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Who Needs a Nobel Laureate When We Have Google?

June 7th, 2011 . by economistmom

google-government-logo

I was debating on what to write about tonight–either the update on Nobel Prize winner Peter Diamond’s failed nomination to the Federal Reserve Board (with his very public withdrawal as shared via the New York Times), or Minnesota governor (and Republican presidential candidate) Tim Pawlenty’s speech on his “economic plan” (text of speech here via the Wall Street Journal’s Washington Wire blog).  I decided I could do both in one post, because both Peter Diamond (in his NYTimes column) and Tim Pawlenty (in his economic policy speech) talk about how they would approach improving the role and quality of government in our lives.

By the way, the Diamond nomination appeared doomed back in October of last year when Diamond had just won the Nobel Prize–as I wrote about at the time, here.  The updated story on the “why” (from Diamond’s new column) isn’t really any different from the story last October.

As Diamond explains:

Last October, I won the Nobel Prize in economics for my work on unemployment and the labor market. But I am unqualified to serve on the board of the Federal Reserve — at least according to the Republican senators who have blocked my nomination. How can this be?

The easy answer is to point to shortcomings in our confirmation process and to partisan polarization in Washington. The more troubling answer, though, points to a fundamental misunderstanding: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy…

[U]nderstanding the labor market — and the process by which workers and jobs come together and separate — is critical to devising an effective monetary policy. The financial crisis has led to continuing high unemployment. The Fed has to properly assess the nature of that unemployment to be able to lower it as much as possible while avoiding inflation. If much of the unemployment is related to the business cycle — caused by a lack of adequate demand — the Fed can act to reduce it without touching off inflation. If instead the unemployment is primarily structural — caused by mismatches between the skills that companies need and the skills that workers have — aggressive Fed action to reduce it could be misguided.

In my Nobel acceptance speech in December, I discussed in detail the patterns of hiring in the American economy, and concluded that structural unemployment and issues of mismatch were not important in the slow recovery we have been experiencing, and thus not a reason to stop an accommodative monetary policy — a policy of keeping short-term interest rates exceptionally low and buying Treasury securities to keep long-term rates down. Analysis of the labor market is in fact central to monetary policy.

And what could a Nobel laureate economist bring to the question: what makes for better government?  Towards the end of his column, Diamond suggests this:

To the public, the Washington debate is often about more versus less — in both spending and regulation. There is too little public awareness of the real consequences of some of these decisions. In reality, we need more spending on some programs and less spending on others, and we need more good regulations and fewer bad ones.

Analytical expertise is needed to accomplish this, to make government more effective and efficient. Skilled analytical thinking should not be drowned out by mistaken, ideologically driven views that more is always better or less is always better. I had hoped to bring some of my own expertise and experience to the Fed. Now I hope someone else can.

Enter Tim Pawlenty and his speech today, where he laid out his plan, summarized by:  “Let’s grow the economy by 5%” (per year).  His primary means of getting us there:  revenue-losing-that-will-grow-the-economy-so-much-that-they’ll-become-revenue-gaining tax cuts.  I’ll have much more to say about his tax reform plan later (and probably right up through the election).  But besides cutting taxes, Pawlenty would cut spending–by what sounds like a lot.  How would he figure out what to cut?  He explains:

There’s some obvious targets. We can start by applying what I call “The Google Test.” 

If you can find a good or service on the Internet.     Then the federal government probably doesn’t need to be doing it.

So there’s Pawlenty’s answer (and the “connection” in this blog post).  He’s basically saying: Who needs a Nobel laureate economist waxing philosophically and analytically on the spending we need more of versus the spending we need less of, when we could just “Google it.”

Huh?

If it’s not already obvious from my tone, I don’t like the “Google Test.”  There are many things that the private sector cannot be expected to do well on its own, especially when an important “public good” is to provide a “safety net” for people who cannot fend for themselves.  Or whenever any market participant faced with their own self-interest (to maximize their own individual utility or profit) would fail to account for the social costs or social benefits of his or her actions/decisions.  The free market can only “optimize” based on market values; market forces (the “invisible hand”) can’t lead us to allocations that maximize social welfare where market prices don’t correlate well with social values.

I’ll be doing a Minnesota public radio interview on the Pawlenty speech tomorrow (Wednesday) morning, and if there’s anything to share afterward, I will post it.

**UPDATE (12:30 Wednesday):  Here’s a link to the audio of my MN public radio interview, which focused mainly on the tax policy part of the Pawlenty plan.  More on this in future post(s).

11 Responses to “Who Needs a Nobel Laureate When We Have Google?”

  1. comment number 1 by: AMTbuff

    I do not support the underpants gnome plan for economic growth any more than I support it for health care spending reduction.

