Unpleasant Thoughts on Japan

by Reihan Salam

(1) I agree with Felix Salmon on donating funds earmarked for disaster relief in Japan:

 

Earmarking funds is a really good way of hobbling relief organizations and ensuring that they have to leave large piles of money unspent in one place while facing urgent needs in other places. And as Matthew Bishop and Michael Green said last year, we are all better at responding to human suffering caused by dramatic, telegenic emergencies than to the much greater loss of life from ongoing hunger, disease and conflict. That often results in a mess of uncoordinated NGOs parachuting in to emergency areas with lots of good intentions, where a strategic official sector response would be much more effective. Meanwhile, the smaller and less visible emergencies where NGOs can do the most good are left unfunded.

In the specific case of Japan, there’s all the more reason not to donate money. Japan is a wealthy country which is responding to the disaster, among other things, by printing hundreds of billions of dollars’ worth of new money. Money is not the bottleneck here: if money is needed, Japan can raise it. On top of that, it’s still extremely unclear how or where organizations like globalgiving intend on spending the money that they’re currently raising for Japan — so far we’re just told that the money “will help survivors and victims get necessary services,” which is basically code for “we have no idea what we’re going to do with the money, but we’ll probably think of something.”

(2) Megan McArdle wonders how Japan will finance its reconstruction efforts, after noting that the country will have to borrow roughly a third of its GDP this year:

That borrowing is going to come atop an already colossal debt burden–Japan’s debt-to-GDP ratio is currently well over 200%.  This can’t go on forever . . . is this when it stops?In the short term, no, for two reasons.  As Nomura points out in the BBC link, the Bank of Japan is . . . er . . . [insert some metaphor for supergoosing the money-supply that does not involve floods.]  

In the short term the BOJ’s actions may actually increase the price of Japanese bonds–and according to Nomura, the ratings agencies are probably going to cut Japan some “humanitarian” slack.

There’s also the fact that most of Japan’s borrowing is done not only in its own currency, but from its own people.  This means you’re not going to see the sort of capital flight that has brought down other heavily indebted countries.  And in the immediate aftermath of a crisis, I expect that Japan is going to experience the sort of patriotic surge that temporarily unified America after 9/11.  I doubt their willingness to lend will flag in the near term; it will, indeed, probably increase.

On the other hand, it’s very much in question whether Japan can really finance all of this on its own resources.  1/3 of GDP is a lot of borrowing.  It’s not impossible–we borrowed 30% of GDP in 1943.  But we started with a pretty low debt burden. [Emphasis added]

At the risk of making a polemical point, this is one reason to keep an eye on public debt levels. We want to keep our powder dry in case of unanticipated emergencies. 

(3) I have an extremely unpleasant thought. Japan is notorious for heavily subsidizing rural areas and small and mid-sized cities. I have no doubt that some of the devastated regions can and should be rebuilt, because they are economically viable regions that people will choose to rebuild by drawing on their own resources. Rather than have the central government lead an expensive reconstruction effort, it might be best to make large lump sum payments to individuals in the affected regions, as Edward Glaeser proposed for post-Katrina New Orleans.