What Peter Diamond Doesn’t Understand

by Mario Rizzo

I read with interest Peter A. Diamond’s opinion piece in The New York Times, “When a Nobel Prize Isn’t Enough.” Professor Diamond, by all accounts a very competent economist at MIT, is complaining that he really IS qualified to be a member of the Board of Governors of the Federal Reserve System. He really IS qualified to make decisions about monetary policy. He really IS qualified because he is an expert on labor markets. He really IS qualified because a top priority must be to lower the unemployment rate. And he IS qualified because he knows how to do this. 

I might have been forgiven if I had called this blog post, “Peter Diamond is a Crybaby.” The whole piece is a thinly veiled protest based on hurt pride. One wonders why indeed “a Nobel Prize is not enough” recognition for him. Let that pass.

The main problem with Diamond’s piece is that he thinks that economic policy is primarily a technical matter:  “Skilled analytical thinking should not be drowned out by mistaken, ideologically driven views…”

Of course policy requires a good knowledge of the science of economics. But it also has two other components: values and “art.” Because the future is unknown and Fed governors have a long term it is quite relevant to know what general philosophy of government the candidate holds. It is also relevant to know whether the candidate has a good intuitive sense of the features and practicalities of the real world. Not all knowledge is reducible to science as Frank Knight used to remind us regularly.

So, in a sense, Diamond’s technocratic response to his failure to get confirmation is evidence that he really doesn’t understand the world of policy. Whether, on net, this is enough to render him “unqualified” I express no firm opinion – except that his op-ed is evidence against his qualifications for the job.

25 thoughts on “What Peter Diamond Doesn’t Understand

  1. As both Mario and Tyler have remarked, Diamond’s parting defense actually buttresses the case of his critics. My Cato colleague, Mark Calabria, has also pointed out that Diamond is legally not qualified to serve. There can be only one governor from a Federal Reserve district, and there is already a governor from the first district.

  2. I was also shocked by his whiny piece.

    Peter Diamond seems to ignore the fact that both the Nobel as well as an appointment to a FED Board are political decisions. He should get both feet on the ground.

    Thank God he does not mess with politics and has found a job that matches his skills better. He should appreciate that more than most people. 🙂

  3. Mario Rizzo has determined that Peter Diamond “really doesn’t understand the world of policy.” Thanks for clearing that up, Professor.

    The Austrians are celebrating. Let the matho-phobes of the word unite!

  4. Well, it is known that most people believe they are above-average drivers. Going by that, most economists must believe they possess above-average competence. Therefore most economists would believe they are qualified to be a member of the Board of Governors of the Federal Reserve System. What makes Mr. Diamond (a bit) unusual is his airing his grievance in public.

  5. Mario Rizzo @ 2:28pm: “Peter Diamond’s mathematics has nothing whatever to do with this matter nor does Austrian economics.” Au contraire. I suggest that both play a fundamental role in your severe discounting the substantive importance of Peter Diamond’s analytical work. Further, both contribute to your apparent lack of appreciation for Prof. Diamond’s understanding of policy issues.

  6. Glib, you are not engaging Mario’s argument. His post raises no doubts about Diamond’s competence as a technical economist. That issue is just not in the picture. Nor is there anything “free market” or “Austrian” in his argument. Diamond complains that his technical expertise was not valued by some crass politicians. Mario points out that a slot on the Fed’s board of governors is a political position. Diamond’s seeming failure to recognize (or at least face up to) that fact weakens the case for his appointment. It is not the sort of carping you seem to call it, but a devastating internal critique.

  7. GlibFighter: “Let the matho-phobes of the word unite!”

    Glib, did you even bother to try and find out where Mario’s PhD is from?

    Chicago… hardly a place where a “matho-phobe” could get a doctorate. You are just being an ignorant troll.

    “I suggest that both play a fundamental role in your severe discounting the substantive importance of Peter Diamond’s analytical work.”

    But, Mario said nothing whatsoever about whether Diamond’s analytical work is important or not, so you have absolutely nothing to go on in saying he is “discounting” it! You are acting like someone who is walking by the schoolyard and decides to call the kids inside a few names on the way by.

  8. The most apposite comment I’ve seen on the Diamond withdrawal comes from Cato’s Mark Calabria, who makes it clear that the Republican senators had good monetary reasons to keep Diamond off the Fed Board. Calabria writes:

    “We all know unemployment is an important issue and needs to be addressed. The question is whether it can be addressed with loose monetary policy. Mr. Diamond apparently believes it can. There are many who believe it cannot. If all our labor market problems could be solved with loose money, then we’d already be at full employment. In case Mr. Diamond didn’t notice, we aren’t. We also have gone down this path too many times before. The belief in a long-run trade-off between unemployment and inflation has the been source of considerable economic harm.”

    See http://www.cato-at-liberty.org/diamond-down/ for his Calabria’s full text, including a brief discussion of Diamond’s ineligibility for the post, as noted here earlier by Jerry O’Driscoll.

