MIT’s Diamond Says Washington Must Fix Jobs Before Deficit

Nobel Prize-winning economist Peter Diamond said U.S. policy makers should focus on fighting long-term unemployment because workers who lose skills present a bigger challenge than the country’s budget deficit.

“We have an unemployment crisis and a debt problem, and Washington is behaving as if we have a debt crisis and an unemployment problem,” Diamond, a professor at the Massachusetts Institute of Technology since 1966, said during an interview today on Bloomberg Television.

Young people who are unemployed for long periods are forfeiting income not only today but “for years to come” because they are losing workplace experience, Diamond said. The government should take advantage of low borrowing costs to finance infrastructure projects and research and development that help put the unemployed to work, he said.

U.S. employers added more workers to payrolls than forecast in December and the jobless rate declined to an almost three-year low, a Labor Department report showed today. The 200,000 increase, which beat forecasts, followed a revised 100,000 gain in November that was smaller than first estimated, Labor Department figures showed. The jobless rate unexpectedly fell to 8.5 percent, while hours worked and earnings climbed.

Even so, the unemployment rate during the past three years has marked the worst stretch of joblessness since 1939 to 1941.

Best Option

Government spending is the best option for spurring employment and economic growth, Diamond said. The benchmark 10-year Treasury note yield has traded near 2 percent since September.

“Fiscal is the only big gun around,” he said. While there isn’t a risk of inflation, “fiscal tools right now are much powerful than the monetary tools.”

Diamond spoke from Chicago, where the annual meeting of the American Economic Association was taking place. He shared the 2010 Nobel Prize in Economic Sciences with Dale Mortensen and Christopher Pissarides for research into the difficulties of matching supply and demand, particularly in the labor market.

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