Japan Disaster Casts Dark Cloud Over Global Economy

Japan is struggling to prevent a full meltdown of reactors at a nuclear plant following Friday's devastating earthquake. A second explosion was heard at the facility in Fukushima Monday. The country is still reeling from last week's damage caused by the massive quake and tsunami, which hit its northeastern region. Host Michel Martin speaks with Wall Street Journal economics reporter Sudeep Reddy about the likely impact of the catastrophe on both the Japanese and global economies. They also discuss creative solutions proposed by Tell Me More's Facebook fans, for reducing the budget deficit in the U-S.

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MICHEL MARTIN, host:

I'm Michel Martin and this is TELL ME MORE from NPR News.

Coming up, baseball season is upon us. We will tell you about baseball's number one draft pick. Plus, I bet many of us wish a superhero or two would appear on the scene right now. Later, we'll meet two men in two different cities who actually dress up as superheroes to fight crime. Really.

But first, the crises just keep coming. First, the uprisings in the Middle East and now that devastating earthquake and tsunami in Japan. The human toll is of course the first concern. But officials, business leaders and economists around the world must begin to assess the impact on the global economy.

At the same time, the U.S. government continues its budget negotiations as a temporary measure to fund government operations expires at the end of this week. We thought this was a good time to talk about how all this is affecting the global economy. So once again we've called upon Wall Street Journal economics reporter Sudeep Reddy. Welcome, Sudeep. Thanks so much for joining us.

Mr. SUDEEP REDDY (Economics Reporter, The Wall Street Journal): Great to be with you, Michel.

MARTIN: In a minute we're going to talk about the budget battles on Capitol Hill and we're going to ask you sort through some creative cost-cutting and revenue-generating ideas that NPR's Facebook fans have offered up.

But first, we did want to talk about Japan and we wanted to ask, first, what kind of impact this tragedy is having first on the Japanese economy and then on the global economy.

Mr. REDDY: There are a number of short-term problems for Japan to deal with. Obviously they're concerned first about the loss of life and securing whoever they can. But when you look at the markets, the market is already down substantially in Japan and probably will remain down until they get past the nuclear part of the crisis.

And the Japanese economy has already been struggling. It's been weak for a couple of decades and the Japanese government debt is the highest in the industrialized world. And so they have a number of issues to sort through even without something like this.

And so this is just adding to the problems for them as a slow recovery. In the long run, construction, rebuilding usually helps an advanced country recover from something like this. And so their overall economic effect in the long run should be minimal, but in the short term it's going to actually be substantial.

MARTIN: And Japan, though, is the third largest economy in the world. That's also a major U.S. trading partner, of course, as well as an ally. Is there any immediate effect on the U.S. economy in the same way that we've seen in the Middle East, for example, that the uprisings, the political uprisings there have affected the oil flow?

Mr. REDDY: Absolutely. There are a number of, actually, really important supply chains coming from Japan. If you think about autos that are actually - huge flows of autos coming into the U.S., coming into other countries, and look at smartphones, computer chips, there are a lot of things that have just been disrupted from Japan. But this just adds to the cloud hanging over the global economy at a very delicate moment.

Oil, the Middle East, all of these things start accumulating and eventually they will have some effect on global confidence and the ability to bounce back from what was a deep recession.

MARTIN: Now we want to turn to the budget battles in this country. State and local governments across the country are struggling to balance their budgets and to cut deficits, and as we mentioned, members of Congress and the White House are still in negotiations over the long-term budget plan.

So we thought it would be fun to ask our Facebook fans to share their ideas for cost-cutting or revenue generating. And we received over 1,200 comments. We recorded some of these thoughts. First, Sudeep, before we get to those comments, where do the budget negotiations stand? The stopgap measure that had been agreed on would keep the government running through April 8th. What's the status of things?

Mr. REDDY: We're going to be seeing a few short-term measures in the coming weeks. And once you get past the short-term measures, there's actually a lot more attention and hope now for some of these behind-the-scenes negotiations that are going on in the Senate, what's being called the Gang of 6, working together to come up with a longer term solution to the budget problems. A lot of this is going to be done quietly between senators and between administration officials, just because the negotiations tend to get pretty tense.

And they will hopefully be dealing with some of the very difficult problems when you look at the budget, the things that are not easily addressed in most normal circumstances. And so they need to figure out a plan for that and there's just going to be a few more weeks before we have a clear sense of it.

MARTIN: So let's turn to some of our Facebook fans. And you were nice enough to go through a lot of these comments. Let's play the first. Let's start with Dan Stormont. He's a retired Air Force officer. He lives in Brigham City, Utah. And this is what he had to say.

Mr. DAN STORMONT (U.S. Air Force, Retired): If we're really going to address the budget woes that the nation has, we need to start looking at the defense budget before we start making cuts in very sorely needed social programs. I know from experience that the defense budget can afford to take some cuts. And actually the advantage of cutting the defense budget would be that by reducing the size of the military, we'd be less inclined to use it all the time.

We'd be less inclined to try and be the world's policemen and more focused on what do we really need to protect our nation and our citizens and less concerned about trying to get involved in every incident that occurs anywhere around the world.

MARTIN: You know, it was fascinating to hear a retired Air Force officer make this suggestion. But what percentage of the budget does go to defense and are there serious proposals on the table to look for cuts in this area?

Mr. REDDY: Michel, Dan actually got to a very important issue. If you were to add up the defense budget plus the cost of the wars in Iraq and Afghanistan, you're actually looking at about a fifth of the budget, $700 billion total. And that is a very large chunk. It's something that you have to deal with. You can't actually fix the budget problem without looking at some of these big pools.

