Web Chat: The Japanese Tsunami, Middle East Unrest and the U.S. Economy

In a live web chat with POLITICO, expert Robert Pozen took questions about the wider economic implications of the Japanese tsunami and unrest in the Middle East. Seung Min Kim, of POLITICO, moderated.

The transcript of this chat follows.

12:29 Seung Min Kim: Hi everyone. We’re here today with Robert Pozen of the Brookings Institution, who’ll take your questions on the economic ramifications of the Middle East unrest and the tsunami and earthquake in Japan on the United States. Looking forward to it. Welcome, Bob.

12:30 [Comment From Matt Rudow: ] Given that a natural disaster of this magnitude is unfortunately bound to occur on US soil at some point, what can American communities learn from Japan’s experience to prepare themselves? What are the most important things Japan has done right in the face of this disaster and how can our communities emulate those?

12:31 Robert Pozen: We should learn from the Japanese experience that it is critical to think about the location of nuclear power plants. Don’t put them on earthquake faults or in places where they could be hit by tidal waves.

12:31 [Comment From Eric: ] For decades, Japan has been completing poorly planned construction projects – ie bridges to nowhere. While the tsunami was tragic, how might the purposeful construction that will likely occur as part of the country’s recovery impact Japan’s construction industry?

12:33 Robert Pozen: Japan has been spending billions of yen of government monies on lots of construction projects in rural areas that have not been related to promoting economic growth — such as bridges to nowhere. Perhaps this tragedy will lead to a new focus for public spending that is more growth oriented — for example, on high tech and urban projects.

12:33 [Comment From Andrew (DC): ] How will the upheaval in the Middle East – particularly Libya – impact the world’s supply of oil and in turn the price of oil for countries like the U.S.?

12:36 Robert Pozen: Libya accounts for about 2% of global oil production, and that can be covered by excess production by Saudi Arabia, which is already pumping more oil. But the margin of error is being reduced so there will be more pressure on oil prices. The main source of this pressure will be the growth in emerging markets like China and India, which are still not energy efficient, By contrast, the US usage of oil is roughly the same today as it was twenty years ago — through more efficient use of energy.

12:36 [Comment From Eric: ] In the same vein, Japan has extremely tight borders in terms of immigration. Are these regulations likely to loosen, given the amount of construction work that needs to be done?

12:38 Robert Pozen: Japan will surely need a lot of young workers to reconstruct areas devastated by the tsunami. Given the demographics of Japan, which is heavily weighted toward the elderly, many of these workers will have to come from abroad. The question is whether Japan will allow these workers to become permanent immigrants. This would be a good idea from the perspective of financing Japan’s retirement programs, but politically the Japanese government has been pretty strong against permanent immigration.

12:39 [Comment From Patrick LaCrosse: ] To what extent might the clean up and rebuilding in Japan, probably several hundred billion dollars worth over the next 2-3 years, drive up commodity prices worldwide? Commodities such as cement, steel, lumber, etc. which have been in high demand by the Chinese economic growth may be in even shorter supply due to the rapid addition of Japan’s reconstruction to the mix. How will this affect worldwide construction materials commodity prices and how might it affect the United States?

12:41 Robert Pozen: In the short run, there is likely to be more pressure on building materials because of the reconstruction efforts in Japan. But the longer term question is whether this tragedy in Japan will lead to lower economic growth there. From the experience in Kobe, we have learned that there will be an initial slowdown followed by a pickup in economic growth and then back to normal.

In short, the long-term impact on building materials will be more influenced by the rate of economic growth in countries like China and Brazil than by the reconstruction efforts in Japan.

12:41 [Comment From Terrence: ] The U.S. notoriously has a trade deficit with Japan. Given Japan’s impending need for materials, do you expect this to change?

12:43 Robert Pozen: US exports constitute roughly 12% of GDP, and US exports to Japan are less than 1% of our GDP. So this is not a big issue economically for the US.

In the near term, Japan will be less able to export finished goods and will have to import more raw materials. As a result, the US trade deficit with Japan is likely to decline modestly over the short term.

12:43 [Comment From Nancy: ] How will expanded U.S. military involvement in countries like Libya affect our already tremendous deficit?

12:46 Robert Pozen: At present, US involvement in Libya is limited to airstrikes, naval support, etc. Moreover, our efforts are being coordinated with our NATO allies so some of the costs are being spread around. Thus, if this limited involvement continues for a short time, it will not impact our budget deficit by very much. However, it is unclear how long US military involvement in Libya will last or whether it will be expanded. If this becomes a multi-year offensive with larger goals, it could negatively affect our budget deficit.

12:47 [Comment From Sharon: ] After the Kobe quake, Taiwanese high-tech companies had enjoyed a decade-long boom due to Japan’s technology transfer & investment. Do you expect Taiwan to be the direct beneficiary again this time around?

12:50 Robert Pozen: Over the next six months, Taiwanese high tech companies will reap the benefits from a decline in Japanese output. And foreign companies will start to switch their lines of supply away from Japan as long as there is uncertainty about the extent of the nuclear threat there.

However, Japan has a resilient population and a strong set of tech manufacturers so they will try to get back online as soon as possible. The strength and speed of this rebound will depend primarily on what happens in terms of the fallout from the nuclear plants in the rest of Japan.

12:51 [Comment From Gary (DC): ] Do you expect that the tsunami will cause the Japanese economy to morph from one driven mostly by services and high-tech industries to a greater proportion of manufacturing?

12:53 Robert Pozen: No. Japan has a tough time competing with China and other Asian countries on the low end of manufacturing due to costs. Japan’s comparative advantage lies in high-tech industries and services, and that will continue to be true. Indeed, the overhanging problems from the nuclear plant will tend to move manufacturing out of Japan to suppliers in other countries. Corporations do not want to take a chance about the spread of nuclear fallout to other parts of Japan — which would hurt manufacturing plants there.

12:54 [Comment From Sally: ] Will this affect the US stock market? The reaction has been less than I would have expected. Any thoughts?

12:57 Robert Pozen: If we look at the US companies comprising the S&P 500, they derive roughly 1.5% of their revenues from Japan. Nor is Japan a big growth center for most of these US companies. Indirectly, US companies may have to shift production facilities out of Japan to other countries, but that shift might actually reduce their production costs.

In sum, the modest effect on US stocks seem warranted.

12:57 [Comment From Tom: ] I’m interested in the Middle East “youth bulge” and how their unemployment has helped create the unrest. As these young people come of age will it put downward pressure on US wages? Or is that already happening?

1:01 Robert Pozen: There are a lot of countries in the Middle East where over half their populations are under the age of 30. Many of these young people are unemployed and therefore support political change. Even if there is regime change, however, it is much more difficult to build a receptive environment for manufacturing and other economic facilities. This takes considerable investment in infrastructure, changes in government policies and modernization of financial systems. It will probably be several years before countries like Egypt become effective competitors to countries like Vietnam for plants that would take jobs away from US workers.

1:02 Seung Min Kim: And that’s all the time we have for today — thank you very much to Bob for his answers and thanks to all for your questions.