Fed nominee Diamond: U.S. can slay unemployment

OSLO (Reuters) - Peter Diamond, a 2010 Nobel laureate in economics whose nomination to serve on the Federal Reserve board is in political trouble, said Thursday the United States can crack stubbornly high unemployment by using every available tool.

“The recipe is activism,” he told Reuters.

Fears that more fiscal and monetary stimulus could trigger runaway inflation are overblown in the face of a jobless rate that has been 9.5 percent or higher for 16 months, he said.

“My reading is that right now I don’t see any signs that we should be worrying about inflation as a reason to limit our reaction to high unemployment,” said Diamond.

“Right now, I worry about doing too little.”

President Obama last April nominated the 70-year-old Massachusetts Institute of Technology professor to serve on the seven-member Fed board headed by Chairman Ben Bernanke. But Diamond’s nomination has languished in the Senate and will lapse if not approved by the end of the year.

If the Senate fails to act, Diamond said, “I would expect that the Obama administration will nominate me again.”

Diamond received his Nobel in Stockholm last week with co-winners Dale Mortensen and Christopher Pissarides. They were honored for research into labor market inefficiencies.

In Oslo Diamond scoffed at predictions by some economists that high U.S. unemployment is here to say as a result of globalization and other factors.

“Historically when there has been an extended period of high unemployment there have always been people saying that this time it is structural -- that now it’s going to be permanent. But it isn’t,” he said in an interview.

In an speech to finance executives and investors earlier, he said debt overhang from the popped U.S. housing bubble could weigh on hiring for years as “the impact of deleveraging on behavior” plays out.

But he said an overrepresentation of construction workers among today’s U.S. jobless bodes well for eventual improvement in the unemployment rate.

“When construction picks up again, those jobs will come back,” he said.

To speed the process, he said, “a bit more aggregate demand” is needed from tightly coordinated monetary and fiscal policies.

He said it is too early to know if the Fed will have to buy all $600 billion in government debt that it has planned. But he said the executive and legislative branches should defer worrying about long-term deficits and spend “vigorously” toward recovery.

“We need a vast amount of infrastructure improvement and this is a terrific time to be doing it, because part of the resources that would be used would otherwise be idle,” he said.

Editing by Kenneth Barry