SLOWLY but surely, more horror stories are emerging from the rubble that is Tsunami-hit Northern Japan. The death toll will undoubtedly be many orders of magnitude higher than the few thousand so far confirmed by the authorities, while the big issue last night was the extremely serious problem at several Japanese nuclear power plants. While this series of accidents still appears to be no Chernobyl, there is some radiation leakage and the situation is far more dangerous than it looked to be on Sunday. Outsiders are finding it impossible to work out true levels of risk. If the situation isn’t resolved, a second wave of panic is likely, in the markets and among investors if not among the astonishingly stoic Japanese public.
As to the actual economic damage, the Kobe earthquake of 1995 produced losses worth around two per cent of GDP; this disaster could cost up to five per cent. Rich economies inevitably bounce back from severe natural disasters; after a sharp slump in GDP, output inevitably shoots back up again as reconstruction efforts begin. It will be no different this time, despite Japan’s excessive public debt and unfavourable commodity prices.
But one should not confuse a rise in GDP as repair work kicks in in a few months’ time with a rise in wealth. That would be to fall foul of what Frederic Bastiat called the broken window fallacy: a country doesn’t become richer when its assets are smashed up, even if mending them temporarily creates new jobs. Earthquakes don’t boost a nation’s wealth, they make it poorer; resources that could have been allocated to other things need to be diverted to the rebuilding effort. Vast amounts of Japan’s capital have been destroyed, including several nuclear power stations worth at least $5bn each, as well as tens of billions worth of housing and commercial property. One need not agree with the more extreme estimates of the value of the destruction – one analyst puts the destroyed capital at $1 trillion – to see that replacing what is broken is different to adding to the stock of wealth. So much for the economics – today, however, all eyes will be on the nuclear reactors.
NOT ALL RICH FOLK ARE BANKERS
For those people who hate all bankers and financiers, the 50p tax rate on income over £150,000 a year is usually welcomed as an anti-City tax. It is portrayed as a targeted, punitive measure to exercise retribution for the recession (which the public attributes almost exclusively to high-earning bankers as a class). There is a lot wrong with this naive argument, including the fact that the causes of the crisis were hugely complex and included central banks’ low interest rates, government guarantees, intellectual errors about statistical patterns and numerous other policies.
Yet another point is even more fundamental: most people on high incomes don’t actually work in finance. Jo Johnson, the Tory MP for Orpington, was keen to find out who actually paid the tax; the Treasury’s permanent secretary Sir Nicholas Macpherson has obliged. Of the 275,000 paying the new 50p tax (which will reach 52 per cent in April with extra employee national insurance) only 63,000 work in financial intermediation, such as banks and funds. I would guess a few thousand others on similar incomes yet not in this list could be described as quasi-investment bankers (lawyers specialising in corporate finance and so on). But the vast majority of those paying the new tax work in other fields.
The widespread view that the only rich people in the UK today are bankers is absurd. A little more than 2,800 people in firms under the Financial Services Authority’s remit earned more than £1m in 2009, the regulator revealed last year. Even if we were to assume that this number has gone up, and that other quasi-bankers (consultants, lawyers, top partners at professional services firms) ought to be added in, it is fair to assume that no more than 4,000 people in City-style jobs make £1m a year. Yet HMRC estimates that around 13,000 people in the UK earn £1m (down 1,000 from its peak).
Most are the entrepreneurs who are meant to grow us out of recession, non-finance company directors, top business people, entertainers and footballers. None are to blame for the crisis – all are being hammered.