March 20, 2011
The Japanese Catastrophe
The Japanese Catastrophe—Posner
The earthquake-triggered disaster that has engulfed Japan is a textbook example of the public policy dilemmas posed by catastrophic risk (on which see my 2004 book Catastrophe: Risk and Response). A catastrophic risk, in the policy-relevant sense, is a very low (or unknown but believed to be low) probability of a very large loss. If the probability of loss is high, strenuous efforts will be made to avert it or mitigate its consequences. But if the probability is believed to be very low, the proper course to take will be difficult, both as a matter of sound policy and as a political matter (to which I return in the last paragraph of this comment), to determine and implement. The relevant cost is the catastrophic loss if it occurs discounted (multiplied) by the probability of its occurring. If that probability is believed to be very low, the expected cost may be reckoned to be low even if, should the loss occur, it would be catastrophic. And if the expected cost is low but the cost of prevention is high, then doing nothing to prevent the risk from materializing may be the optimal course of (in)action. Furthermore, even if the expected cost of catastrophe is high, the scale of the catastrophe—the loss that it inflicts—may be reducible to moderate proportions by responsive measures. For example, while one way to deal with the risk of an epidemic is to vaccinate everyone, another is to quarantine the persons first infected, so that the epidemic is limited.
With these thoughts in mind, one can attempt a preliminary analysis of the Japanese response to the risk of the kind of disaster that occurred. Earthquakes cannot be prevented or predicted, though they can be detected as soon as they occur and if they occur in the floor of an ocean, and as a result trigger a tsunami (a tidal wave), people in the path of the tsunami can receive a warning of minutes or hours, depending on the distance between the earthquake and populated areas. Unlike the countries that border the Indian Ocean, whose populations suffered more than 200,000 deaths from a tsunami in 2004, Japan appears to have had a good early-warning system, as a result of which the number of deaths from the recent tsunami is in the tens of thousands rather than the hundreds of thousands.
The catastrophic effects of a major tsunami cannot be prevented by building seawalls; nor, in all likelihood, could the vulnerability of nuclear reactors to catastrophic damage from an earthquake or tsunami be reduced by moving the reactors inland, because they require access to large bodies of water for their normal operation, and it appears that the only large bodies of water available to Japan are the seas surrounding it. But catastrophic damage to nuclear reactions could be reduced by building stronger containment vessels for the reactors.
The loss of life and the radiation hazards from damaged reactors could be minimized by creating a rapid response capability that could be mobilized as soon as an earthquake or tsunami struck. Japan failed to create such a capability.
At considerable but not astronomical cost, Japan could have reduced the losses caused by the tsunami substantially by strengthening the containment vessels for its reactors and by creating a rapid response capability. I do not know why it did not do so, considering that it is a wealthy, technologically highly sophisticated, and risk-averse society. One possibility is that the probability of an earthquake within several hundred miles of Japan that would be as violent as the earthquake that triggered the tsunami turned out to be (9.0 on the Richter scale) was thought too slight to justify the cost of the protective measures that would have been necessary to minimize the consequences of such an earthquake. Suppose the expected cost of a 9.0 earthquake was $100 billion, but there was believed to be only a 1 percent annual probability that it would occur; then preventive measures that cost $1 billion or more per year would not be cost justified. The 1 percent figure is arbitrary; but considering that Japan had a 9.0 earthquake in 2011 that triggered a tsunami comparable to the recent one, that the Indian Ocean tsunami occurred only seven years ago, that on average a 9.0—or greater—earthquake occurs somewhere in the world every 20 years, and that Japan is in a region that is highly prone to earthquakes and tsunamis, 1 percent seems as good a guess as to its probability as any.
Strengthening the ability of its nuclear reactors to withstand a tsunami triggered by a 9.0 earthquake (or greater? 9.0 is not the ceiling—the Indian Ocean earthquake was 9.1 on the Richter scale) would be very expensive—Japan has more than 50 nuclear power plants, all on its coasts. But how much would it have cost to have built them slightly inland, connected to the seas by canals? And the creation of a rapid-reaction capability would probably not be very expensive, although I have not seen cost figures.
It would not be surprising, however, if as seems to be the case Japan failed to take cost-justified measures to minimize the damage from a 9.0 or greater earthquake. Politicians have limited time horizons. If the annual probability of some catastrophe is 1 percent, and a politician's horizon is 5 years, he will be reluctant to support significant expenditures to reduce the likelihood or magnitude of the catastrophe, because to do so would involve supporting either higher taxes or a reallocation of government expenditures from services that provide immediate benefits to constituents. In principle, it is true, politicians would take a long view if their constituents did out of concern for their children and grandchildren. But considering how the elderly cling to their social benefits, paid for by the young including their own young, I doubt the strength of that factor, although I do not know enough about Japanese politics to venture a guess on whether politicians' truncated policy horizons was indeed a factor in Japan's surprising lack of preparations for responding promptly and effectively to the kind of disaster that has occurred.
