Disaster and national debt

Japan’s and ours. . .

As Japan begins the complex and costly job of rebuilding the areas of the country that were destroyed, the task will be made more difficult by the government’s vast debt.

Japan has the highest level of debt relative to the size of its economy of any major industrial nation — 234 percent of gross domestic product this year, the International Monetary Fund estimates, compared with 99 percent for the United States. With the cost of rebuilding devastated areas expected to be in the hundreds of billions of dollars, that debt level is likely to grow in the years ahead.

There are lessons for the United States. Even when borrowing rates are low, as they are for the United States and Japan, running high budget deficits can leave a country with less flexibility to respond to a disaster or an economic setback.

“When you have as much debt as the Japanese have, you’re vulnerable to this kind of shock and can’t do much about it,” said Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics whose research shows that financial crises frequently lead to high debt burdens, which in turn cause other problems.

Borrowing money to rebuild after a disaster is a productive use of debt, most economists say. It is likely to have a high economic payoff and is a one-time expense. But because of its already high debt levels, the Japanese government may be forced instead to raise taxes or cut other spending to pay for the reconstruction, further damaging Japan’s weak economy.

A third option for funding reconstruction would be for the Japanese government to sell off some of its foreign assets, such as U.S. Treasury bonds. In theory, Japan maintains those reserves so it is prepared for an economic emergency, which surely this is.

via Nikkei recovers 5.7%; U.S. stock futures fluctuate over nuclear crisis – The Washington Post.