Peter Diamond

Origins, education and career

Diamond was born to a Jewish family in New York City. His grandparents immigrated to the U.S. at the turn of the 20th century. His mother's parents and six older siblings came from Poland. His father's parents met in New York, she came from Russia and he came from Romania. His parents, both born in 1908, grew up in New York City and never lived outside the metropolitan area. Both finished high school and went to work, his father studying at Brooklyn Law School at night while selling shoes during the day. They married in 1929. He has one brother, Richard, born in 1934.

He started public school in the Bronx, and switched to suburban public schools in the second grade when the family moved to Woodmere, on Long Island. He eventually graduated school from Lawrence High School.

He earned a bachelor's degree summa cum laude in mathematics from Yale University (1960), and a Ph.D. at the Massachusetts Institute of Technology (1963). He was an assistant professor at the University of California, Berkeley, from 1963 to 1965 and an acting associate professor there before joining the MIT faculty as an associate professor in 1966. Diamond was promoted to full professor in 1970, served as head of the Department of Economics in 1985–86 and was named an Institute Professor in 1997.

In 1968, Diamond was elected a fellow and served as President of the Econometric Society. In 2003, he served as president of the American Economic Association. He is a Fellow of the American Academy of Arts and Sciences (1978), a Member of the National Academy of Sciences (1984), and is a Founding Member of the National Academy of Social Insurance (1988). Diamond was the 2008 recipient of the Robert M. Ball Award for Outstanding Achievements in Social Insurance, awarded by NASI. As a Fulbright Distinguished Chair, in 2000 he taught Economics at the University of Siena.

Diamond wrote a book on Social Security with Peter R. Orszag, President Obama's former director of the Office of Management and Budget, titled Saving Social security: a balanced approach (2004,-5, Brookings Institution Press). An earlier paper from Brookings Institution introduced their ideas.

In April 2010, Diamond, along with Janet Yellen and Sarah Bloom Raskin, was nominated by President Barack Obama to fill the vacancies on the Federal Reserve Board.

Ben Bernanke, Chairman of the Fed at the time of the nomination, was once a student of Diamond.

In August 2010, the Senate returned Diamond's nomination to the White House, effectively rejecting his nomination. President Obama renominated him in September.

In October 2010, Diamond was awarded the Nobel Prize in Economic Sciences, along with Dale T. Mortensen from Northwestern University and Christopher A. Pissarides from the London School of Economics "for their analysis of markets with search frictions".

In June 2011, following a third round of consideration for the Fed seat, Diamond wrote in a New York Times op-ed column that he planned to withdraw his name. In the column, he strongly criticized the nomination process and "partisan polarization" in Washington, saying he was effectively blocked by Republicans on the Senate Banking Committee. He also detailed the consideration process, saying that in the first and second rounds, three Republicans had favored his confirmation. In the third, when his name was resubmitted in January 2011, the Republicans all followed ranking minority member Shelby (R, Alabama) in voting against it. Diamond continued, quoting Shelby:

"Does Dr. Diamond have any experience in conducting monetary policy? No," [Shelby] said in March. "His academic work has been on pensions and labor market theory." But [Diamond began his reply, in the column] understanding the labor market—and the process by which workers and jobs come together and separate—is critical to devising an effective monetary policy.

Diamond went on to discuss how his expertise would, he felt, have benefited the central bank and his opinion that "[s]killed analytical thinking should not be drowned out by mistaken, ideologically driven views." In a statement, Shelby "wouldn't be drawn into a public spat with the nominee," saying simply "I have said many times that I commend Dr. Diamond's talent and career. I wish him the best in the future."

Andrei Shleifer and Emmanuel Saez are two of his doctoral supervisees who won the John Bates Clark Medal for the best American economist under the age of 40.

Diamond has been married to Kate (Priscilla Myrick) since 1966. They have two sons.

Professional activity

Diamond has made fundamental contributions to a variety of areas, including government debt and capital accumulation, capital markets and risk sharing, optimal taxation, search and matching in labor markets, and social insurance.

Dynamic inefficiency

Diamond (1965) extended the Ramsey–Cass–Koopmans model, with a representative infinitely-lived agent, to a setup where new individuals are continually being born and old individuals are continually dying. He built on a framework developed by Paul Samuelson, who had termed it "an exact consumption-loan model."

Since individuals born at different times attain different utility levels, it is not clear how to evaluate social welfare. One of the main results of this paper is that the decentralized equilibrium might be dynamically Pareto efficient even though it is ex ante inefficient.

Diamond–Mirrlees efficiency theorem

Diamond and Mirrlees (1971) provide sufficient conditions for a second best Pareto efficient allocation with linear commodity taxation to require efficient production when a finite set of consumers have continuous single-valued demand functions.

Diamond and Mirrlees examine a situation in which the government requires a revenue raised by taxes but lump-sum taxation, and therefore a first-best Pareto optimal allocation of resources is unavailable. However, if there are no other distortions in the economy (e.g. externalities), if firms are characterized by constant returns to scale and if the government can set the vector of indirect consumption taxes independently of production prices then it is optimal to have productive efficiency in the economy. This implies that there should be no taxes on intermediate goods and imports.

The key idea is that when the government can control all consumer prices, the producer prices are disconnected from the consumer prices and the consumption decision part of the optimal taxation problem becomes independent of the production decision.

Labor market search and match

Diamond (1982) is one of the first papers which explicitly models the search process involved in making trades and hiring workers, which results in equilibrium unemployment.

Social Security policy

Diamond has focused much of his professional career on the analysis of U.S. Social Security policy as well as its analogs in other countries, such as China. In numerous journal articles and books, he has presented analyses of social welfare programs in general and the American Social Security Administration in particular. He has frequently proposed policy adjustments, such as incremental but small increases in social security contributions using actuarial tables to adjust for changes in life expectancy and an increase in the proportion of earnings that are subject to taxation.