Fed Seat Stalemate Leaves Diamond in the Rough: Kevin Hassett
If a modern-day Aesop were to write a fable that illustrates the essential character of the American government, he could model it on the story of Peter Diamond.
Of the 67 winners of the Nobel Prize in economics, only a handful could be considered giants, thinkers whose names will echo in the halls of academia centuries from now. Diamond, a professor at the Massachusetts Institute of Technology, is one of them.
Which makes it surpassingly odd that he finds himself in an appalling Senate confirmation purgatory. His nomination to the Federal Reserve Board of Governors has been mired in the approval process for 11 months.
The gruesome sight is instructive. Anyone who wants to fix Washington needs to start with an understanding of Diamond’s case.
Since his initial nomination, Diamond has been twice approved by the Senate Banking Committee but hasn’t made it to the Senate floor for a vote. After his first approval from the committee last July, the full Senate failed to vote on the nomination before a long summer recess.
Under Senate rules, a nomination that doesn’t get a floor vote before a full recess must be returned to the White House, unless the Senate agrees by unanimous vote to hold the nomination until the next session. That means any one senator can scuttle the nomination. Diamond’s name was sent back to the White House.
Try, Try Again
President Barack Obama reissued the nomination in September, and Diamond was reapproved by the Banking Committee in November. The Senate again failed to vote on the nomination before the end of the session in December, nullifying the nomination for a second time. Hoping that the third time is the charm, the Obama administration renominated Diamond shortly after the current session opened in January.
Diamond may be in trouble because he holds views that are to the left of the Republican Party on many issues. In “Saving Social Security: A Balanced Approach,” the 2004 book he co- wrote with former Obama administration economist Peter Orszag, he revealed himself to be opposed to the individual retirement accounts that are at the center of many conservative proposals for reforming Social Security.
That said, the most likely explanation for Diamond’s confirmation problems is that he is caught up in the Republican payback for indefensible Democratic behavior during the final years of George W. Bush’s presidency.
The worst of many confirmation horror stories under Bush was the refusal of Democrats to confirm his nomination of Randall Kroszner to the Fed board.
No Slam Dunk
Kroszner, a respected conservative economist at the University of Chicago, was already serving a partial term when Bush nominated him for a full 14-year term in 2007. Confirmation should have been a slam dunk. But Democrats held him up, motivated in part by a desire to reserve that appointment for a president of their own party, which they in fact got in the 2008 election.
This is what we have come to: In the minds of our politicians, partisan maneuvering and score-settling far outweigh the desire to populate government with skilled individuals.
The fact that Diamond could be caught up in this mess is especially lamentable, since his body of work is difficult to locate on the political spectrum.
Tax Theory Pioneer
Along with James Mirrlees, also a Nobel winner, Diamond was a pioneer in the field of tax theory. His path-breaking work on optimal taxation demonstrated that government shouldn’t tax production, a result that helped start the literature that led to the flat-tax movement. That work should warm the heart of any red-meat Republican.
The Nobel committee cited his work on search theory, an area of economics that explores the implications for markets of the observation that search can be costly, a characteristic of real-world economies that had previously been omitted from models. This innovation made the models better without slanting them politically.
At this point in the fable, our modern-day Aesop would have to decide between two endings. He could imagine a president with great wisdom, who recognizes the history of injustice that has led us to this impasse. Such a man would call up Republican leadership and offer a deal that solves the problem and sets the stage for a hopeful future.
The deal is possible because Federal Reserve Governor Kevin Warsh recently announced his intent to retire from the board, opening up a new vacancy. If Kroszner were nominated to fill that position, then the Senate would confirm both Diamond and Kroszner. There it is -- a happy ending.
In a more likely scenario, Diamond is pilloried by Republicans and goes back to MIT defeated. What would have been his chair at the Fed sits empty, until the next election, when a Republican wins the White House and sends a worthy Fed nominee to the Senate for confirmation.
Guess what happens then.
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. The opinions expressed are his own.)
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