Wednesday, March 16, 2011

Earthquakes, tragedy, and growth

In my undergraduate class at Queens College today, I found myself trying to turn a tragedy into a teachable moment, at least in the limited sense of better understanding macroeconomics. Humans are irreplaceable, but buildings and equipment are not. I suppose it might also be appropriate to observe that the environment is also irreplaceable, to the extent we might harm it enough that nature can't heal. My initial guess based on what we know is that the environmental impact of the 9.0 magnitude earthquake in Sendai is likely to be minimal compared with the human and capital costs, but I could easily be wrong given the current uncertainties.

Especially in a country like Japan, where population growth is zero or negative, people are very dear. They're dear regardless. But one of the lessons of the standard neoclassical growth model is that capital, on the other hand, is replaceable. Shocks to the Japanese capital stock, such as that associated with an earthquake, will reduce the levels of wealth and income in the short run, but income growth is likely to be more rapid after the shock than before.

A 2002 article by Mark Skidmore and Hideki Toya in Economic Inquiry went further than that, suggesting that turnover of the capital stock might also be good for fostering technological innovation. Another relevant article is by George Horwich in 2000, writing about the 1995 Kobe earthquake, where he argues that the greater importance of human capital, of which losses were high but not catastrophic, contributed to the quick recovery. He cites an estimate of fatalities of about 6,500 and destroyed capital of about $114 billion, or 0.8% of the nation's capital stock.