Japan Quake Shaking CA Economy

MARCH 15, 2011

BY JOHN SEILER

In the long run, California’s economy probably will not be greatly affected by the economic aftershocks of the earthquake and tsunami in Japan. In the short run, it could be shaken in various ways. And these assumptions presume that the news from Japan does not get much worse that it already is.

Those are conclusions drawn from numerous news reports and from Esmael Adibi, director of the A. Gary Anderson Center for Economic Research and Anderson Chair of Economic Analysis. Chapman’s annual economic forecast, to be updated in June, includes highly accurate prognostications on California’s economy, which Adibi closely watches.

“Everything will be a short-term negative impact,” Adibi told me. “Japan is one of California’s largest trade partners, number three after Mexico and Canada.”

One immediate impact is to the eastern ports of Japan, which will affect imports and exports to California ports. In particular, he said, there will be lower car production in Japan.

USA Today reported:

Toyota has halted overtime at its U.S. factories to conserve Japan-supplied components delayed by the devastating Mar. 11 earthquake and tsunami that wiped out entire portions of the country’s northeast coast.

That’s the first direct effect of the Asian wave on the U.S. auto industry. The big Japan car companies build in North America most of their U.S.-market vehicles, but some still rely on parts from Japan.

Predictably, stocks in Japan have crashed:

Japan’s Nikkei share average plunged 10.6 percent on Tuesday, posting the worst two-day rout since 1987, as hedge funds bailed out after reports of rising radiation near Tokyo. Many mutual funds were left on the sidelines, leaving them poised to dump shares into any rebound.

The yen tripped on talk of intervention by authorities trying to contain the economic impact from last week’s devastating earthquake and tsunami, but then recovered. Government bond yields rose as investors sold debt to offset stock market losses.

Meanwhile, American stocks continued their post-earthquake decline. According to today’s Reuters:

Stocks fell 1 percent on Tuesday as fears of a nuclear crisis in Japan fanned caution in equities and the market looked likely to extend its bearish trend.

The Nasdaq briefly turned negative for the year in a second straight day of losses tied to worries about Japan. Analysts said a break below 1,257 on the S&P 500, the index’s closing level for 2010, could signal deeper losses.

Positive Signs

There are some positive signs, including for California. “California will get some rebuilding activity, such as of industrial machinery,” Adibi said. “Reduced exports now will be made up down the road. For imports from Japan, the earthquake could create shortages. Nobody can anticipate how long that will last.”

He added that, for Japan’s economy, a major problem will be electricity generation, which is essential to industrial production.

Reported MSNBC:

When Japan lost a large chunk of its electricity-generating capacity to the one-two punch of earthquake and tsunami, the narrative in parts of one of the world’s most technologically advanced societies was transformed overnight into one of Third World hardship.

For most Japanese, the rolling outages instituted in the wake of the twin disasters translate to inconvenience, sacrifice and economic loss. But for tens of thousands who are now homeless and huddled in evacuation centers in the hard-hit northeast, the stakes are much higher.

The earthquake hit Japan after two decades of stagnation. The 1990s are called the country’s “lost decade,” with growth of just 1 percent a year. But the 2000s weren’t much better. Some now are speculating that the earthquake could shake Japan into a third “lost decade.”

During the past 20 years, Japan went from the second-largest economy in the world, to third place, behind China. And Japan’s economy dropped from being about half that of the economy of the United States, to one-third.

California Budget

Will Japan’s problems affect the ongoing struggle over California’s state budget? “I don’t think so,” Adibi said. “It will not have a significant impact on taxable sales and so on.”

But Japan’s predicament is a cautionary tale for California, which also suffers major earthquakes, and the United States as a whole. Even before the earthquake, a major factor hobbling growth in the Japanese economy was the immense debt run up by its government the past 20 years.

Japan’s public debt was 197 percent of GDP in 2010, in second place among the nations behind only pathetic Zimbabwe, at 242 percent. The United States is at 59 percent.

Although U.S. debt seems better by comparison, it’s still in dangerous territory, especially when compared to the so-called PIIGS nations on the brink of default: Portugal (83 percent), Ireland (99 percent), Italy (119 percent), Greece (114 percent) and Spain (63 percent).

Moreover, California’s state debt for bonds currently is $72 billion, according to state Treasurer Bill Lockyer’s Web site. Amazingly, despite the state’s fiscal problems, another $10 billion was charged this year to the state’s credit card.

California’s debt rating now is the worst of the 50 states, and worse even that Kazakhstan, a former Soviet republic.

The annual payment for the debt already run up now is $7.65 billion. If that payment weren’t due, Gov. Jerry Brown’s demand for $12 billion in tax increases would be a lot smaller. This shows how, as I have pointed out for decades, debt equals delayed tax increases. The debt binge of the 2000s decade, under governors Davis and Schwarzenegger, now has turned into demands for tax increases.

Moreover, Japan’s earthquake could mean higher interest payments for the state’s debt (as well as for consumers). According to Stand Strong Research:

This probably means noticeably higher interest rates across the board for Americans over the next year or so as they rebuild and start selling US gov securities in order to pay for their reconstruction.

So California’s immense debt could end up costing even more to taxpayers. And as Chriss Street writes today, California’s immense debts for government workers’ pensions and medical insurance already have the state on the brink of insolvency.

Both Japan and California are getting lessons in how debt should be run up only for emergencies, such as earthquakes, not for normal expenses, let alone for such boondoggles as the California High-Speed Rail Authority.

The Japan earthquake is another warning to get California’s fiscal house in order. When the Big One strikes here — and seismologists say it’s only a matter of time — a solvent state would be better able than an insolvent one to recover from disaster.