The Peace Bridge in Buffalo, New York. MIT professor Peter Diamond is not always a supporter of infrastructure spending as stimulus but says a massive program would work in the present context because the goal is to reduce long-term U.S. unemployment.DAVID DUPREY
He should be a member of the Federal Reserve Board.
Peter Diamond, the Massachusetts Institute of Technology professor who shared the Nobel Prize in economics last year for his work on labour markets, failed to convince some stubborn Republicans that he was qualified to work at the central bank.
Alabama's Richard Shelby, the ranking Republican on the Senate Banking Committee, was adamant that Prof. Diamond was ill-suited for the Fed because he lacked a background in monetary policy. Few thought Mr. Shelby's refusal to clear Prof. Diamond's nomination was anything more than crass partisan obstructionism. The Fed, after all, has a legislative mandate to maintain maximum employment.
Forget the debt-ceiling debate: the failure of the president to put a Nobel laureate at the central bank was the moment when it became clear something was seriously wrong in Washington. But if there's a silver lining to this episode, it's that Prof. Diamond is free to air his views on economic policy at an important time.
"No. 1 on my list remains serious fiscal stimulus," he said in an interview last week at a conference in Lindau, Germany. "Obviously that's not something Obama can do on his own...But it's an interesting question if he came out strong, how would the American public react."
What follows is a rough sketch of what a Peter Diamond stimulus program would look like.
It would recapitalize smaller banks and it would allow bankruptcy judges to rewrite mortgages. (The former are the primary lenders to entrepreneurs, who create jobs faster than established companies; the later would create an incentive for banks to avoid foreclosures.)
Prof. Diamond's centrepiece would be a "big" infrastructure program. But not for the reasons you are thinking. "This is not Keynes, let's dig holes." Prof. Diamond dislikes infrastructure spending as a stimulus in a normal recession because it takes too long to get the money in the system (the "shovel-ready" problem.)
But the U.S. isn't fighting a recession; it's fighting a protracted period of weak economic growth that will condemn millions of people to welfare. An infrastructure program works in the present context because the goal is to reduce long-term unemployment. The U.S. needs to upgrade its roads, bridges and schools, so why not do so now? "This is a real problem widely acknowledged to exist," Prof. Diamond said of the U.S.'s crumbling infrastructure. "In so far as we do now something that we are going to do in a few years because the American economy needs infrastructure upgrading, we're not hurting the long-run debt position.
"Absent another insanity over the debt limit, we've got a decade before anyone is going to worry about the U.S.'s ability to pay for these things," Prof. Diamond said. "What I worry about is we have an elephant sized problem and I hope we don't just get flea-sized proposals."
In the flea-sized camp is the current Obama administration proposal to create an infrastructure bank. "The government should just up and do it," Prof. Diamond said, explaining that creating a new entity that would use tax money to leverage private funds would only waste time. A bank might bring private-sector expertise into the lending process, and it might help keep politicians' hands off the money, but "it seems like something that will slow down something that is inherently slow anyway," Prof. Diamond said.
There is also talk in Washington of a corporate-tax cut. Prof. Diamond wouldn't bother. In his own words:
"You have to ask yourself what you are getting for the spending. If you are getting infrastructure that you badly need sooner…and you are getting it at no additional cost -- in fact cheaper, because you are drawing on idle resources -- that's a winner. What do you get out of the corporate tax cuts? You lose some federal revenue for investment that might happen anyway later. It would be good to have it earlier, but is it worth that tax cost? That's got to be factored in: what do you get for it."