There’s no reason to expect Japan’s disaster to wreck the world economy, but plenty to expect politicians to use it as an excuse.
The world is witnessing a horrible tragedy in northern Japan: an earthquake, followed by a tsunami and a near nuclear catastrophe – with as yet unknown repercussions of cleanup costs, radiation contamination and energy capacity loss. Even if the nuclear threat is contained, we are still seeing a humanitarian disaster, with more than 18,000 deaths and many more sick and injured.
Many have asked how this tragedy will affect the world economy. There are serious grounds for concern – though not for the reasons generally given. The direct effect of the disaster on the world economy is likely to be relatively limited. The region most directly affected by the earthquake and tsunami was relatively sparsely populated. Japan’s industrial belt in the centre and south of the country seems to have escaped largely unharmed.
Much of the country is experiencing rolling blackouts due to the loss of the electricity from the damaged nuclear plants. This has forced the scaling-back of some industrial production. There are reports that this will lead shortages of certain car parts and other items that would ordinarily be exported to the United States and elsewhere.
This will lead to some scattered shutdowns of assembly plants in various areas, but what is lost in one area is likely to be gained in others. If some cars are temporarily in short supply, most customers will simply buy a different type of car. This can be bad news for the workers in the shut assembly plants, but ends up being pretty much a wash for the economy as a whole.
More generally, from a strictly US point of view, Japan may actually end up being a somewhat larger customer for American products, as it will need to import a wide range of goods as it recovers and rebuilds from the disaster. For this reason, the disaster may actually have a modest positive effect on the US economy and the world economy as a whole.
But there is another dimension to the disaster that could lead to worse outcomes. We have to remember that our political leaders are absolutely shameless in creating excuses for bad economic outcomes. Right to the end of his presidency, President Bush would cite the 11 September attacks as part of the explanation for the economy’s poor performance during his tenure in office. The attacks were, indeed, a human tragedy, but it is pretty hard to tell a story that has them imposing a major long-term economic cost on the country.
In the weeks and months immediately following the attack, the airline and tourist industry were certainly crippled; but six or nine months later, air traffic and travel had pretty much gotten back to normal. It took an unusually creative imagination to tell a story as to why the economy was not generating jobs in the second half of 2002, or the first nine months of 2003, because of the 11 September attacks. But President Bush would routinely toss out this excuse and the national media would dutifully report it, as though it somehow made sense.
Creative excuse making is bipartisan. The economy barely generated enough jobs in 2010 to keep pace with the growth of the labour force. To help explain away this bad news, many in the media pointed to the euro crisis. It’s not clear how the trouble in the euro zone was supposed to have impeded the US recovery. Most immediately, it led to a plunge ininterest rates, as investors sought out the dollar as a safe haven. This would have given some boost to housing and investment, as well as consumption, since homeowners had the opportunity to refinance at lower rates.
The dollar did rise against the euro briefly, but it is difficult to envision this, either, having much effect. The US exports roughly $200bn a year in goods and services to eurozone nations and imports around $250bn. If the rise in the dollar against the euro caused exports to fall by 5%, and imports to rise by 5%, then the total impact would be a rise in the trade deficit of $22.5bn, or 0.15% of GDP. And this almost certainly overstates the true effect.
In short, there is no plausible story that the euro crisis had any noticeable effect on the US economy, but this has not kept this assertion from being a routine part of the economic discussions. And this is what should worry us most when we consider the economic impact of the Japanese disaster.
The actual impact may be invisible or even positive, but this will not stop politicians and pundits from seizing on it as yet another excuse for poor economic performance. In this case, the official reason that the economy is not creating enough jobs will not be that we have inadequate policies in place; rather, the reason will be the earthquake/tsunami/nuclear disaster in Japan.
We have to recognise that our political leadership is dominated by the “dog ate my homework” crowd. They will seize on any excuse for theirfailure in policy prescription, no matter how implausible. And given the quality of the media reporting, they will likely get away with it.
So, the real economic impact of the Japanese disaster results from the fact that it gives our leadership an excuse for poor economic policy. Given the history, we should expect that they will take full advantage of this excuse.