    As to Diamond, the Nobel Committee has over the past 20 years completed the destruction of its brand identity. What was once a badge of merit is now a badge of left-wing political identity. A peace prize to Obama for doing nothing other than defeating the specter of Bush? To Arafat for doing worse than nothing? The Committee is simply pathetic, and its award taints the recipient more than it honors him.

    Diamond is an excellent economist, and he would have done a good job in government. I think the Nobel Prize seriously hurt his approval chances by labeling him as a leftist in the same group as Paul Krugman, who coincidentally was awarded the prize at the peak of his Bush bashing.

    One of these days someone who does not wish to be tainted will refuse the Nobel Prize despite its huge monetary value.

  2. comment number 2 by: Gipper

    Amazing that Diamond didn’t mention the minimum wage and hyper-extended 99 week unemployment benefits as major factors in sustaining high unemployment rates. Anyone who took Econ 1 would figure out that those are obvious major-league culprits in prolonging the jobless recovery. But our Nobel laureate is mum on the subject. Amazing!

    However, because Diamond, like Krugman, is a partisan hack that will allow his prejudices to tailor his economic policy recommendations, I think he is far from fit as a member of the Federal Reserve. We need objective advice not tainted with partisan nonsense.

  3. comment number 3 by: Gipper

    “Safety net for those who cannot fend for themselves.” Is that why the federal govt. spends (net of defense) 20% of GDP? Really?

    NPR, high speed rail, ag subsidies, Medicare and SS for wealthy seniors, bailouts for Chrysler, GM, Fannie Mae, AIG, etc.? Economistmom, you are full of it.

    Let the states take over the safety net burden, as the framers of the constitution intended. We don’t need departments HUD, HHS, Labor, Commerce, Energy, and Education to foster the common good or a safety net in this nation of ours.

    You are just as lame as Pawlenty, which is why this budget struggle is taking so long.

  4. comment number 4 by: AMTbuff

    Gipper, flattery will get you nowhere. :/

  5. comment number 5 by: Jason Seligman

    How is the Nobel a “liberal” thing? Haven’t several leading “conservative” economists won?

    Who would not accept the prize to prevent being tainted?

    And what exactly is the underpants gnome (besides possible a terrible anti-conscience that appears increasingly to guide the male political ruling class regardless of nation or party…)?

    But back to basics - Diane I enjoyed your radio show. Of course the link between National Savings and economic growth has been more or less tenuous over time, but given our proximity to long run solvency thresholds there is no reasonable way to argue against the very real link at present for all but the most productive investments, and a generic supply side tax cut is not among them. Very straightforward.

  6. comment number 6 by: AMTbuff

    http://www.southparkstudios.com/clips/151040/the-underpants-business

    I warn you that you may burst out laughing!

  7. comment number 7 by: Shadowfax

    We know several Republican canards on the economy are baloney (e.g., tax cuts increase revenue, we have a spending problem not a revenue problem, Fannie/Freddie/CRA caused the crisis, stimulus has no effect except on deficits, global warming is a hoax).

    In other words, most of what the new Republican party stands for is counter-factual nonsense.

    However, what scares me is that folks just don’t care anymore. They like the idea of low taxes and small government. Many folks don’t want to give their tax dollars to a government that bailed out banks and other rich folks without serious consequences (i.e., jail time).

    If facts matter less in decision-making, that is a danger for all of us.

  8. comment number 8 by: BillSmith

    What are Diamonds ideas on the economy?

  9. comment number 9 by: Centerist Cynic

    We see this over and over again, educated and thoughtful analysis is treated with disdain. Meanwhile things like the “google test” gain traction.

    Is it any wonder that our country is in such horrible shape fiscally?

  10. comment number 10 by: Andrea

    Honestly, I don’t like the Google test and I think that if we leave to the private sector we are missing the real function of the public which is to give a safety net to the people unable to fend themselves….

  11. comment number 11 by: Jim Glass

    the Nobel Committee has over the past 20 years completed the destruction of its brand identity … A peace prize to Obama for doing nothing other than defeating the specter of Bush? To Arafat for doing worse than nothing? The Committee is simply pathetic

    To be fair, the Peace Prize comes from a different group than the rest — out of Norway rather than Sweden.

    Keynes said the government shouldn’t do what the private sector can even if politicians believe they can do it better — so I don’t see what controversy is deserved over that idea. (I admitt hat Keynes can be quoted on both sides of most every issue he ever mentioned, but still …)

    And anyone who appreciates the underpants gnomes will appreciate the real story of the Treasury’s management of the financial crisis (not shown on HBO!).

    “All the economics I need to know I learned from South Park”.