Who needs a Nobel Laureate when we have Google?(Read article summary)
Nobel Prize winner Peter Diamond was turned down from the board of the Federal Reserve. Are his philosophical and analytical perspective undervalued?
Stephan Savoia / AP / File
I was debating on what to write about tonightâ€“either the update on Nobel Prize winner Peter Diamondâ€™s failed nomination to the Federal Reserve Board (with his very public withdrawal as shared via the New York Times), or Minnesota governor (and Republican presidential candidate) Tim Pawlentyâ€™s speech on his â€śeconomic planâ€ť (text of speech here via the Wall Street Journalâ€™s Washington Wire blog). I decided I could do both in one post, because both Peter Diamond (in his NYTimes column) and Tim Pawlenty (in his economic policy speech) talk about how they would approach improving the role and quality of government in our lives.
By the way, the Diamond nomination appeared doomed back in October of last year when Diamond had just won the Nobel Prizeâ€“as I wrote about at the time, here. The updated story on the â€śwhyâ€ť (from Diamondâ€™s new column) isnâ€™t really any different from the story last October.
As Diamond explains:
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 â€” 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, points to a fundamental misunderstanding: a failure to recognize that analysis of unemployment is crucial to conducting monetary policyâ€¦
[U]nderstanding the labor market â€” and the process by which workers and jobs come together and separate â€” is critical to devising an effective monetary policy. The financial crisis has led to continuing high unemployment. The Fed has to properly assess the nature of that unemployment to be able to lower it as much as possible while avoiding inflation. If much of the unemployment is related to the business cycle â€” caused by a lack of adequate demand â€” the Fed can act to reduce it without touching off inflation. If instead the unemployment is primarily structural â€” caused by mismatches between the skills that companies need and the skills that workers have â€” aggressive Fed action to reduce it could be misguided.
In my Nobel acceptance speech in December, 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 â€” a policy of keeping short-term interest rates exceptionally low and buying Treasury securities to keep long-term rates down. Analysis of the labor market is in fact central to monetary policy.
And what could a Nobel laureate economist bring to the question: what makes for better government? Towards the end of his column, Diamond suggests this:
To the public, the Washington debate is often about more versus less â€” 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.
Enter Tim Pawlenty and his speech today, where he laid out his plan, summarized by: â€śLetâ€™s grow the economy by 5%â€ť (per year). His primary means of getting us there: revenue-losing-that-will-grow-the-economy-so-much-that-theyâ€™ll-become-revenue-gaining tax cuts. Iâ€™ll have much more to say about his tax reform plan later (and probably right up through the election). But besides cutting taxes, Pawlenty would cut spendingâ€“by what sounds like a lot. How would he figure out what to cut? He explains:
Thereâ€™s some obvious targets. We can start by applying what I call â€śThe Google Test.â€ť
If you can find a good or service on the Internet. Then the federal government probably doesnâ€™t need to be doing it.
So thereâ€™s Pawlentyâ€™s answer (and the â€śconnectionâ€ť in this blog post). Heâ€™s basically saying: Who needs a Nobel laureate economist waxing philosophically and analytically on the spending we need more of versus the spending we need less of, when we could just â€śGoogle it.â€ť
If itâ€™s not already obvious from my tone, I donâ€™t like the â€śGoogle Test.â€ť There are many things that the private sector cannot be expected to do well on its own, especially when an important â€śpublic goodâ€ť is to provide a â€śsafety netâ€ť for people who cannot fend for themselves. Or whenever any market participant faced with their own self-interest (to maximize their own individual utility or profit) would fail to account for the social costs or social benefits of his or her actions/decisions. The free market can only â€śoptimizeâ€ť based on market values; market forces (the â€śinvisible handâ€ť) canâ€™t lead us to allocations that maximize social welfare where market prices donâ€™t correlate well with social values.
Iâ€™ll be doing a Minnesota public radio interview on the Pawlenty speech tomorrow (Wednesday) morning, and if thereâ€™s anything to share afterward, I will post it.
**UPDATE (12:30 Wednesday): Hereâ€™s a link to the audio of my MN public radio interview, which focused mainly on the tax policy part of the Pawlenty plan. More on this in future post(s).
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