When Diamond was nominated to be a Fed Governor, my first reaction was that this was an odd choice, as Diamond's policy expertise is related mainly to social security and taxation. I was told that one of the objections from Republicans in Congress had to do with this interview in Macroeconomic Dynamics, where Diamond says:
I think there are things you can learn from macro models that have the underlying market-clearing, competitive, structure, but you shouldn’t weight them too heavily when thinking about policy because they are missing some key ingredients. I don’t know if I have anything more to say, because it’s not the case that I stay abreast with macro developments.Now, you might be a little troubled at the thought that a nominee for a post as Fed Governor does not think much about macroeconomics, but if you read the rest of the interview, he comes across as a fairly open-minded and thoughtful individual. Knowing Diamond's work, and reading that interview might lead me to conclude that Diamond probably dominates most of the people who have actually served as Fed Governors. Surely, given his knowledge of economics, he could fill in for any particular shortcomings in terms of monetary economics, banking, and institutions.
Now, after reading Diamond's piece in the New York Times and reviewing his Nobel address (with slides here) I'm not so sure.
First, as Diamond points out in his Nobel address, in policy analysis you are allowed to be somewhat loose:
Understanding of the economy, and policy recommendations and decisions, should reflect analysis through multiple models. And they should incorporate insights that seem right even though they have not yet been modeled.What does that last sentence mean? What makes things "seem right?" Does this mean you vote in the FOMC based on a thought that popped into your head in the shower that morning? You get an idea about what seems right in Diamond's mind from his New York Times piece and the rest of his Nobel lecture. We understand that it is fine to jump from talk about labor search and observations on labor market flows to statements about inflation; we understand that inflation cannot rise when unemployment is high; we understand that we are in a state of aggregate demand deficiency.
Diamond seems like a breed of economist we have seen before: the smart theorist who, when faced with a macroeconomic problem, for some reason reverts to the Keynesian crosses and IS-LM models he or she learned as an undergraduate, rather than putting to good use the solid economics that he/she knows well. Richard Shelby and the other Republicans on the Senate Banking Committee may be goofy. They also appear inconsistent, as Peter Diamond would surely not behave much differently from Janet Yellen at an FOMC meeting, and he knows far more economics than does Sarah Bloom Raskin. However, maybe Shelby did society a favor, and we're much better off if Peter Diamond works at MIT than at the Fed. Diamond may not realize it, but he may be much better off as well. A Fed Governor does not have the same access to and control over staff economists that a regional Fed President does, and there are constraints on how a Governor can interact with other Governors. Seems like a lonely life.