  9. NO human, economist or otherwise, is qualified to “serve” as a Fed governor.

    Any discussion that suggests disagreement with this point (such as the post) is grievously mistaken.

  10. @Mario: Funny post. I can’t believe Diamond wrote that either. Don’t these laureates have agents? Is he married? Couldn’t his wife have said, “You’re writing *what*?!”

    @GlibFighter: I know some mathophobe Austrians. They’re friends of mine. And Mario Rizzo is no mathophobe Austrian.

  11. See Glib, maybe you thought you were in one of those wimpy, math-free Austrian neighborhoods, but you wandered in to a hood you weren’t ready to deal with. Mario, Chicago PhD. Roger, writes sophisticated econometrics papers. Murphy, NYU PhD, another top program very heavy on math. And even though I have not done the amount of mathematical economics those fellows have, I did program for twenty years, doing things like state-of-the-art, real-time options trading programs. So you better take your mathophobe trash talking to some grammar school where that sort of intimidation doesn’t make them laugh.

  12. I happen to be reading Richard Posner’s public intellectuals: a study in decline.

    Posner makes many interesting points about how academics make poor politicians and political advocates. Fed Governors are politicians.

    • Academics lack the ability to build coalitions and to compromise, flatter and lie, and to make package deals;
    • Academics cannot forgo the prideful self-satisfaction of purity and devotion to pure principle;
    • Tenured academics have little incentive and/or residual ability to get along with their colleagues or with anyone else, for that matter.

    These drawbacks as a bureaucrat-politician apply before Diamond’s views on inflation as a monetary phenomenon and what monetary policy can and can not do are considered.

    Would the democratic party looked favourably on a nomination of Milton Friedman or other members of the shadow open market operations committee to the Fed?

  13. Forgive me for taking a joke seriously, Mario, but you are not putting yourself in the model. Mises put himself in the model. Thus (according the story anyway) when asked what he would do if appointed economic czar Mises answered, “Resign!”

  14. What Roger said on rule by experts.

    Most of the time of the Board of Governors is taken up with regulatory matters, not monetary policy. Traditionally the Board has been dominated by bankers not economists.

    There have been notable exceptions, like Henry Wallich and Larry Lindsey. But it’s a job requiring structural knowledge of banking.

  15. Diamond’s technical work on labor markets falls more into the fiscal side of government intervention. Under Bernanke’s direction, however, the Fed’s insinuation into fiscal matters might actually make the teething-Diamond a pretty good fit.

  16. Diamond’s statement that if much of the unemployment is caused by a lack of adequate demand, the Fed can act to reduce it without touching off inflation suggests that he has not accepted the ideas that founded the great moderation and modern macroecomic debates.

    Back to the 70s is Peter Diamond in theory and policy; a modern day Arthur Burns.

    Friedman defended his policy ideas by pointed to where they and worked and where rival policies had failed.

    Diamond did not mention any prior empirical success of his proposed policies nor how he would overcome the leads and lags on monetary policy or the mounting unpleasant monetary arithmetic.

  17. We note with some irony that the esteemed mathematicians of the Fed were pretty much in agreement that the housing bubble and ensuing financial crisis were all small blips and to be taken quite lightly.

    Clearly an institution that must draw its policy inferences from the tea leaves of the long term have extreme difficulty in reading them, as we are constantly reminded by their track record.

    An intelligent and reasonable technocrat might acknowledge the growing hubris of controlling interest rates for the ‘benefit’ of us rubes. And even an incompetent data analysis must at least admit the possibility that they have given us about as much ‘help’ as we can stand.

    How much management will we endure, before the system is deemed a failure for the economy? Unfortunately all we know is that the Fed in its current form will endure much longer and evolve and adapt very little since it is happily immune from market forces.

  18. I always get a kick out of visiting here.

    Roger Koppel says, “He [James Fallows] is wrong. We should prefer democracy to expertocracy”

    Somehow Senator Shelby, in Roger Koppel’s mind, is an advocate for democracy even though his actions denied a vote on the Diamond nomination. Democracy, indeed.

    And, all of you claim great expertise as to why Diamond should not have been appointed anyway. Looks like “expertocracy” at work to me.


  19. Pay attention to the arguments actually being made, lxm. As I noted above, Mario’s argument is an internal critique of Diamond’s complaint, not a judgment of Diamond’s expertise.

    Similarly, my comments criticize Fallows and do not judge Shelby’s merits as a legislator. Read this from Fallows:

    A career politician with a law degree from the University of Alabama (Shelby has 8 years as a prosecutor, 40 years as a legislator). Versus the economist who has just been recognized with the highest international lifetime-achievement honor that exists in his field — and whose specialty is studying America’s worst economic problem of the moment, chronic unemployment. Hmmm, I wonder which of them might be in a better position to judge the other’s street-cred about Fed policy.

    That’s a celebration of experts.

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