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Home Publications Blogs Beat the Press The Japanese Disaster and Plant Shutdowns

The Japanese Disaster and Plant Shutdowns

Monday, 21 March 2011 04:12

There have been numerous media accounts of plant shutdowns (largely in the auto industry) as the result of a cutoff of the supply of parts from Japanese manufacturers due to the earthquake/tsunami/nuclear disaster. These accounts are somewhat misleading.

While these disruptions may lead to reduced supply of some types of products, they will almost certainly not lead to overall shortages in the market. In other words, there may be some cars that temporarily will be in short supply, but it is almost inconceivable that there will be a shortage of cars more generally. This means that car buyers may switch brands; they will not be unable to buy a car.

In this case, the shutdowns of certain factories are likely to be offset by increased production at other facilities, with the net effect on the industry being close to zero. The shutdowns are of course bad news to the workers affected, but they will be of little consequence to the economy as a whole.

Comments (4)Add Comment
written by izzatzo, March 21, 2011 6:48
That's all we need in these perilous times. Another free market socialist economist who just wants to scare people with lower prices and downplay the ability of responsive markets to freeze up in a supply shock with short run inelastic demand curves that send price rationing market signals confirming there's no substitutes and consumers will just have to pay ransom prices if they want to continue driving.
The worst is yet to come
written by Dean , March 21, 2011 12:36
this is a longer form test
written by Dom, March 22, 2011 9:11
Katrina had hit Louisiana, not the entire United States. Likewise, earthquake had hit Fukushima Prefecture and tsunami had hit the coast of Fkushima Pref, not the entire Japan. Because nobody knows where the heck is Fukushima Pref., the news reported "Japan" was hit. As a result, some people might have thought that the whole Japan was destroyed. Please use common sense. There are some car factories in Fukushima Pref that have been shut down but there are many more in other prefectures. So I agree with Dean. There will be of little consequence to the economy as a whole.
written by Steve Athearn, March 22, 2011 11:08
Dom, actually, the tsunami hit all along the Pacific coast of Tohoku district, a much larger region than Fukushima prefecture. The greatest devastation and loss of life occurred in Miyagi and Iwate prefectures.

Hope Dean is right on this one in the near term, but the dangers described by Barry Lynn in The End Of the Line should not be underestimated. We should not think so much of factories that manufacture finished products like cars, but those that manufacture components:

"The shock wave from the Taiwan quake [September 21, 1999] hit the American economy within days. Although the quake's epicenter was far from Taiwan's major industrial center in Hsinchu, and although key plants reported only slight damage, the weeklong break in the island's electrical and transportation systems meant production could not take place and that what little inventory existed could not be shipped. The first Americans to feel the effect of the quake were therefore workers at factories that depend on components made in Taiwan; within days thousands of manufacturing employees were sent home from assembly lines from California to Texas....

"And so we should understand that although today's global industrial system poses many grave dangers, the ultimate peril is that it will crash. In today's ever more intricate, ever more tightly geared system, the risk increasingly is that a single relatively isolated event will set in motion a cascading series of industrial shutdowns that cannot be stopped, and that this will wipe out the system's ever more thinly spread reserves of components and cash. Such a catastrophe would ultimately be mainly financial in nature, and not all that different from a stock market crash or a bank run, though in this case it would be industrial firms that would knock one another over. But unlike such purely financial crashes, a physically precipitated crash would likely prove far more destructive. Unlike cash, industrial components are not fungible, which means this system could prove very hard to restart."

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.