Nobel winner Diamond says U.S. needs second stimulus

CAMBRIDGE, Massachusetts Tue Oct 12, 2010 6:14am BST

1 of 2. Professor Peter Diamond (L), co-winner of the 2010 Nobel Prize for Economics, poses for a photograph with Bob Solow, winner of the 1987 Nobel Prize for Economics, after a news conference at Massachusetts Institute of Technology in Cambridge, Massachusetts October 11, 2010.

Credit: Reuters/Brian Snyder

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CAMBRIDGE, Massachusetts (Reuters) - Peter Diamond, a 2010 Nobel economics prize winner who has been nominated to the U.S. Federal Reserve board, said on Monday a second stimulus bill would help stem the deepening problem of local government worker job losses.

Diamond's nomination by U.S. President Barack Obama to the Fed has been held up amid questions from top Republicans about his qualifications. He will be subject to another Senate committee hearing.

In a statement on Monday, Obama said he hoped Senate confirmation would come quickly to "help bring (Diamond's) extraordinary expertise to our economic recovery."

Diamond, 70, a Massachusetts Institute of Technology professor, won the Nobel award with fellow American Dale Mortensen and British-Cypriot Christopher Pissarides for their work helping explain elements of unemployment and job markets.

The work honoured is highly topical since many countries with developed economies, including the United States, are worried about future job growth after the worst global crisis since the Depression.

Diamond said a second federal stimulus effort "would be valuable," especially if the federal government stepped in to help state and local governments save jobs for such employees as teachers, firefighters, police, and social workers.

The first stimulus bill "was unquestionably extremely valuable. Without that, unemployment would be a lot higher now," Diamond said. The Obama administration approved an $814 billion (512 billion pound) package in spring 2009.

The U.S. economy shed jobs for a fourth straight month in September, with payrolls depressed by the end of 77,000 temporary Census jobs and loss of 76,000 local government jobs, about two-thirds of them teaching positions.

The employment report was the last before the November 2 mid-term congressional elections and was a blow for Obama's Democratic Party, trailing in opinion polls.

DEBATE ON NATIONAL DEBT

With expected Republican gains in the elections, new moves to stimulate growth through spending are all but ruled out. Instead, how to best tackle a rising national debt is a debate that will heat up when a commission of lawmakers and budget experts reports in December.

Most states and municipalities, unlike the federal government, are required to balance budgets, so they must cut spending to close gaps -- and many have.

Obama said state and local governments needed help to keep workers who provide vital services.

"These continuing layoffs of state and local government ... would have been even worse without the federal help that we've provided to states in the last 20 months," Obama said.

Diamond said he thinks stubbornly high U.S. unemployment will decline slowly.

"With suitable macroeconomic policies, there's no reason to think that once we get through this we won't get back to normal unemployment," he said.

"We're starting from a place with unusually high unemployment. I think this process is going to be slow and that's painful for the whole economy and painful, obviously, for the people having trouble finding a job," he said.

Despite his support for more government intervention, Diamond said that he was a "believer in markets. I'm a believer in capitalism."

(Writing by Philip Barbara; Editing by Jerry Norton)

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