What is an unstable coalition?

The recent resignation of Yukio Hatoyama as Prime Minister of Japan made me curious as to the tenure of the Japanese government. The following table is from Wikipedia. Except for Junichiro Koizumi, the average length of office has been less than 2 years. Is it a coincidence that a large part of the change in government is also during what is considered Japan's lost decade?

				Days in	Years in	Months in
Prime Minister	Took Office	Left Office	Party affiliation	Office	Office	Office
Noboru Takeshita	11/06/87	06/03/89	Liberal Democratic	575	1.57	19
Sōsuke Uno	06/03/89	08/10/89	Liberal Democratic	68	0.19	2
Toshiki Kaifu	08/10/89	11/05/91	Liberal Democratic	817	2.24	27
Kiichi Miyazawa	11/05/91	08/09/93	Liberal Democratic	643	1.76	21
Morihiro Hosokawa	08/09/93	04/28/94	Japan New	262	0.72	8
Tsutomu Hata	04/28/94	06/30/94	Renewal	63	0.17	2
Tomiichi Murayama	06/30/94	01/11/96	Socialist	560	1.53	19
Ryūtarō Hashimoto	01/11/96	07/30/98	Liberal Democratic	931	2.55	30
Keizō Obuchi	07/30/98	04/05/00	Liberal Democratic	615	1.68	21
Yoshirō Mori	04/05/00	04/26/01	Liberal Democratic	386	1.06	12
Junichirō Koizumi	04/26/01	09/26/06	Liberal Democratic	1979	5.42	65
Shinzō Abe	09/26/06	09/26/07	Liberal Democratic	365	1	12
Yasuo Fukuda	09/26/07	09/24/08	Liberal Democratic	364	1	12
Taro Aso	09/24/08	09/16/09	Liberal Democratic	357	0.98	12
Yukio Hatoyama	09/16/09	06/01/10	Democratic	258	0.71	9
			Average	549.53	1.5	18.07
			Median	386	1.06	12
			25th percentile	309.5	0.85	10.5
			75th percentile	629	1.72	21
			Min	63	0.17	2
			Max	1979	5.42	65

Are military bases a (resource) curse?

In Descent into Chaos, Ahmad Rashad argues that U.S. military bases in Afghanistan only serve to divide the efforts to unify the country. Clans or tribes are paid more than civil servants in Kabul to maintain and run the bases and these clans often compete to service the bases. The large amounts of payments are funneled into private accounts instead being repatriated to the central government in Kabul and undermines all its reconstruction efforts because the central government is very often less well financed than the warlords.

A reminder that military bases are a curse is the downfall of Yukio Hatoyama the Prime Minister of Japan for his failure to keep his campaign promise to close the American base on Okinawa. Perhaps the curse is that instead of America paying Japan, it is the reverse:

The Japanese government paid more than $5.2 billion for funding the stationing of U.S. troops in Japan in 2009. That includes facilities maintenance and improvements, Japanese support employee salaries, and other needs. Of that funding, $1.6 billion is for military support on Okinawa.

And there is indirect support, which includes waivers of taxes, road tolls and port fees for military operations, and SOFA personnel pay less tax on their cars than Japanese citizens.

Would things in Okinawa be different if America paid Japan like they are paying the warlords in Afghanistan?

Or would the situation turn out to be similar to Manas Air Base in Kyrgyzstan where America is paying $60 million (a year?) for using the facilities.

An additional $117 million will be given to the Kyrgyz government, including $36 million for upgrading the airport with additional storage facilities and aircraft parking, $21 million for fighting drug trafficking in the country, and $20 million for economic development.

Some of these payments have been alleged to have been embezzled by the people close to the administrations of Askar Akayev and Kurmanbek Bakiyev either by gaining rights to service the air base on by outright theft.

Models versus blogs redux

I was wrong in my post accusing bloggers of arguing based on conviction instead of models. Mark Thoma clarifies that he is basing his arguments on Eggertson and Woodford's models. I also concur with him when he says the following (emphasis mine):

Using a different model is fine. I've already noted that the models I have been using have their problems, and that there can be a legitimate debate over what type of model is best. But at some point you have to commit to a specific model and use it to answer your questions, one that has hopefully been carefully specified and thoroughly investigated, and that does not change daily. Full awareness of the model's weak spots and limitations should be used to qualify the answers you give, but you cannot avoid committing to a model of some sort. The policy advice I have been advocating is based upon these models and is fully consistent with them. That doesn't mean that other models won't give different answers, but those aren't the models I am using.

Unfortunately, when economists are arguing from different models, they really are arguing from convictions that their model is the right one.

