize employment, you would think that such an economist would be a natural pick for the position. Richard Shelby says you’re wrong.
The top Republican on the Senate banking panel made clear Tuesday that he still opposed the nomination of the M.I.T. professor and Nobel laureate, Peter A. Diamond, to the Federal Reserve calling him an “old-fashioned” Keynesian supporter of big government.
Opposition from Senator Richard C. Shelby of Alabama to a nomination that Republicans have already scuttled twice poses a challenge to President Obama, who must decide how much political capital he wants to spend to push for Mr. Diamond’s approval.
“It is clear to many of us that he does not possess the appropriate background, experience or policy preferences to serve,” on the Fed’s board, Mr. Shelby said of Mr. Diamond.
Mr. Diamond won approval from the banking panel twice last year — both on party-line 16-7 votes — but Republicans blocked his consideration by the full Senate, which is needed before he can take a seat on the seven-member board.
OK, first off, filibuster reform. Peter Diamond has the support of a majority of the Senate. Second, when Shelby says that Diamond doesn’t possess the appropriate “policy preferences,” that’s about the most brazen example of how this all works that I’ve heard. Richard Shelby seems to think that the man or woman the President of an opposing party picks for the Federal Reserve must be essentially a clone of Richard Shelby.
As for this claim that Diamond doesn’t have the right background to serve, here’s Henry Aaron:
For starters, although he is known as a theorist–and deservedly so–he has done a fair bit of empirical work, both statistical and observational—for example, he was a member of a panel chaired by James Mirlees (another Nobelist) that analyzed the Chinese pension system and recommended changes to the government. He has worked extensively on social insurance for decades, which requires intimate familiarity with the details of how those systems work, financial markets, and demographics and he has co-authored a superlative book on pension reform with British economist, Nicolas Barr. He is done empirical work on consumption with his MIT colleague, Jerry Hausman (I know because I edited it for a Brookings volume). And if one reads his Nobel lecture … his deep familiarity with the empirical literature on labor markets is palpable.
Shelby’s questioning of the background of Diamond represents a misinterpretation of the desired background for a position at the Federal Reserve. Shelby thinks that Fed Governors only assign interest rates to guard against inflation. He doesn’t want them interested in labor markets and indeed probably thinks the mandate for full employment should be stripped. So naturally, he doesn’t want a labor market economist at the Fed.
I offer this post not as a full-throated supporter of the Fed or of Peter Diamond, but more as an example of the small-mindedness of those who don’t think government should do anything about a jobs crisis.