A Tale of Two Storms: Rebuilding after the U.S. and Japanese Disasters

Tale-of-two-storms

The earthquake and tsunami that struck the East Coast of Japan in 2011 killed nearly 20,000 people, displaced 500,000, caused $360 billion in economic damage and destroyed 138,000 buildings. It also created a large, coastal uninhabitable zone and left many shoreline residents unsure about rebuilding their residences and their lives.

Two-and-a-half years later, these issues still resonate. As the Brookings Institute reported, “The reconstruction challenges remain daunting for Japan. Hundreds of thousands of people are still displaced, the quality of the nuclear cleanup continues to raise concerns and the financial cost of rebuilding the Tohoku region is staggering.”

The Japanese government has pledged a massive, long-term reconstruction budget of $262 billion. But the question has to be asked: Given the frequency of devastating natural disasters in earthquake-prone regions of Japan, as well as the likelihood of a sea-level rise as a result of climate change, should population-intensive human settlements be rebuilt just as they were?

Scientists and other experts are questioning the wisdom of such policies. It was a topic at the May 2013 Wharton Global Forum in Tokyo, organized by the Initiative for Global Environmental Leadership (IGEL) at Wharton, in a session titled “Risk, Challenges and Opportunities: Lessons Learned from 3/11.”

Given the frequency of devastating natural disasters in earthquake-prone regions of Japan, as well as the likelihood of a sea-level rise as a result of climate change, should population-intensive human settlements be rebuilt just as they were?

The issue is also relevant in the wake of Hurricane Sandy in the U.S., where federal insurance until recently has been greatly subsidized, enabling some residents to repeatedly rebuild coastal property more easily. As is often the case, financial and political considerations — including the high valuation of shoreline homes and businesses continue to influence policy decisions.

Relocation Challenges

National Geographic, in a 2013 article titled “Rising Seas,” predicts that coastal storm damage is set to rise dramatically. Shoreline cities, it said, “face a twofold threat: Inexorably rising oceans will gradually inundate low-lying areas, and higher seas will extend the ruinous reach of storm surges. The threat will never go away; it will only worsen. By the end of the century a 100-year storm surge like Sandy’s might occur every decade or less…. By the next century, if not sooner, large numbers of people will have to abandon coastal areas in Florida and other parts of the world.” In 2070, according to the Organisation for Economic Co-operation and Development, the at-risk population in large port cities could reach 150 million, with $35 trillion worth of property under threat.

Abandoning coastal property, no matter how it may be threatened by future natural disasters, is difficult for people worldwide. In Japan, the post-Fukushima challenge is complicated by both the nature of the destruction and the limited options available in such a small island nation. Japan, says Robert Giegengack, professor of earth and environmental science at Penn, “is almost all coast. It’s coast and Mount Fuji.”

Yet people affected by the nuclear disaster have to relocate. The tragedy in Japan was not just “the thousands of people who were killed, and the people who were made sick by radiation sickness and will die within decades, but also that you have this beautiful region of the country that’s been decimated for many hundreds of years,” said Eric W. Orts, a Wharton professor of legal studies and business ethics who chaired the Wharton Forum panel in Tokyo and who also heads IGEL. Erwann Michel-Kerjan, managing director of the Risk Management and Decision Processes Center at Wharton, adds that people in Japan “want to stay where they are — they don’t want to move — but nuclear contamination means that hundreds of miles of coastline may be lost.”

Unlike Japan, says Michel-Kerjan, “the U.S. is huge. We really could relocate entire cities elsewhere.” But in the absence of an immediate and lethal threat, such as nuclear contamination, it’s much harder to declare property off-limits. “When people’s houses are destroyed, they say, ‘I will rebuild again right here,’” he notes. “And politicians, mayors or governors, how many of them will say, ‘You guys are out.’ They know they wouldn’t be re-elected if they said that. In any case, these aren’t easy questions to answer, because some of the people affected have been living in those locations for generations.”

The Catastrophe Paradox

Given that large-scale earthquakes and tsunamis regularly assault the Japanese coast (though not usually of such magnitude and usually not together), why were reactors like Fukushima Daiichi built along fault lines?

“When people’s houses are destroyed, they say, ‘I will rebuild again right here.’ And politicians, mayors or governors, how many of them will say, ‘You guys are out.’ They know they wouldn’t be re-elected if they said that.” — Erwann Michel-Kerjan

According to J. Mark Ramseyer, a professor of Japanese legal studies at Harvard Law School, it’s because owners such as the Tokyo Electric Power Company (TEPCO) faced limited liability. In a 2011 journal article for Theoretical Inquiries in Law, he argues that TEPCO “would not pay the full cost of a meltdown anyway.… It could externalize the cost of running reactors. In most industries, firms rarely risk tort damages so enormous they cannot pay them. In nuclear power, ‘unpayable’ potential liability is routine. Privately owned companies bear the cost of an accident only up to the fire-sale value of their net assets. Beyond that, they pay nothing — and the damages from a nuclear disaster easily soar past that point.”

Total claims against Tokyo Electric have been estimated by Bank of America/Merrill Lynch to reach $31 billion to $49 billion, well beyond the pre-storm market capitalization of the company. Beyond that amount, Ramseyer says, “any losses fell on its victims –or if the government so chose, on taxpayers.”

Ramseyer’s point also applies to homeowners living on the coast in both Japan and the U.S. for whom routine rebuilding, often at public expense, has been a given. But the catastrophic nature of the recent Japanese and American coastal disasters has led to some rethinking of those assumptions.

The World Bank estimated the cost of the Japanese catastrophe at $235 billion, plus $125 billion related to shutdowns and delays in business recovery. The Japanese government has pledged huge long-term aid, but so far has offered a fraction of this amount for rebuilding efforts. It faces its own budget issues — Japan has the highest level of public debt in the world.

