Monday, March 21, 2011

What’s the Cost of the Japanese Tsunami?

Dollar value estimates of the costs of disasters — as reported in the legacy media — are usually badly biased on the low side.

There are three reasons for this: 1) property damage estimates come from insurance companies and cover only losses that were insured before the disaster, 2) many things aren’t insurable‡, and 3) the legacy media has an unethical aversion to putting a dollar value on the loss of life.

Believe it or not, yours truly was the first person to come up with an accurate estimate of the damage from Hurricane Katrina. It wasn’t that hard: estimates of private wealth exist for the U.S., and the damage was largely confined to an administrative unit that matched that data set. This doesn’t exist for Japan because the damage covers only parts of 3 prefectures. Arguably, the damage in Sendai alone — which is a larger city than New Orleans, and whose damage appears more extensive — will exceed $100B.

As to insurability, we all know about family memories that can’t be replaced, but the big factor here may actually be goodwill as recorded on business balance sheets. Things like brand names have value, and it isn’t small: dozens of international firms have brands that are values in the tens of billions of dollars for each firm. Physical assets can be replaced, but goodwill will be much tougher.

I am not sure why the legacy media has an aversion to tallying human costs. It’s not like humans don’t actually make choices that make it very clear how much they value their own life (e.g., riding without helmets) or the lives of others (e.g., texting while driving). The newest estimate is $9,100,000 for a human life, and that comes from the EPA; other government agencies use similar values in the high 7 digits. For years, I’ve used $10,000,000 as a high ballpark estimate. The value in Japan would be approximately the same, given that their standard of living is similar. If we tally up the dead (8,450), and assume that the missing (12,931) are gone for good, and round up for good measure, we get 22,000 casualties, with a value of $220B.

To hazard a guess then, I’d say $500B. This may be the largest disaster in terms of physical damage, but once you start counting the value of lost human lives, it will have trouble making the top 10. This actually is a really good thing, and a credit to developed economies everywhere.

How much of a share of the Japanese wealth has been destroyed? As I’ve remarked in class, national wealth statistics are lousy (and don’t even begin to count the value of human life). So, published estimates are on the very low end of the true value. For Japan, $35,000B is a good estimate of national wealth. So, we’re talking probably no more than 2%.

‡ In particular, most people outside of business schools do not understand why insurance companies do not insure against floods, tsunamis, and earthquakes (unless forced to by regulators). The reason is that insurance is based on diversifying one person’s risks by pooling them with someone who doesn’t face the same risk. At worst, this is impossible if the disaster is large enough, and at best it is problematic if one’s choice of insurance company is driven by word of mouth.

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