Peter A. Diamond

by on October 11, 2010 at 7:11 am in Economics | Permalink

Here is Diamond's home page, here is Diamond on Wikipedia.  Diamond has been at MIT since 1970 and he is considered one of the bulwarks there, having produced many excellent students, including Bernanke and Andrei Shleifer.  Here is the bit of most current interest:

On April 29, 2010, Diamond was announced by Barack Obama as one of three nominees to fill the three vacancies then present on the Federal Reserve Board, along with Janet Yellen and Sarah Bloom Raskin.[5] On August 5 the Senate returned Diamond's nomination to the White House, effectively rejecting his nomination. Ben Bernanke, the current Chairman of the Fed, was once a student of Diamond.

Some of Diamond's early work was in capital theory, as he outlined the conditions under which, in dynamic growth models, the level of capital could be inefficient.  Read this paper, from 1965, which is still his most frequently cited work.  It helped produce a standard framework for thinking about national debt and economic growth.

Diamond has contributed plenty to the theory of optimal taxation, in particular when linear commodity taxes are optimal and how to use the tax system for redistribution.  See this paper with James Mirrlees (also a Nobel Laureate) and also this one.  One implication is that taxing inputs often leads to more distortion than taxing outputs and you can think of this as one possible motivation for a consumption tax.

Here is Diamond's 1982 paper on macro and search theory, which I think of as his most influential.  The abstract is classic Diamond:

Equilibrium is analyzed by a simple barter model with identical risk-neutral agents where trade is coordinated by a stochastic matching process.  It is shown that there are multiple rational expectations equilibria, with all non-corner solution equilibria inefficient.  This implies that an economy with this type of trade friction does not have a unique rate of natural unemployment.

The relationship to the current day U.S. is striking.  One point he stresses is that subsidization of production can make sense and also that there can be real costs of converging to the lowest possible rate of unemployment too quickly.  This remains an important "framework" paper for analyzing the interaction of search and aggregate demand.  His other 1982 search paper implies that labor mobility will be less than is socially optimal.  This paper on search theory shows that unemployment compensation can lead to better job matches, by limiting crowding externalities in the job market.

He and Olivier Blanchard wrote a classic piece on the Beveridge Curve, which is about the relationship between job vacacies and the unemployment rate.  Some commentators cite the Beveridge Curve as evidence for structural unemployment, although this is controversial.

Diamond has written a great deal on social security, often at the applied level.  Here is his paper criticizing social security privatization in Chile for its high costs.  Here is his survey on social security reform proposals.  Here is his paper on macro and social security reform.  Here is a very good European talk he gave on pension issues.  Diamond wrote a book with Peter Orszag on social security and he has been a major influence on Democratic Party thinking on this issue; the book looks closely at progressive price indexing rather than wage indexing of benefits.  Here is a CBO summary and analysis of the plan.  Much of Diamond's more formal social security analysis stresses risk-sharing issues and in general he often points out that social security proposals, including Bush's privatization idea, are not well-grounded in rigorous analysis.

Here Diamond tells us not to expect 7 percent stock returns for the ongoing future.

Diamond has many interests, here is his survey on contingent valuation and whether some number is better to use than no number at all.  He and Stiglitz wrote a famous paper on risk and risk aversion.

Personally, my favorite Diamond paper is this short gem on the evaluation of infiinite utlity streams; it will make your head spin, as it asks whether we have coherent means of thinking about prospects with infinite utility and in general how intertemporal utility streams should be ordered.  See also his related paper on stationary utility, co-authored with T.J. Koopmans.

Here is his short introduction on behavioral economics.

I think of Diamond as the classic MIT economist, especially of the earlier, pre-Acemoglu generation.  Lots of theoretical rigor, though sometimes his theory pieces don't have a simple or simply analytic punchline.  There is greater concern with risk, and stability conditions, and dynamic and border conditions, than you would see in a Chicago theory paper.  There is a strong emphasis on the ability of government to implement welfare-improving schemes of the sort found in social democracies.  The approach is quite technocratic — solve and advise.  Public choice and political economy considerations take a back seat.  High IQ.  Of the MIT economists, he has done the most to pursue the Samuelson tradition of having a universal method and very broad interests.  His papers remain central to public finance, welfare economic, intertemporal choice, search theory, macroeconomics, and other areas.  His policy impact on social security has been significant.

