So I’ve returned from my little hiatus off-the-grid. And the world looks a lot worse than when I left. In Wisconsin, the governor and the Republicans have abused the normal legislative process to ram through their repeal of collective bargaining rights for public workers (at least those public worker unions that didn’t endorse them in the last election). In Michigan, Governor Rick Snyder continues his subterfuge that aims at privatization of cities and schools along with union-busting. In Europe, the Euro continues it’s march to self-destruction but it’s picked up Portugal and the Portugese people along the way.
But the worst news by far is, of course, the news from Japan. A triple catastrophe: earthquake, tsunami, and partial meltdowns of 2 (perhaps now 3) nuclear reactors. The toll in human life, both lives ended and lives disrupted, is sobering. The power of nature is humbling. There is little I can add to any news about the events in Japan. However, I can add a couple of economic-related observations.
First, the entire disaster illustrates one of the problems with GDP accounting. The first problem is that while some nations (I believe Japan is one) do attempt to record a value for “fixed capital used/destroyed” when calculating GDP to reflect the damage done, it is usually a weak and inferior estimate. It gets swamped by the spending that is then spent on re-construction. The spending adds to GDP. Thus it will often appear that a major natural disaster shows as a “boost to GDP” because it prompts spending on reconstruction. I expect much the same to happen this time. In no way should people think or interpret this as economists saying that the earthquake was “good” for GDP or Japan. Quite the contrary. The earthquake/tsunami/partial meltdowns are a disaster. In some ways, I would not be surprised if the Japanese economy, as measured by GDP, actually struggles in the coming months. This is because the tsunami and evacuations based on the partial meltdowns constitute a huge “supply shock”. So much capacity for production has been destroyed that it will hamper growth somewhat. If nothing else, the rolling 3-hour blackouts of electricity thoughout Japan while the generating capacity gets restarted/restored will limit production at non-affected firms. There is just a tremendous uncertainty now.
A second observation that should be made is about how civil and social the response in Japan has been. I have read numerous reports of Japanese being rescued from perilous circumstances and yet they apologize for inconveniencing the rescuers and taking the time/resource. More significant is how social mores and culture in Japan have made the scenes at rescue shelters, water stations, stores, and elsewhere peaceful. Numerous photos have shown these neediest people in the disaster areas peaceably queuing in line to get limited supplies of water or food. I seriously doubt the same would happen here in the U.S. Much of the difference is cultural. Yet, the culture is also related to the economy. In Japan, the inequality of income is much narrower than in the U.S. There is a powerful sense of social obligation. Here in the U.S., while such a sense exists in pockets (and manifests at times in disaster), there is also a much more powerful individualistic, self-maximizing ethos that is reinforced by a larger inequality of income.
Finally, I have noted that some economists, particularly bank, financial, and “conservative” economists have been claiming that Japan may not be able to “afford” to re-build since it’s government has been running a large deficit already and it’s national debt is near 200% of GDP. Well these same economists have been claiming economic bankruptcy for Japan for over a decade now as it’s debt accumulated. These same economists have down-graded the “ratings” of Japanese bonds throughout this past decade as well. These same economists are dead wrong. Japan is a sovereign nation that borrows in it’s own currency and floats that currency on exchange markets (no fixed exchange rate). Just like the U.S., Canada, Australia, U.K., and many others. And just like them, Japan’s national government cannot go bankrupt. As Bill Mitchell of Billyblog observes:
the only relevant considerations are the real and human dimensions. There is no government financial crisis facing Japan as a result of the damage. Household and firm finances might be severely impaired but that is because these entities have financial constraints. The Japanese government has no financial constraints.