On December 20, 2018, on the threshold of a new year and a new era for the Tokyo Foundation for Policy Research, Research Director Keiichiro Kobayashi sat down with newly appointed Chief Scientific Adviser Kiminori Matsuyama and Trustee Motoshige Itoh for a wide-ranging discussion on the role of economists and think tanks in policymaking and their hopes for the Foundation in 2019 and beyond.

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KEIICHIRO KOBAYASHI (moderator): I’m delighted to have this opportunity to sit down with our newly appointed Chief Scientific Adviser, Kiminori Matsuyama, and Trustee Motoshige Itoh to discuss some of the challenges facing Japan and the Foundation in 2019. But let’s start with a bit of personal background. I understand you two have known each other for some time?

Common Academic Roots

MOTOSHIGE ITOH: Yes, we go way back. I first got to know Matsuyama-san at the University of Tokyo, where he was a graduate student, and I had just begun working as an assistant professor. He later moved to Harvard, but whenever I visited the university, we would get together for coffee and conversation. He was one of our rising stars in the field of economic theory.

One of the things that has always impressed me about his papers, whether they were published in a journal or delivered at a conference, is the impact of the introductions. Even though the subject matter was highly specialized and complex, he always managed to introduce it in a way that left a deep impression on others, including people outside his own specialty.

KOBAYASHI: I’m sure there was some overlap in your research, since one of Dr. Itoh’s specialties is international trade theory.

KIMINORI MATSUYAMA: Yes, and we’re also close in age. When I started out as a graduate student in economics at theUniversity of Tokyo, there were many eminent scholars on the faculty, such as Hirofumi Uzawa, Ryutaro Komiya, Takashi Negishi, and Koichi Hamada. But they were of a different generation. Right around the time I began thinking about studying overseas, Dr. Itoh showed up on campus, just back from the United States. He was enthusiastic about exploring new avenues of research, and his work really piqued my interest—perhaps even more so than studying under someone more established.

He was also very friendly and approachable. He would sometimes come up to me and casually suggest that we read a certain book together. He was naturally intent on keeping up with the latest ideas after earning his PhD and teaching at US universities. This was very stimulating and gave me incentive to go abroad myself. A year after I enrolled in the PhD program at Harvard, Dr. Itoh arrived there as a visiting scholar. He was the first person I turned to for advice on my research plan. As a Japanese studying in a US PhD program, I found his presence and support very reassuring.

ITOH: That was thirty-three years ago. Matsuyama-san quickly distinguished himself, and before long he was doing impressive work across many fields in economics. He’s especially noted for his excellent work elucidating the mechanisms of macroeconomic instability and the relationship between structural change and economic inequality. I think a chief scientific adviser with such a broad outlook on economics and a solid résumé in the United States is a true blessing for the Foundation.

Influence of Jeffrey Sachs

MATSUYAMA: My original area of interest was microeconomic theory. But economists in Cambridge, Massachusetts—those at Harvard, MIT, and the National Bureau of Economic Research—tend to place more emphasis on policy implications than, say, those at the University of Chicago or Stanford. Even if your topic is a theoretical one, your professors are going to grill you about the significance for economic policy. And that was particularly true of my faculty adviser, Jeffrey Sachs.

ITOH: Sachs isn’t much older than us, is he?

MATSUYAMA: I was twenty-five when I transferred to Harvard, and he was just twenty-nine and had just become a tenured professor at Harvard.

KOBAYASHI: I thought Sachs was an empirical economist. Did he do theoretical research as well?

MATSUYAMA: Jeffrey Sachs is famous for his policy recommendations, but he builds his argument on economic theory. Instead of starting with a preferred model and testing its applicability to real-world situations, he’s inclined to start with a real-world problem and carefully choose and adapt a model to fit that situation.

ITOH: His wife is a physician, as I recall. I remember attending a seminar in which he talked about applying the lessons of clinical medicine to economic policymaking. In addition to understanding the underlying scientific principles, one needs to look closely at the actual symptoms to determine the causes and come up with an appropriate treatment.

MATSUYAMA: Professor Sachs helped me tremendously by pointing out the importance of examining a theory from a variety of different angles and thinking about it in a real-world policy context. Whenever I write an introduction to a paper, however theoretical, I make a point of presenting the issue to make it relevant and interesting to as wide an audience as possible. If I’ve succeeded in doing that, it’s because of the influence of Jeffrey Sachs.

Conveying a Point of View

ITOH: You said something once at a seminar that left a lasting impression on me. You were talking about the center and the periphery in the context of European integration, and you remarked that the same theory could yield two completely different hypothetical outcomes, depending on how it was applied: One was that more intra-regional trade would bring about economic convergence by enriching low-wage countries like Poland and Portugal on the periphery. The other was that, with the free movement of people and information, the optimal resources would gravitate toward the center, causing the situation to deteriorate on the periphery. You accurately identified the very problem facing the European Union today.

I think this points to an important function of think tanks. Publishing the results of quantitative research is important, but that’s not enough; you have to provide coherent theoretical insights that can shed new light on real-world issues, such as EU integration and Japanese monetary policy.

MATSUYAMA: I recently attended the inauguration events of a new research center at Peking University. There, I had chance to chat with a Polish economist on the very issue you mentioned. He said that membership in the EU had brought economic growth to Poland, but it did so by turning the country into a cog in the EU’s economic machine. Subcontracting for German companies had created jobs and spurred economic growth, but many of the country’s most talented engineers and entrepreneurs wound up migrating to Germany. Now, he said, Poland is in danger of falling into the middle-income trap. It’s so much easier to understand other economists’ ideas on various topics when you already have a conceptual framework in mind.

