Citing partisan politics and a misunderstanding of how economics and money supply work together, Nobel Prize winner Peter Diamond has decided to withdraw as a nominee for Federal Reserve governor.

 

The MIT professor’s nomination has encountered repeated opposition from Senate Republicans, led by Richard Shelby of Alabama, who allegedly objected to Diamond’s lack of monetary policy experience.

 

In October 2010, Diamond was awarded the Nobel Prize in Economics for his research relating to unemployment and labor markets. In an Op-ed published by The New York Times, Diamond insisted that his expertise in labor markets qualified him to serve on the Fed board, because joblessness can affect the economy and the monetary system.

 

In addition to blaming his stalled nomination on the “shortcomings in our confirmation process and to partisan polarization in Washington,” Diamond wrote: “The more troubling answer, though, points to a fundamental misunderstanding: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy.”

 

Michael Gapen, a former Fed economist, said it was “a pity” Diamond was prevented from helping the national bank, “since Diamond’s work on labor markets would be of importance…. This was a case of politics winning out over pragmatism.”

 

When the current chairman of the Federal Reserve, Ben Bernanke, turned in his doctoral dissertation at MIT in 1976, he thanked Professor Peter Diamond for reading and discussing his work.

 

The real reason Republicans blocked Diamond’s nomination probably has more to do with settling a score with Democrats. In 2007 and 2008, Democrats blocked one of Republican President George W. Bush’s Federal Reserve nominees, Larry Allan Klane, in order to hold open a place on the assumption that Barack Obama would be elected president and make his own choice. Republicans had used the same tactic eight years earlier, blocking a Bill Clinton nominee. The pettiness of the whole affair is highlighted by the fact that Klane was a Democrat.

 

With Diamond out, President Barack Obama must now fill two vacancies on the Fed board.

-Noel Brinkerhoff, David Wallechinsky

 

Obama’s Nobel-Winning Fed Pick Withdraws, Slams Partisan Politics (Reuters)

When a Nobel Prize Isn’t Enough (by Peter A. Diamond, New York Times)

The Scandal No One is Talking About (by E. J. Dionne Jr., Washington Post)

Nobel Prize Winner Peter Diamond Deemed “Unqualified” by Sen. Shelby (by Noel Brinkerhoff, AllGov)

Markets with Search Frictions: Scientific background on the Nobel Prize in Economic Sciences 2010 (Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences) (pdf)