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Nobel Winning MIT Professor Discusses Unemployment, National Debt at USNA

Posted on: October 24, 2012 08:00 EDT by Jessica Clark

From U.S. Naval Academy Economics Department

Economist and 2010 Nobel Prize recipient Peter Diamond visited the Naval Academy Oct. 18 to discuss unemployment and national debt in the U.S. during the 32nd annual Michelson Lecture.

The talk began with a discussion of the importance of incorporating search theory and labor market frictions into the discussion of unemployment.

At any point in time there is both excess demand for labor and excess supply of labor - workers seeking jobs and employers with unfilled vacancies, said Diamond.

He identified the current unemployment situation as a "crisis" - something that requires immediate attention - and the federal debt as a "problem" that must be dealt with but doesn't require immediate action.

Two particularly troubling aspects of the current unemployment situation were highlighted:

  1. Long-term unemployment. Workers that remain unemployed for extended periods suffer a loss of productivity that hurts their long term earnings potential and gross domestic product. The longer they remain unemployed the greater the erosion of human capital and the lower probability of ever regaining a job similar to the one they lost.
  2. Youth unemployment. Unemployed youth do not acquire work experiences that allow them to eventually end up in their most productive jobs.
Diamond argued that dealing with the unemployment crisis requires increasing aggregate demand now. He proposed three areas of expenditures that would stimulate the economy now and increase the productive capacity of the economy in the future: infrastructure, research and development, and education, focusing on reform initiatives.

The public debt is a serious problem that requires attention, but tax increases or expenditure cuts at this time would result in higher unemployment, said Diamond.

Diamond is professor emeritus at MIT where he taught from 1966 to 2011. He was one of three winners of the 2010 Nobel Prize in Economic Sciences for his work on job search and unemployment. He first consulted to U. S. Congress about Social Security reform in 1974. He has written about national pensions worldwide as well as the U.S. and has written numerous books on pension reform and behavioral economics.

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