On June 5 Peter A. Diamond PhD ’63 announced that he would withdraw his nomination to the Federal Reserve Board of Governors. Senate Republicans had repeatedly blocked President Barack Obama’s nomination of Diamond, an MIT professor of economics and the 2010 Nobel Prize winner. Diamond explained his decision and delivered an indictment to partisan politics in his June 6 New York Times opinion column “When a Nobel Prize Isn’t Enough.” Obama first named Diamond as a candidate to fill one of three long-standing vacancies on the Federal Reserve Board in April 2010.
The Senate rejected Diamond’s nomination for the first time in August 2010. According to a Reuters article from Aug. 5, 2010, hostility toward Diamond first appeared when the Senate committee voted on the nominees. Senator Richard Shelby (R-Ala.) led the opposition, saying Diamond lacked monetary policy experience: “I do not believe the current environment of uncertainty would benefit from monetary policy decisions made by board members who are learning on the job,” he was quoted as saying by Reuters.
Despite Diamond’s renomination by Obama on Sept. 13, 2010, the Senate Banking Committee adjourned at the end of the year without approving the Nobel Laureate. The White House renominated Diamond for the third time in January 2011, but once again, the nomination was not approved. In this most recent failed vote, all Republicans on the Banking Committee voted against Diamond.
A June 6 Bloomberg article quoted Shelby saying before the May committee vote that Diamond was “an old-fashioned, big government Keynesian” and that he “supported bailing out the big banks during the crisis.” When it came time for the committee to vote in May, Republican Senator Mike Johanns of Nebraska, who had initially supported Diamond, felt that he could “no longer support a nominee so vocally in favor of more spending, more stimulus, and more quantitative easing.”
Furthermore, the Club for Growth, a non-profit organization that supports small government and low taxes, issued a statement opposing Diamond’s nomination and urging all Senators to vote “no” on his confirmation.
According to the Bloomberg article, Shelby issued a statement on June 5 calling for Obama to “nominate someone capable of garnering bipartisan support in the Senate … it would be my hope that the President will not seek to pack the Fed with those who will use the institution to finance his profligate spending and agenda.”
Bloomberg quoted Senate Banking Committee Chairman Tim Johnson (D-S.D.) as saying that “with nearly 14 million Americans unemployed, it is disappointing Republicans would rather play politics than help bring the Federal Reserve to full strength.” Johnson further added that “there was no reasonable justification for blocking” the confirmation. A June 6 MarketWatch article reported that this sentiment was echoed by FAO Economics chief economist Robert Brusca, who called the blocked nomination a victory of politics over intellect.
“The easy answer is to point to shortcomings in our confirmation process and to partisan polarization in Washington,” wrote Diamond in his opinion column, reflecting on the rational behind opposition to his nomination. “The more troubling answer, though, points to a fundamental misunderstanding: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy.”
After Shelby objected that Diamond’s work focuses on the labor market and pensions, Diamond explained in his column that “understanding the labor market — and the process by which workers and jobs come together and separate — is critical to devising an effective monetary policy.”
Diamond referred to his Nobel acceptance speech, in which he concluded that structural unemployment — mismatches between the skills of workers and the needs of companies — is not the driving force behind high unemployment in times of slow economic recovery. Though Diamond says the Fed is not well-suited to address structural unemployment, the fact that today’s unemployment is actually more related to the business cycle and decreased demand means that the Fed can alleviate unemployment without causing undue inflation.
Jonathan H. Gruber ’87, another MIT professor of economics, also commented on the crucial relation between unemployment and monetary policy: “Basically, they’re incredibly closely related,” he said. “The Fed’s job is a balance of managing unemployment and managing inflation.”
That the Senate would “say someone who won a Nobel Prize on unemployment is not qualified … is insane,” said Gruber. “Certainly, managing monetary policy is a complicated process, not academia,” he acknowledged. “But that is why the Fed needs the smartest person who can learn those issues best, and the most honest person who can do the right thing — and Peter Diamond is that person.”
“[The Republicans] object to Peter because Obama nominated him … they’re just playing politics,” Gruber said.
Diamond’s withdrawal leaves the White House with two vacancies on the Board of Governors to fill, a potentially difficult task. MarketWatch reported that “Shelby signaled that President Barack Obama should not expect smooth sailing for any of his nominees.”
“I had hoped to bring some of my own expertise and experience to the Fed,” wrote Diamond. “Now I hope someone else can.”