Sunday, October 17, 2010

How Big of a Sell Out is the New Nobel Laureate Peter Diamond?

I have already pointed out how Diamond is a major tinkerer/supporter of the Ponzi Scheme known as Social Security, but he went way over the top this morning as a guest on Fareed Zakaria's CNN show, GPS. He pretty much threw the theory, that got him the Nobel Prize, under the bus.

The Royal Swedish Academy of Sciences specifically stated they awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2010 to Diamond, Mirtensen and Pissarides for: (my emphasis):
Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates' models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.

Diamond, et al, used mathematical gobbldygook, but they do reach the correct conclusion that if you pay people not to work, it takes them a lot longer to find work.

So when Zakaria questions Diamond about the high unemployment, do you think Diamond would enlighten the television audience about what he discovered about unemployment, that won him the Nobel Prize (!)? That is, if you pay people not to work, they take longer to find work. Nope, doesn't mention a word about it. Instead he goes into Krugman/Keynesian type blather about weak aggregate demand. Does he not understand his own theory or, since he is up as a nominee for a Fed governorship, is he afraid to speak truth?

BTW, he also said that Bernanke, who is about to go on a money printing binge that is sure to create huge inflation, did a great job during the financial crisis. That, of course, is the period when Bernanke shoveled billions upon billions to Goldman Sachs and the other Wall Street elite.

UPDATE: Here's the full transcript of the Zakaria interview with Diamond. Nothing, nothing about his theory of unemploymnet.
ZAKARIA:Here to talk about our job problem and his is MIT professor and Nobel laureate in economics Peter Diamond. Welcome.

PETER DIAMOND, MIT: Thank you. Thank you for having me.

ZAKARIA: You are up for a position on the Federal Reserve board, and after President Obama nominated you, the first time, Richard Shelby of Alabama put it on a hold saying, he didn't think you had enough experience and he didn't want this to be an on-the-job training process. How do you react to that, you're a 10-year professor at MIT and just won the Nobel Prize?

DIAMOND: This is a job I would like to have. I would like to clarify. I'm filling in the tail end. Nobody is proposing that at age 70 I take on a 14-year commitment.

The appointment I've been nominated for would end in January, 2014, and I understand there's a political process in Washington and I'm patiently waiting and hoping it turns out well.

ZAKARIA: Are you frustrated by it?

DIAMOND: I was warned right at the beginning that this is a process that is unpredictable as to how long it will take or even what the outcome will be, and that's what I should expect.

The first piece of advice I was given was, don't sign a lease or buy a house until you've been confirmed. So frustration often comes from deviation of reality from expectations. Fortunately, people were giving me reasonable expectations.

ZAKARIA: If do you get the job, you will be in the unusual position of being on a board where the chairman is your former student. You were Ben Bernanke's adviser. Do you think he is doing the right thing?

DIAMOND: I have greatly admired what Ben did as the financial crisis hit. As a student of the great depression, he understood how terrible this could turn out to be, if we didn't step in dramatically to prevent the financial markets from really crashing the rest of the economy.

And naturally, this, the economy is very different from what it was in the '30s. So there was very much a trial and error and experimental look at different ways of doing things.

There's no reason to expect that anyone would get it just right, but I'm full of admiration for his viewing. The problem is doing whatever it took to make sure we didn't get a second great depression.

ZAKARIA: Professor Diamond, when you look at the American economy today and you see this enormous unemployment rate, 9.6 percent, what do you think is at the heart of it?

Is there a structural problem, a mismatch between the kinds of skills that American workers have and the kinds of jobs they need for the new world they're going into?

Why is it that it's so hard for people to get jobs, other than the obvious problem that there's not demand in the system, that people aren't buying a lot of stuff so there isn't enough demand for products and therefore, for workers?

DIAMOND: When you said other than the obvious thing that demand is limited, you took away the way I wanted to start, which is the central focus of the problems in the economy right now, is not that the labor market is working badly, but the demand for labor is weighed down.

