The Economic Fallout From the Crisis in Japan

Shaking the World Economy

By DEAN BAKER

The world is witnessing a horrible tragedy in northern Japan, an earthquake followed by a tsunami and now the risk of a nuclear catastrophe. Even if the nuclear threat can be contained we will still see a humanitarian disaster, with more than 10,000 deaths and many more sick and injured.

Many have asked how this tragedy will affect the world economy. There are serious grounds for concern, although 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 center 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 endangered 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, Japan may actually end up being a somewhat larger customer for U.S. 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 U.S. economy and the world economy as a whole.

However, 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 September 11 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 indeed crippled, but six or nine months later, air traffic and travel had pretty much gotten back to normal. It took a pretty 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 September 11 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 bi-partisan. The economy barely generated enough jobs in 2010 to keep pace with the growth of the labor force. To help explain away this bad news, many in the media have pointed to the euro crisis.

It's not clear how the trouble in the euro zone was supposed to have impeded the U.S. recovery. Most immediately it led to a plunge in interest 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 as homeowners had the opportunity to refinance at lower rates.

The dollar did rise against the euro briefly, but it is difficult to envision this having much effect. The U.S. exports roughly $200 billion a year in goods and services to euro zone nations and imports around $250 billion. If the rise in the dollar against the euro caused exports to fall by 5 percent and imports to rise by 5 percent, then the total impact would a rise in the trade deficit of $22.5 billion or 0.15 percent 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 U.S. 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 recognize that our political leadership is dominated by the "dog ate my homework" crowd. They will seize on any excuse for their failure, 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.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.
This column was originally published by The Guardian.