And it is also because of this disagreement on which models should be used that I agree with Kocherlakota's claim that economists do not have a playbook - or perhaps they have too many playbooks. And while I am a strong supporter of model based policy prescriptions, I am also fully aware that an over-reliance on models is one of the reasons we are in the crisis in the first place.

Should policies be model-based or blog-based

Each argues to their own conviction that their arguments are right:

Beginning with Tyler Cowen:

Romer, Geithner, Summers, et.al. know all the same economics that Krugman and DeLong and Thoma do. If a bigger AD stimulus would set so many things right, they'd gladly lay tons of political capital on the line to see it through and proclaim triumph at the end of the road.

Except they expect it would bring only a marginal improvement.

From Mark Thoma:

As for Tyler's (and others') call for monetary policy instead of fiscal policy, here's the problem. It relies upon changing expectations of future inflation (which changes the real interest rate). You have to get people to believe that the Fed will actually be willing to create inflation in the future when it comes time to do so. However, it's unlikely that it will be optimal for the Fed to cause inflation when the time comes. Because of that, the best policy is to promise that you'll create inflation, then renege on the promise when it comes time to follow through. Since people know that, and expect the Fed will not actually carry through, it's hard to get them to change their expectations now. All that credibility the Fed has built up and protected concerning their inflation fighting credentials works against them here.

Fiscal policy does not have these problems. Maybe monetary policy would work in spite of the time consistency problems, I'm willing to try and there are creative ways around this problem that might work (see here for how to credibly commit to irresponsibility). But I'm not willing to put all my faith in this one policy basket, particularly since I think fiscal policy is the superior tool in deep recessions (but not in normal times). Fiscal policy must be part of the mix as well, and since the economy is not expected to return to full employment for several years, there's more than enough time for further fiscal stimulus directed specifically at job creation to work.

Back to Tyler Cowen:

This makes perfect sense in terms of a model, but I don't see inflationary expectations as the relevant factors for the real world.

Did he just say that expecations are not relevant for the real world? I am tempted to adopt the attitude I had as a graduate student and be totally dismissive of these arguments by exclaiming: Where is the model? This is all just hand-waving economics. Yet, I am sympathetic to both views. Expectations matter but not all the time. However, I'd like to see some evidence for Tyler making the claim that inflationary expectations not being relevant to the real world. Modeling expectations have been the foundations of DSGE models and even structural equation models since the Lucas critique. The modeling of expectations can be ad hoc or as most economists have done - assume rational expectations.

Yet it is good to be reminded by Rajiv Sethi:

Rational expectations is not a behavioral hypothesis, it's an equilibrium assumption and therefore much more restrictive than "forward-looking behavior". It might be justified if equilibrium paths were robustly stable under plausible specifications of disequilibrium dynamics, but this needs to be explored explicitly instead of simply being assumed.

The arguments put forth by Mark Thoma and Tyler Cowen also has some bearing on Brad DeLong's response to Kocherlakota's claim that economists did not have a playbook to respond to the crisis:

My reaction to this is the old one: "Huh?!"

For "macroeconomics" did and does have a playbook that offered a systematic plan of attack to deal with fast-evolving circumstances.

The playbook was first drafted back in 1825, during the bursting of Britain's canal bubble.

... The government has the power to tax! And so the government can make AAA assets when nobody else can! ... The first and easiest way for the government to create more safe assets is for the central bank to create them by buying up risky assets for safe ones via open-market operations or lending cash and taking other, riskier assets as its sole security.

... Since the fall of 2007 the central banks and the Treasuries of the world have been following this playbook. They have expanded the supply of safe assets via open-market operations, pumping out cash for the private sector to hold and in return accepting duration and interest-rate risk. They have topped up bank capital. They have guaranteed private-sector loans. They have swapped in risky private-sector debt in exchange for government bonds. They have--via expansionary fiscal policy--printed up huge honking additional tranches of government bonds and used the money raised to pull forward government spending and push back taxes.

... The playbook is old and well-established, and has been put to effective use.

Again, I am not arguing against Brad DeLong. My initial reaction was that the IMF used to have a playbook also when rescuing a country facing a capital account outflow and budget deficits. This was to raise interest rates and slash government spending. Saner heads seem to have prevailed and this playbook has, while not discarded, certainly laid aside. What Delong seems to be arguing is that this playbook always works and I am less convinced about that. The Fed acted very innovatively in this crisis yet could do little except to slow the free-fall of the economy. My interpretation of Kocherlakota's comments is that the playbook should not be brought out to clean up the mess but to prevent the mess in the first place (or at least bring it to a screeching halt by the end of 2007 or the beginning of 2008). Slashing interest rates and flooding the market with liquidity is pretty standard but the playbook needs to say by how much and for this we need models not blog entries and shrillness in blog-dom.