And the U.S. military is the largest of the world. If you were to take the next 15 militaries and add up their expenditures, the U.S. is still larger than those 15 combined. And so if you were to cut back the U.S. military modestly or at least prevent its growth, you will actually perhaps avoid getting some of those other countries to ramp up their own spending in a race to see everyone try to create a much larger military. The next largest, China's, is about a sixth of the size of the U.S. military. And so there is a lot of room for cutting there, as difficult as it may be politically.

MARTIN: If you're just joining us, I'm Michel Martin and you're listening to TELL ME MORE from NPR News. I'm speaking with Sudeep Reddy, economics reporter for The Wall Street Journal. He is giving us his take on how all the events around the world are affecting the global economy. Also, we're reviewing some creative ideas from our Facebook fans who gave us their ideas about how we can address the U.S. budget problem.

Let's go to another suggestion from one of our fans. We'll let her introduce herself.

Ms. JANET STAPLETON: My name is Janet Stapleton. I'm from Muskegon, Michigan and currently hold two temporary part-time office jobs. I believe that we should eliminate the corn and oil subsidies. You'd be shocked at the amount saved just from those completely unnecessary programs. Then you could take that money and invest it in research and development for cleaner and greener technologies and infrastructure.

MARTIN: I was surprised by just how many people raised these issues. So tell us about that. I mean, how big are these programs?

Mr. REDDY: They are fairly large, oil subsidies in particular. That's actually an area that some lawmakers are looking to cut right now, to the tune of about $4 billion a year in oil subsidies. And so that's something that's moving right now as part of the larger package. It actually could happen.

Corn subsidies, you get into a somewhat more difficult issue. It's about, depending on how you measure it - there are a lot of measurements out there -roughly $6 billion a year. A lot of this goes toward ethanol productions, supplying subsidies for people in the Midwest, farmland. And if you think of farmland, you think of Iowa and the 2012 presidential elections.

And you're going to see a lot of candidates going to Iowa saying that we need more support for corn production and more support for ethanol and that's one of the reasons it becomes so difficult. Because politically this is really an important area for political candidates and you don't really see them rushing toward cutting subsidies in this area.

MARTIN: And as I mentioned, there was a lot of interest in cutting salaries. Let's listen to Seth Dalton. He's a photographer in Providence, Rhode Island.

Mr. SETH DALTON (Photographer): How about this. We keep taxes all the same, cut all the politicians' salaries down to $30,000 a year and force them to pay for their own travel and all of that, the way that most of the working class is required to. Add to that a 50 percent tax on all income over $10 million annually, and boom, the economy is fixed.

MARTIN: I don't know. How much do members of Congress make, by the way? I should know this.

Mr. REDDY: Rank and file members of Congress make $174,000 a year. So the suggestion here was to cut their salaries by about 80 percent.

MARTIN: OK. And what about the second suggestion - introducing a 50 percent tax on all households that report over $10 million a year in income? What about that? How many people would that affect? How much would that actually raise?

Mr. REDDY: This one was really interesting to go and look into the figures. If you look at just income alone, there were 13,000 returns with income above $10 million in 2008, the latest year for which we have data. And if you were to add all that income up, you're looking at about $350 billion in taxable income, which generates about $84 billion in taxes, and that's a 24 percent tax rate for people in that bracket. And if you were to double that, you're actually looking at about $90 billion. So that's a significant chunk of money that would come from a fairly small number of people.

MARTIN: Well, so the question I have is, are any of these ideas actually being considered? Are they actually part of the conversations being held on Capitol Hill with the White House?

Mr. REDDY: Some of them are being held, but you look back at our latest debate about taxes and setting a threshold at 250,000 for household income became very contentious. And there were actually measures that didn't even pass for taxing income above $1 million. So as soon as you start talking about raising taxes, it generates sometimes a violent reaction among a lot of people and that doesn't actually get us anywhere beyond the debate. But once you start do coming up with a larger comprehensive package, you have to look at some of these opportunities.

MARTIN: As you said that, you know, once you start taxing people, it evokes a violent reaction among some, not everybody. Here's our last comment from a Facebook fan. Here it is.

Ms. ANDREA COLLEGE: My name is Andrea College. I live in Tampa. Well, I would definitely pay for a quality education for my kids. I also value recreation, like parks. It's important to have a clean environment. So I don't mind paying for organic foods, for instance. I will pay a little bit more for that. Just quality of life is huge and I don't understand why we're willing to pay for wars but we're not willing to invest in our own people.

MARTIN: You know, it's become an article of faith that raising taxes is somehow the third rail of American politics, or one of the third rails. Apparently there are a number of third rails. I'm interested in whether Andrea's point of view actually has more resonance than perhaps the political dialogue would suggest.

Mr. REDDY: I think it actually does, and Andrea gets at what I think is the most important philosophical issue in this entire debate. You look at the budget, it looks like a lot of large incomprehensible numbers. But the budget is really, in the broadest sense, a statement about values and our values about what we want from our government, for ourselves, for each other.

And so you start to look at the budget in its pieces and you have to start making tradeoffs of whether you want more parks and cleaner air, whether you want wars, whether you want military supremacy, whether you want something clearer in terms of supporting the people at home who are struggling. And so all of those things get tied up in this debate.

We are clearly a divided country in many ways and this is what generates the big fight about numbers. But these are really fights about values, and one of things Andrea brought up is her values versus what the government is spending right now.

MARTIN: Sudeep Reddy is an economics reporter for The Wall Street Journal. He was kind enough to help us sort through more than 1,000 suggestions for ways to cut costs and generate revenue that were submitted by you, our NPR Facebook fans, and Sudeep was kind enough to join us from our studios in Washington. Sudeep, thank you so much for joining us.

Mr. REDDY: Thanks for having me, Michel.

MARTIN: And if you want to read all the responses we've received, please go to Facebook.com/NPR.

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