WASHINGTON (Reuters) - Peter Diamond, a nominee to the Federal Reserve Board, on Tuesday said the U.S. economy needs more fiscal policy support but extending Bush-era tax cuts for the wealthiest Americans would be the wrong medicine.
In unusually direct comments for a nominee awaiting Senate approval, the Nobel laureate weighed in on the politically contentious debate over taxes. Diamond's remarks are likely to chafe Republican lawmakers and could make it more difficult for him to secure needed support to take office.
"For very high earners, their tendency to spend out of slightly higher after-tax incomes is small enough, that given the worries about the long-term debt trajectory of the country, I think it would not be good policy to extend the tax cut for the highest earners," Diamond said in an interview with Reuters Insider television.
"For the others, I think it's important to extend it, but I think it ought to be a limited extension," said Diamond, an economics professor at the Massachusetts Institute of Technology.
It is highly unusual for a Fed nominee to speak so candidly about fiscal policy -- indeed nominees rarely grant on-the-record interviews -- and Diamond's comments put him at odds with Republicans who want to extend all the tax cuts enacted under former President George W. Bush.
Absent action by Congress, the tax cuts are set to expire at the end of this year. President Barack Obama wants to extend the lower tax rates only for families making less than $250,000 a year, while Republicans are pressing to extend them for all taxpayers. Diamond did not make clear whether he felt Obama's threshold was appropriate.
Obama said after a meeting with Republican congressional leaders on Tuesday that he still disagrees with them but that the two sides had agreed to negotiate a deal in coming days.
The president said he appointed Treasury Secretary Timothy Geithner and White House budget director Jack Lew to work with lawmakers to come up with a compromise to prevent broad tax increases from occurring next year.
Already, Diamond, who won the Nobel prize for economics in October for his research on labor markets, has had trouble securing support for his nomination from Republicans, who have argued he lacks expertise in monetary policy.
Obama initially nominated Diamond in April to serve a term on the Fed's seven-member board that expires February 1, 2014. Diamond is an expert on behavioral economics, which studies why people do not always make rational economic decisions.
His nomination was returned to the White House in August after being blocked by a lawmaker via a procedural obstacle, forcing Obama to renominate him. Diamond's nomination cleared the Senate Banking Committee for a second time on November 16 by a 16-to-7 vote, with all opposing votes cast by Republicans.
The nomination now awaits approval by the full Senate, but it is unclear when, or even if, the Senate will act. If Diamond is not approved by the end of the year, his nomination will die.
Diamond told Reuters Insider that a controversial Fed plan to buy an additional $600 billion in government debt, which some Republicans have said could lead to inflation, was an insurance policy at a time the global economy faces risks.
"The economy is growing and may well grow out of where we are, but it's doing it painfully slowly," he said. "It would be good to move faster, and as we all know, there are various risks around the world that could trigger another dip -- not very likely, but possibly."
He said it would help if Congress would complement the Fed's efforts by using the government's budgetary levers to provide more stimulus for the economy.
"The monetary people are pushing as hard as they can, the fiscal people are not, and it would be nice to have them more in sync with each other," Diamond said.
Diamond said in interviews on the day his Nobel prize was announced that further spending to prevent layoffs of state and government employees would be a particularly important boost for the economy. He said on Tuesday the recession would have been far deeper without the $814 billion stimulus package the Obama administration approved in 2009.