I am grateful that Professor Peter Diamond, Nobel recipient and labor economist, wasn’t nominated to the Fed. In today’s Big Interview on the Wall Street Journal, he said the following:
The economy needs stimulus, it needs monetary stimulus, it needs fiscal stimulus, and this was a good step. How much it will help is hard to know. If we need more down the road we’ll see.
We need fiscal stimulus badly, but that’s not a reason for the Fed to not be adding to monetary stimulus and avoiding the tightening that would come that would result from an undoing of this [quantitative easing and ZIRP].
Inflation is low right now and I don’t understand why people are afraid of it suddenly appearing.
The point here is that there — we’ve gone into an unusual recession compared to the things we’ve had since WW2. We’ve had a banking crisis, and we’ve had a great deal of overbuilding in commercial and residential real estate, and we have a lot of mortgages underwater, a lot of foreclosure that have happened, and the economy coming out of that won’t look like the economy coming out of a standard recession, so the level of construction wont bounce back quickly. There is some structural element associated with part of the economy not functioning at the same level as before even if we had adequate aggregate demand. There are a bunch of studies of how much is structural by which we mean the residual— it’s what we would subtract by how much unemployment has gone up to get an estimate of how much we need to be using aggregate demand stimulus.
… but what is very clear in the course of a short period when unemployment goes from 5% to 9 or 10% most of that is from inadequate aggregate demand … inadequate aggregate demand is the cause of unemployment. … Most of it is from inadequate aggregate demand and what we need now very badly is more fiscal stimulus and the continuation of the Fed of rolling out money stimulus as it fits their projections for what’s going on.
…The recovery of the economy is a process, it’s slow, and one number [of an amount of fiscal stimulus] isn’t the issue, it’s what you need at the time. … My view is there are lot of things the country needs serious spending on and infrastructure is an obvious one. … And we get a Keynesian multiplier out of it.
Right now, in the US [deficits are less important than fiscal stimulus]….We do not have a debt crisis we have a long run debt problem.
[Economic policy] needs to be a process of monitoring and adapting to it. … You need to see what happens and design a policy around it.
The man is a doctrinaire Keynesian with no subtleties. Everything he has suggested has been tried and has failed, yet he wishes to do more of the same. He is an economic tinkerer and meddler with no understanding of the operation of markets. He does not understand that his policies create and sustain unemployment.
We are fortunate that Professor Diamond is a private citizen and not a policy maker.