Wednesday, January 21, 2009

Pants Afire

The editorial page of The Wall Street Journal is on a crusade/jihad (choose your poison) against the fiscal stimulus plans of the Obama economic team. In order to bolster their already disproven arguments against a boost of government borrowing and spending, the editors have drafted to their cause, without of common sense or logic, the dorky string of fiscal stimulus packages passed by successive LDP governments in the 1990s--which spent a lot of money but achieved a lot of nothing because of a zombified banking system.

In this vein it seems the journal is willing to publish anything containing a jab at "pork-barrel spending" -- even if the essay is a pastiche of nonsense.

Time for Change in Japan
The Asian Wall Street Journal

The ruling party's same-old, same-old isn't good enough.

By JESPER KOLL - The United States isn't the only major economy bracing for a change of power. For the first time in more than 50 years, a single opposition party has gathered enough strength and built sufficient credibility to dethrone Japan's ruling Liberal Democratic Party. And the LDP has only itself to blame for its demise.

(...)

It didn't have to be this way. Former leader Junichiro Koizumi, who led the country from 2001 to 2006, showed how to remake the LDP into a modern party. Mr. Koizumi appealed directly to voters for support, rather than party elders or faceless technocrats. Never before had a Japanese political leader put so much trust in his national vision. Voters embraced this empowerment wholeheartedly and rewarded Mr. Koizumi at the polls.

Yet the LDP quickly shunned Mr. Koizumi's legacy. His successors -- Shinzo Abe, Yasuo Fukuda and Mr. Aso -- fell back into old-style patterns of appointing ministers according to factional alignments and seniority ranking, rather than on the basis of merit and competence. While countless bills serving specific localities and industries were passed into law over the past few years, not a single law of national significance was achieved. Indeed, the Japanese people are hard pressed to name a single policy or specific policy goal for which any of Mr. Koizumi's successors stood...
Oh really? Not a single law? The first reform of the Basic Law on Education since 1947--not of "national significance"? The directives to NHK to emphasize the abductees issue? The reapplication of the gasoline levy, without a redirection of revenues to the general fund as promised?

Not one law?

Not defensible, Mr. Koll. Your assertion, that is.

Sadly, the above is the good part of the opinion article. The latter paragraphs are a forest of unrepentant untruths:

"Although untested in government, their consistent call for economic reform and change looks very attractive. Their leader, Ichiro Ozawa, has taken a chapter out of Mr. Koizumi's book, calling for a politics that 'places people's lives first.' "

Koizumi Jun'ichirō never said that his goal was for a politics that "places people's lives first." Indeed, his clarion calls were "No sacred cows" and "No reform without pain." So Ozawa is not taking a chapter out of Koizumi's book.

"Mr. Ozawa, in fact, sounds a lot like Mr. Koizumi these days. He understands that Japan needs a total system reboot, and has thus put administrative and bureaucratic reform at the core of his platform."

Having heard both Ozawa's utterances and Koizumi's oratory, I cannot imagine what Koll is talking about here . As for Democratic Party's platform, it is an immense laundry list of programs great and small, all of which cost money and all of which will require careful administration. As for the notion that somewhere inside this immense, ungainly scramble one can find a "core" -- well, frankly no, one cannot.

The Democrats are also mimicking Mr. Koizumi's message of youth and vigor. Almost all DPJ members of parliament are first generation politicians, men and women who left their careers in the bureaucracy or business to bring about political change. By contrast, almost two-thirds of the LDP candidates are second- or third-generation professionals who inherited their constituencies from their fathers or fathers-in-law. The Democrats' self-made men and women are largely free from vested interests built up over past generations.

Where to begin?

"Koizumi's message of youth and vigor"? No, the current Prime Minister Asō Tarō, has a message of youth and vigor. Prime Minister Abe Shinzō had a message of youth and vigor. Koizumi? Not so much youth and vigor as a preference for competence, sacrifice, super hip flippancy, and yes, good looks.

"Almost all DPJ member of parliament are first generation politicians...." Well, yes perhaps. It depends on your definition of the phrase "almost all," doesn't it? The party leadership of the DPJ is just as stacked with legacy holders (Ozawa, Hatoyama, Watanabe) as the LDP.

"The Democrats' self-made men and women are largely free from vested interests built up over past generations" -- really? Former members of the bureaucracy or business are "self-made" and "largely free from vested interests built up over past generations"? For some reason, the assumption seems overoptimistic, nay overenthusiastic. Nay, silly.

And when I say silly, I mean...silly.

The DPJ is also unlikely to adopt the LDP's pork-barrel politics -- not because their instincts are any better than the LDP, but because they simply can't afford to do so. Japan's public debt stands at 180% of GDP. The debt servicing expense eats up more than one-quarter of all current expenditures. The deficit is so large that it automatically restrains politicians from trying to spend their way to popularity.

Can anyone explain how the heck this paragraph keeps from flying to pieces? According to Koll, the DPJ will not adopt pork-barrel politics like the LDP because the national debt keeps politicians from spending their way to popularity. Nevertheless, the Ozawa and the DPJ have promised to do just that, spend at the local and national level beyond anything promised by the LDP.