A final factor may be that Japan, unlike the United States, does not have an independent nuclear regulatory agency.
The Economic Implications of the Japanese Earthquake Disaster and its Aftermath-Becker
Japan has certainly been unfortunate during the past couple of decades. It has had almost twenty years of confidence-destroying slow economic growth, a series of humiliating confrontations with a rising and more aggressive China, and finally the biggest earthquake ever recorded in Japan. And this earthquake not only directly caused great damage, but it also set off a tsunami with huge destructive power. As if this were not enough, the combined earthquake-tsunami badly damaged two nuclear energy plants located on the fault lines and by the sea, damage that led to the release of as yet undetermined amounts of radiation. Still, I do not expect this disaster, despite its severity, to have major effects on the Japanese economy, but it will have a big impact on the nuclear power industry, and may help different countries better prepare for very rare but destructive natural events.
The fundamental loss to the Japanese people from this earthquake-tsunami-nuclear disaster is the destruction and damage to people and property. Perhaps in the end about 20,000 people would have been killed, and many others would be severely injured, including the unfortunates who were exposed to high levels of radiation. Twenty thousands deaths are a terrible loss, but they are only a small subtraction from the economy since they constitute about 0.016% of the Japanese population of some 127 million people. Studies of what people in a country like Japan would be willing to pay to avoid highly rare destructive events like that of a magnitude 9.0 Richter scale earthquake combined with a major tsunami suggest that these 20,000 deaths would be valued by about $3 million per death (many of those who died are older and have shorter remaining lives). The total cost of 20,000 deaths would then be $60 billion, a large sum to be sure, but again very small relative to Japan's GDP of about $5 trillion.
The loss of property is even more difficult to calculate at this point. Since the earthquake hit a depressed region of Japan dependent on declining industries like farming and fishing, it could not have caused a major loss in buildings, equipment, and consumer durables relative to Japan's total stock of assets. The output produced by the worst affected parts of this region are no more than about 4% of Japan's GDP, so that percent would be a gross upper bound to the economy's loss of buildings and equipment.
Even if the leaks from the nuclear reactors are contained without major public exposure to radiation, the combined loss of people and property are sizable in an absolute sense, and of course are disastrous to the people who lost their lives and property, or the lives of their loved ones. Still, it is not a major economic loss to Japan as a whole, and per se these losses should not result in more than a small decline in the per capita standard of living of the Japanese people.
Further economic consequences always follow from major disasters. Production by some businesses has been temporarily reduced since supply chains were disrupted. Since the earthquake hit a depressed and declining region, out migration of young men and women will accelerate, as will the decline of fishing and farming in that region. Construction will increase to replace some of the destroyed homes, businesses, and infrastructure. Presumably also, substantial amounts will be spent on repairing the damaged nuclear plants. These increased activities might give the appearance of an economic boom in the region, but it is a fake "boom" since they will mainly replace or repair destroyed and damaged buildings and equipment. I do not expect it to take very long before the region replaces most of its damaged property. A year after the powerful Kobe earthquake in 1995 that destroyed or damaged about 100,000 homes, GDP of the Kobe region of Japan surpassed its level prior to the earthquake.
The growing worldwide boom for nuclear energy will surely end. Nuclear power does not use fossil fuels and does not cause environmental harm if the radioactive waste is disposed of properly. However, these major advantages now have to be weighed against the different events that can damage nuclear reactors, and release large amounts of radiation into the atmosphere. At the minimum there will be a justified reluctance to locate new reactors on earthquake fault lines and close by seas that may have major tsunami action. Some reactors already in these vulnerable locations may be closed or relocated. Yet I hope that this does not also lead to a sustained moratorium on construction of new nuclear energy plants, but rather mainly induces even closer attention to safeguards against the release of high radiation levels, whether due to natural disasters or terrorist attacks.
It is difficult for people, no matter what their intelligence, to factor into their behavior the consequences of exposure to events that are both very rare, such as a major earthquake, and cause major damage when they do occur. It often takes decades that encompass most or all of a typical lifetime before another such event occurs. In addition, it is not always clear about how much protective action should be taken against such events. The expected damage from such events, which is the product of a small number (the probability of the event), and a large number (the damage inflicted when the event occurs), may itself be only moderate in size. Such moderate expected damages would not justify very expensive protective measures.
Governments have important roles to play in providing the latest information in readily accessible form on the location and likelihood of major, if rare, potential disasters. They also have the responsibility to prevent the building of plants, such as nuclear reactors, in places that would greatly harm people and property in the event of catastrophic events. At the same time, governments need to allow housing and other markets the flexibility so that individual choices can price into different locations their vulnerability to various rare but catastrophic events. An important World Bank study on disasters (see the important book "Natural Hazards, UnNatural Disasters", staff of the International Bank for Reconstruction and Development/ World Bank, 2010) shows, for example, that in flexible housing markets property values often are lower in areas more vulnerable to earthquakes and other disasters.