ITOH: Let’s remember that one of the purposes of economics is communication. Economists are able to discuss issues more efficiently and in greater depth because they share the same basic concepts and assumptions.

Promoting Cross-Fertilization

ITOH: At the French-sponsored World Policy Conference in Morocco last October, one of the panel discussions featured former European Central Bank President Jean-Claude Trichet and economist Ashoka Mody, a former IMF official. Mody has mercilessly criticized Europe’s monetary union in his book EuroTragedy, which came out the previous June. Trichet, on the other hand, is a great defender of the euro, having worked very hard as president of the ECB to secure confidence in the fledgling currency. As a member of the audience, I was riveted by the intensity of the debate. Very few people in Japan realize that the euro is a subject of such ongoing controversy.

Debates like these can provide an important stimulus to researchers and policymakers here in Japan, so I’m hoping you’ll use your new position at the Foundation to keep everyone in Japan informed of the latest trends overseas.

MATSUYAMA: I also think it’s important to let the rest of the world know what’s being said here in Japan. It’s very difficult for people overseas to get a good sense of what Japanese experts are thinking. Japan is on the front edge of the big structural problems awaiting the industrial world in the twenty-first century, so there should be plenty of interest in what’s going on in the country today.

The Tokyo Foundation for Policy Research is noteworthy for its independent footing in a country where the vast majority of think tanks depend on money from the government or private financial institutions. I’d like our website to be the first place scholars go to when they want to know what sort of policy debates are taking place in Japan. And I hope I can leverage my own connections abroad to help raise the Foundation’s profile.

ITOH: The Internet makes it possible to connect with people whose needs and interests are outside the mainstream. It may still be a small minority, but there are definitely people overseas with an interest in matters like Japanese monetary policy and social security policy in a hyper-aging society. So, the first thing to do is to make sure we’re reaching those people. Interest in those topics taking off from a broader policymaking standpoint would certainly be welcome. At the same time, an effective approach for the Foundation going forward may be to selectively choose the focus of its quantitative research and publish the results in an accessible form.

Linking Theory and Practice

KOBAYASHI: Dr. Itoh, as the former director of a major think tank, you’ve been in a similar position of promoting and publishing policy-oriented studies while pursuing your own theoretical research.

ITOH: When I was serving as president of the National Institute for Research Advancement [since reconstituted as the private Nippon Institute for Research Advancement], we were facing a choice between going private and closing down entirely, and there was a great deal of discussion about the proper role of a think tank. In my view, think tanks occupy a kind of middle ground between journalism, with its moving target of current events and short-term developments, and academic research, with its fixed, systematic focus on the big questions.

The challenge for a think tank is to conduct solid, scholarly research on topics of current relevance and publish them in a timely and persuasive manner. The best thing is if you can anticipate trends and identify major issues before others are even aware of them. You need to stay in touch with other sectors of society, including government, as well as the news media. You also need to collaborate with experts in academia, even while maintaining your own separate identity.

KOBAYASHI: I think we’re seeing a growing tendency for the media and the public in general to reject the views of academics on economic policy issues, particularly monetary policy and the consumption tax.

ITOH: Not to mention international trade.

KOBAYASHI: More and more, it seems, public opinion is veering toward a kind of anti-intellectual Trumpism. What can think tanks and academic institutions do in this environment but persevere in presenting sound, scientific arguments in a form the public can digest?

ITOH: Populism isn’t a new phenomenon, of course, but until now we’ve clung to the optimistic belief that our research-based views would percolate through to the rest of society via conscientious journalists, government officials, and perhaps the college students who took our economics courses. But today, with the rise of Trumpism, I get the feeling that major fault lines have formed between the general public and those of us operating in an intellectual milieu, and I wonder whether we can proceed on our optimistic assumptions.

MATSUYAMA: Communication has to go both ways. In addition to explaining things to lay people from the standpoint of economics, we need to listen to the voices of people in the real economy and incorporate that sort of information into our economic models. That kind of input can open scholars’ eyes to important evidence that they’re otherwise apt to overlook.

Jeffrey Sachs is very good at this, but I’m impressed by what Paul Krugman has done. Neoclassical trade theory shows that everyone benefits from free trade, but some people felt a disconnect between theory and what was actually happening. Krugman incorporated these empirical observations into his new trade theory and has been able to explain things in a way that made sense to people involved in the real economy.

ITOH: Krugman’s work certainly makes you question your assumptions. Maybe this is a role think tanks can also play, not just communicating the findings of academic research to the public but also “re-educating” people in academia about realities on the ground.

KOBAYASHI: This reminds me of the debate over population and deflation in Japan. Kosuke Motani, a senior researcher at the Japan Research Institute, suggested that Japan’s chronic deflation was related to the decline in the working-age population in our aging society. He came under a lot of criticism from Japanese economists because there was no accepted model tying population to deflation. But in 2014, Gauti Eggertsson of Brown University published “A Model of Secular Stagnation,” which quantified the so-called “secular stagnation hypothesis” using a New Keynesian model. He logically demonstrated how a drop in population growth could exacerbate deflationary pressures. So, an idea can turn out to be correct even though it may initially seem absurd from the viewpoint of conventional theory.

MATSUYAMA: In his Nobel Prize lecture, Krugman stressed the need to listen to people who know what’s going on in the real world. They may be seeing something important that we’re missing. I’m hoping that the Tokyo Foundation for Policy Research can help bridge the gap between academic theorists on the one hand and people with a direct knowledge of real-world issues on the other.

Continued in "Special New Year’s Colloquy: Priority Issues for Public Policy Research (Part II)."