Unfortunately (with apologies to Reinhart and Rogoff), while crises are all the same they are also all different. By this, I mean that the source of the shock to the economy is very different. Who could have forseen that Bear Stearns would have gone bankrupt within 3 days even though it began that fateful weekend with $10 billion and there was almost nothing that DSGE economists could point to that would constitute a "technology shock".

There were no models that economists could turn to that they could use to generate a policy for the Fed or Treasury. Likewise, in the beginnings of a crisis such as the East Asian crisis, the facts on the ground are few and existing models were inadequate to show that high interest rates and cutting government spending would stem the tide of outflows.

Models have always been inadequate. As Kocherlakota says:

During 2007–09, macroeconomists undertook relatively little model-based analysis of policy. Any discussions of policy tended to be based on purely verbal intuitions or crude correlations as opposed to tight modeling.

I would say that in all crisis, the analyses and model building have always been retrospective. Whenever a crisis occurs, almost all economists fall back on AS-AD or IS-LM type models. And it is because of this lack of good policy based models that we have debates between Krugman, Cowen, Sumner, and Thoma about what to do. Each of them are talking through their convictions rather than a common model and parameters in which they can all agree on. Even if they could not agree on parameters but could agree on a model then at least the discussion would be less shril than it is.

What is the right counterfactual

It's not always obvious and the obvious - no treatment versus treatment is not always right. This post on airline deregulation was a good reminder:

The catch is that all such economic comparisons must be counterfactual: they must show an improvement not with respect to CAB [Civil Aeronautics Board]-set fares of the late-1970s, but rather with respect to what reasonably competent regulation could have produced under the other circumstances of the deregulated era. ... If the comparison exercise is tough by the (inappropriate) historical yardstick thanks to declines in (average) service quality and the airline industry’s trail of fleeced stakeholders, then the counterfactual comparison is going to be tougher still thanks to a couple of factors that should have produced large declines in airline costs and hence fares even in the absence of deregulation.

The factors of note are a pair of technological advancements — the development of high bypass ratio turbofans suitable for shorter-haul airliners and the demise of the flight engineer’s job thanks to cockpit automation, both of which have origins predating deregulation — and the long secular decline in oil prices through the deregulated era’s zenith prior the crash of the 1990s stock market bubble.

Kids today are such hypocrites

I took the garbage can out to the sidewalk for pickup. A few minutes later, I watch from the window as some teenagers roll up beside the trash can in their Honda CRV. One of them leans out the front window and attempts to open the trash can. She has a garbage bag in her hand which she is hoping to put the trash in. The garbage can falls over. The trash spills out. She drops her garbage on the road and they drive away.

They lecture to us about global warming and our responsibilities toward Mother Earth. Yet they can't even take the garbage out and clean up after themselves.

Another reminder of the lost decade in stocks

From the Letters to the Editor section (emphasis mine):

More than 10 years ago in these pages, James K. Glassman and Kevin A. Hassett argued a new theory of stock valuation, writing that the Dow Jones Industrial Average would rise “to the neighborhood of 36,000” (“Dow 36,000,” September 1999 Atlantic). In January 2000, J. Douglas Van Sant of Stockton, California, wrote in to say that their theory was “a giant fallacy.” He bet Glassman and Hassett that in 10 years, the Dow would be closer to 11,000. The writers agreed to the bet: “If the Dow is closer to 10,000 than to 36,000 ten years from now, we will each give $1,000 to the charity of your choice.”

On December 31, 2009, the Dow closed at 10,428, as Brad W. Bradley of Bel Air, Maryland, pointed out to Atlantic editors earlier this year. Glassman and Hassett conceded, donating $1,000 each to the Salvation Army, by Van Sant’s request.

“It’s been a bad run for optimists,” Hassett noted. “James and I included a chapter in our book [based on the article] outlining why the equity-premium decline that was at the core of our thesis might stop or reverse itself. Just about every equity-downside scenario we could envision, including terrorist attack, later became a reality. Going forward, investors have to decide whether the U.S. has had a run of bad luck or whether something fundamental has changed that cannot be reversed. Either is possible.”

“I’m surprised at the way it turned out. I thought their theory was pretty extreme, and that was the point of my letter,” Van Sant said. “I never imagined the Dow would have been less than in 1999 [when it closed the year at 11,453]. In a way,I was probably just as wrong as they were. If someone had bet me it would be lower, I would have taken the bet and lost it. Everybody lost on that one.”

Not only did the Dow never had a chance to even reach 36,000 their theory was entirely silly (according to Paul Krugman).