And there a number of things the government has done to enhance labor demand, and I'd pick out the two big ones, the original stimulus bill, not only increased demand generally, but particularly by providing money to states and local governments, greatly reduced the number of layoffs early on, we're seeing the layoffs picking up now.

And secondly, an enormous amount of the functioning of ordinary business of Main Street relies on credit flows, credit flows for investment, credit flows for dealing with your suppliers.

And when the financial markets seized up, that would have been even more destructive to the rest of the economy than what we have seen the current 10 percent unemployment is painfully high and bringing that down is a central goal for the country.

But it would have been vastly higher if the government didn't act to get some of those credit flows back functioning even though with all the problems that have come out.

It's obviously not functioning as well as it was before, but I think if we get it functioning again, we will go back to normal times.

ZAKARIA: But you know that many people believe that these will not be normal times, this is not a normal recovery, because in the aftermath of a financial bubble, you have a much longer period of recovery, basically because consumers are maxed out, they are very reluctant to spend.

Right now, if you look at the average American savings rate is back up to 6 percent, but the historical average is 9 percent. Now if American savings go back up to 9 percent, it's going to be a year and a half more before you really see consumer demand come back and therefore the demand for workers come back.

Is it likely that we can handle 10% unemployment for another year and a half?

DIAMOND: I think you've put your finger on something essential, which this is a slow process. It will continue being a slow process, and there's a critical role for government in trying to speed it up.

I view the U.S. economy as extraordinarily adaptive, and we've seen historically concerns voiced whenever there's a technological change in their automobiles or there are airplanes or there's the steam engine, and there's worries that now there will be permanent high unemployment. The economy adapts, and I expect the economy to adapt this time as well.

On the other hand, it would be folly to think this could happen very quickly, that there's a switch in Washington that all they have to do is throw it and we'll go promptly back to 5 percent unemployment. There's no way of doing that.

ZAKARIA: What would you do about the Bush tax cuts, set to expire, if all of them expire, the government gets $700 billion over the next 10 years. It eliminates almost half the structural deficit instantly, but yet of course it would have, it would take money out of the economy.
DIAMOND: I think in terms of the short run, it's important to preserve at least some of the Bush tax cuts, but for the long run, it's important to preserve flexibility by not making the tax cuts permanent.

Much of Washington debates are about more versus less, and my training as an economist is to focus on how to do it better. What we need is more spending on some things, where it would really be worthwhile, and less spending on others, and we need some taxes to be fixed to function better.

And that may mean more taxes for some people, and lower taxes for others. I think the details really matter.

ZAKARIA: All right, a final question, Professor Diamond. How are you going to celebrate or have you already celebrated the news of the Nobel Prize?

DIAMOND: Well, there was a lovely celebration at the department yesterday, with all our graduate students and my faculty colleagues, and Saturday is my anniversary and my wife and I will go to one of our favorite restaurants and have a celebration.

ZAKARIA: Perhaps a special bottle of wine. Thank you very much, Professor Diamond.

DIAMOND: Thank you for having me.


  1. Not surprising. Remember, no Keynesian actually believes in markets.

  2. Hahaha. When asked to choose between either a highly respected economist's clear explanation of his intelligent, nuanced, and comprehensive view of employment and social security vis-a-vis the economy on the one hand and an angry, insult-laden and politically-motivated blog post that refers to math as "gobbledygook", I know I'm going right to that blog post for THE TRUTH.

  3. Appeal to authority is great way to win an argument when you don't actually know anything about the topic.

  4. I love how he wins the Nobel with "gobbldygook" and math and stuff and yet you think you know more than he does.

    You, sir, are an idiot.

  5. Dr. Diamond's responses are clipped as yours would be if you were up for senate confirmation. But essentially his arguments and follow thru are consistent. He's just parsing the massively grim news with required media optimistic spin so he doesn't scare the bejesus out of America before the confirmation hearing. No bus. No sell out. Just prudent politicking.