Furthermore, if

1) the national debt automatically restrains politicians from trying to spend their way to popularity, and
2) LDP politicians are politicians, then
3) the national debt automatically restrains LDP politicians from trying to spend their way to popularity.

Ipso facto. Jijitsu sore jitai ni yotte.

Koll-san, what gives?

5 comments:

John Mock said...

With all due respect, it seems to me that you are being too gentle with this article. Unfortuntely, it appears to reflect a generally "low information" approach by many in the United States to Japan. Only someone completely uninformed could possibly make some of those utterances. That is, of course, the charitable interpretation. A less charitable version would suggest intentional distortion or even "making stuff up". For a more-or-less respected journal to actually publish this bilge is really beyond the pale.

There is also a unfortunate parallel to the recent election in the United States where "low information" or "informationally challenged" voters seemed to carry a really amazing amount of weight. Living outside of the States, I decided this year to scan the various political blogs. It is not an exercise for the faint hearted. As one of my former students told me, "In America, blogging is a blood sport". The amount of really spectacularly false information and lack of very much substantial information was obvious.

In any case, back to the article at hand. I believe it was Dorothy Parker, speaking of a book she was reviewing, "This is not a book to be put aside lightly, it should be thrown, violently, across the room". This sentiment seems to be applicable to the article and, by extension, by the publication which carried it.

Rubashov said...

Just a quick FYI about the "unproven" argument about deficit spending an economic stimuli. This quote is the abstract from a recent paper. (The paper is online at http://www.nber.org/papers/w14551).

"We propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions. Specifically, we use sign restrictions to identify a government revenue shock as well as a government spending shock, while controlling for a generic business cycle shock and a monetary policy shock. We explicitly allow for the possibility of announcement effects, i.e., that a current fiscal policy shock changes fiscal policy variables in the future, but not at present. We construct the impulse responses to three linear combinations of these fiscal shocks, corresponding to the three scenarios of deficit-spending, deficit-financed tax cuts and a balanced budget spending expansion. We apply the method to US quarterly data from 1955-2000. We find that deficit-financed tax cuts work best among these three scenarios to improve GDP, with a maximal present value multiplier of five dollars of total additional GDP per each dollar of the total cut in government revenue five years after the shock."

If you read the actual paper, you'll see that _empirically_, deficit spending in the US is followed by a medium-term drop in GDP. This is true even controlling for a lot of potential multicollinearity.

In their literature review, guess who they cite as an earlier paper that found the same result? Christina Romer--Obama's new chief economic advisor. Along with several other papers that reach the same conclusion, of course.

So, did Obama pick an advisor whose ideas on the primary economic question of the day are disproven "nonsense," or are you maybe not up to date on what has or has not been disproven?

MTC said...

Rubashov -

Please indicate at what points during the period 1955-2000 were policy interest rates in the United States at the zero bound, with production and asset prices continuing to fall?

Get back to me when you have your answer.

Yes, yes, it IS amazing the results one can derive from a carefully delimited data set.

Pax vobiscum.

Rubashov said...

Sure. 1958.

1. Unemployment was at 7.7%, higher than the current US rate of 7.2%.

2. Home prices were falling from their postwar highs in the mid 50s.

3. Production was way down. Last I've seen, US GDP fell .5% last quarter. During the 57-58 recession it fell by six times that amount (3.2%).

4. Finally, interest rates were near zero. In 1958 they were .63% versus the current .25% (I suppose you could quibble about the .38 difference if you wanted, but on a scale of .25%-20% or so, .38 is a pretty weak leg to quibble on).

The rate was also pretty low in 2005 and production was down, but asset (home) prices were still rising, so that doesn't meet your criteria, I suppose.

This thing reminds me of the ironic article in last week's NYT, headlined "Current Recession almost as bad as 1982" (or something like that). The current recession doesn't even approach the Great Depression, if that's what you're reaching for with the "carefully delimited data set" comment.

Still, that is a fair question--why 1955? I went back and tracked down their data sources (available at BEA and the St. Louis Fed). The useful data series only start proliferating after WWII. Before that, what series there are only get recorded annually, which doesn't offer fine grained enough information, so they couldn't have added the 30s even if they wanted to.

I suppose the flip side is fair too, no? Where is the "proven evidence" of fiscal stimulus pulling countries out of a depression? Romer's work has demonstrated the New Deal didn't pull the US out of our depression, it didn't work in Japan in the 1990s. The 1982 US case might be, given the increase in military spending but there are a lot of factors you'd have to control for there. If I had to guess, I bet you could find examples in postwar Europe, but I don't know for sure.

This made me curious, so I did a quick scan of NBER papers for this, and didn't find much. One thing I did find was a 1989 piece by Stiglitz arguing that government interventions to increase firm equity (in response to financial crisis) should increase output. Unfortunately, it is all theoretical, no actual evidence.

Seriously, though, if you know of any articles in reputable journals that discuss empirical evidence of how deficit spending affects the economy, I'd honestly be curious to read them, so please share.

Pax. :)

MTC said...

Rubashov -

Thank you. You have given me food for thought.