Peter Diamond thinks that because he won a Nobel Prize, he should be running the Federal Reserve. I have just
two three four quick points to add:
(1) The research for which he won the Nobel prize, modeling search processes in labor markets, is from the early 1980s. The mathematics it uses is analogous to that of particles randomly moving in a box. For our purposes, they call the particles “unemployed workers” and “job vacancies.” There is a random probability of a collision, or “match,” as well as probability of filled jobs being lost. What the model shows is how there can be unemployment even in equilibrium. However, this research has little to say about the recession or how to promote employment during a downtown. Clearly, it had little impact on preventing such a catastrophe in the first place.
(2) Diamond’s research is not that different from other neoclassical economics research. The framework is essentially the same. Neoclassical economists were advising the president before the crisis, and Obama’s real problem is that there simply are no other major schools of economic thought. That is why we need to promote pluralism. Not more of the same.
(3) The Nobel Prize in Economics has long been justification for giving credibility. It should not be. It is given for a contribution to a very specific and highly specialized subdiscipline of the field of economics. Just because Paul Krugman won one does not mean that we should trust everything he writes in the New York Times. Same goes for anyone.
(4) This claim in the op-ed that the political processes is hindering objectivity is not quite right. I do not care much for American politics. But to say that:
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.
implies that economics is not political. Actually, it is. I think it can be quite useful, but let’s also not kid ourselves that the politicians are the only ones with political beliefs and goals.