Addendum: Levitt comments on Diamond.

liberalarts October 11, 2010 at 3:40 am

While it would be difficult to read and digest for people who are not professionally trained economists, Tyler's linked Diamond and Mirrlees paper was really path breaking. It clearly laid out the difference between distorting production and consumption behavior. If the government wants to alter income inequality outcomes, it can sacrifice pure economic efficiency with taxes that improve equity outcomes. It is not optimal, however, to distort production efficiency to improve equity outcomes. [Economic efficiency in this context generally means that relative cost ratio and price ratios are equal across firms and consumers.]

Bill October 11, 2010 at 6:38 am

Didn't know that Obama resubmitted Diamond's name to the Senate.

So, perhaps the headline should read: Nobel Committee Supports Nominee to Federal Reserve.

From the WSJ: "Diamond’s expertise in the labor market, which is of particular concern in the current economic environment, was noted when he was nominated for the Fed. However, his nomination was sent back to the White House. Several Republicans object to his candidacy on the grounds that he has limited macroeconomic policy experience. The White House renominated Diamond, but his nomination requires another vote of the Senate Banking Committee before it can go to the floor.

Senate Banking Committee Chairman Christopher Dodd (D., Conn.) has said he would hold a hearing on Mr. Diamond’s nomination when the Senate reconvenes after the November mid-term elections."

Anonymous October 11, 2010 at 7:21 am

The fact that Obama tried to appoint Peter Diamond says all you need to know about him. He's a socialist, plain and simple, and the Nobel Committee is again trying to impose Scandinavian communism from abroad through undue interference in other people's business.

Diamond, go DIAF.

Bill October 11, 2010 at 8:07 am

Joe, I might have better said it by saying that all mathematical work is theoretical.

Lisa baker October 11, 2010 at 8:36 am

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Joe in San Diego October 11, 2010 at 11:13 am

Is there any reason why my last two post in response to Bill have not made there way onto the board?

Steko October 11, 2010 at 2:02 pm

If Ben Franklin was alive today he'd by like 404 years old! He also might revamp some of his adages. I'd suggest "Nothing is certain but death, taxes and rightwing cranks in blog comment threads."

WillJ October 11, 2010 at 4:42 pm

Socialist? Keynesian?

Wow, some of the comments here are pretty depressing….

Joe October 12, 2010 at 5:50 am

He won his Nobel Prize for his work in unemployment at a time when our unemployment rate is near 10%. Give this guy the job, and a lot more Americans will have jobs too!

wes October 12, 2010 at 9:35 am

Looks like PD's entire career is based on analysis of a ponzi scheme: social securtiy. He is a hack with a meaningless career output; he would have been a toad of a king or prince 250 years ago. Pathetic asskisser despite his ivory tower insights into the world of economic pornography: statism. He is no architect but he sure knows how to drive the big rig at high speed and consequences be damned [with other people's lives and assets]. Hope he blows his prize money on a lousy stock or gets cheated by a Madoff wannabe.

Tom Albert Williams October 14, 2010 at 6:52 am

Bill….there is much theory that is not mathematical. For example, the field of biology. A little bit of knowledge is a dangerous weapon.

Thomas Levenson October 15, 2010 at 10:06 am

I'm flabbergasted by the smug stupidity of much of what is here (Diamond = socialist! Die in a freaking fire! Oy), but to respond to one temperate but wrong claim by Tom Albert Williams, biology is a field that has been transformed by the application of mathematical methods to its theoretical component. At least in the English language, this move was founded in part by the genuine socialist JBS Haldane (see his famous essay "On Being the Right Size" — http://irl.cs.ucla.edu/papers/right-size.html — for a very simple and elegant example of the insights he midwifed with math). It has become one of the central themes of post WW II biology, and it is becoming only more important as time goes one.

Add to that the allied field of computational biology, and you see in this field just as in economics, and in chemistry and physics before, and in geology and planetary science now, and on and on, the impact on generalization, abstraction and explanatory power which follows the application of mathematical reasoning to the "natural history" phase of data acquisition.

All sciences aspire to the mathematization of their theoretical underpinnings. To imagine otherwise is self-deception.

newspooner January 4, 2011 at 6:15 pm

Just another pseudo-economist trying to use his nonsense as a justification of socialism and government control over the limited freedoms of individuals. What a travesty that a rich institution like MIT pays him a big salary to push out drivel and confuse the minds of impressionable college students who are being groomed to be the next generation of big government advocates.

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