Questions are arising about spending many billions on rebuilding, only to face another devastating event, but that is indeed what has been proposed in the Tohoku area. Satoshi Kitahama, representative director of the Kizuna Foundation in Tokyo (a non-profit created to aid the survivors of the March 11, 2011 twin disasters), asks if that effort — though it may be emotionally satisfying — is economically viable. Given a small and aging population of just 20,000 people, with a limited number of those in the workforce, he says that paying residents to relocate might be a more viable option.

“I have suggested to many of the mayors — just pay them,” he says. “You can’t hold [residents] hostage for the nostalgia of what this used to be, because it is never coming back to that.” He suggests that efforts to raise low-lying areas or replant ancient forests are poor public policy. “Instead of dispersing those funds and letting the individual decide what to do with them, they put it into projects like this, spending billions of dollars for a population of 20,000,” he said. “Instead, give people a couple of hundred thousand dollars per resident and let them make the decision. Let people move to higher ground, to other parts of Japan.”

Major Commitments, But Talk of Retreat

As in Japan, the U.S. has made a major federal commitment to rebuilding the Northeast after Hurricane Sandy, committing $50 billion, much of which has not yet been spent. New York Mayor Michael Bloomberg, warning of more storms ahead and a predicted sea-level rise of as much as 31 inches by 2050, has asked for $20 billion to erect flood barriers, including dunes and bulkheads, to protect low-lying areas.

It’s easy to see how, in a litigious society, rebuilding, rather than relocating became the priority. A small coastal town in New Jersey, Harvey Cedars, had the prescience to work with the federal government’s Army Corps of Engineers on a $26 million plan to protect itself against the storms that have repeatedly caused major damage and wiped out both beach and beachfront property.

Some homeowners held out against signing on to the project, which required the building of sand dunes on their property — and in some cases destroyed their view. Harvey and Phyllis Karan took opposition to their dune further than most — to court — and as reported in a 2013 article for The New Yorker, won a $375,000 judgment in March of 2012.

Seven months later, in October, Hurricane Sandy hit the Northeast, taking 159 lives, causing $69 billion in damages, and carrying away 37 million cubic yards of sand. But most of dune-sheltered Harvey Cedars was spared, including the Karans’ house. Despite that, their lawsuit continued, though their financial verdict was overturned last July. “All we wanted was our view,” said Phyllis Karan.

But simply rebuilding the Northeastern shore and moving on won’t be simple, especially in the wake of expensive new building requirements (some homes will have to go up on pilings) and escalating federal flood insurance premiums that can reach $30,000 annually. The National Flood Insurance Program (NFIP), managed by the Federal Emergency Management Agency (FEMA), has long provided subsidized coverage to property owners, but since early 2013 it has been phasing out subsidies for second homes and vacation residences, with premiums rising 25% annually until they reach actual market rates.

For companies, including those in Japan, “The event is seen as so catastrophic, there’s no reason to prepare for it. Small companies may not take protective measures because they can’t afford it — if a major event occurs, they’ll just go under.” — Howard Kunreuther

Until recently, the default position was that property would routinely be rebuilt at federal expense. As Justin Gillis and Felicity Barringer write in The New York Times in late 2012, “Across the nation, tens of billions of tax dollars have been spent on subsidizing coastal reconstruction in the aftermath of storms, usually with little consideration of whether it actually makes sense to keep rebuilding in disaster-prone areas.”

Marshall W. Meyer, a Wharton professor of management with a specialty in Asia, said of the FEMA insurance program, a lot of people think they over-insure – “the government shouldn’t be putting public funds at risk to insure homes on the New Jersey shore.”

The Times cites the example of 1,300-resident Dauphin Island on the Gulf Coast, which has been repeatedly battered by a dozen hurricanes and storms — and rebuilt each time.

According to Kitahama, speaking at Wharton’s Tokyo forum, “When thinking about how to rebuild, it’s very difficult. There will be another quake on the coast of Japan, and communities exist there in areas that have been inundated in the past. Also, some areas that were devastated this time, like Tohoku, had never had a quake or a tsunami.” One city that saw widespread damage “was in a safe zone.”

Reconstruction — in Japan and New York

Kitahama noted that there has been “a lot of focus on reconstruction, because that is the easy way to demonstrate action by the government — but it’s not really what’s needed.” He pointed to action by New York City Mayor Michael Bloomberg to buy heavily damaged coastal property and put it into no-build zones.

“This is not happening on Tohoku,” Kitahama said, “so some are sitting on properties deemed to be in non-build areas, but they haven’t been given any kind of offer for their land.” Kitahama said that one of the best uses for the land in no-build zones would be as locations for renewable energy farms (see the separate report on alternative energy prospects for Japan).

In reality, New York’s efforts have been far from decisive, reflecting the high stakes involving any valuable coastal property. Governor Andrew Cuomo launched a $400 million homeowner buyout, and the Bloomberg administration followed up last spring with a $1.8 billion effort using federal Community Development Block Grant funding.

Cuomo’s plan, which also leverages federal funds, is unambiguous about what should be done with the abandoned property. “There are some parcels that Mother Nature owns,” Cuomo stated.

But Brad Gair, director of New York City’s housing recovery office, said its own funding is not oriented toward turning stricken property into open space — instead, it will be offered for redevelopment by new buyers. “If there is one element that we have not yet come to full alignment on,” he noted, “it’s whether properties acquired should be made permanently open space or whether some of those would be suitable for redevelopment — preferably for the home owners in the area. These are valuable properties. There is a limited amount of coastline properties.”

In announcing the $1.8 billion in grants, deputy mayor for operations Caswell Holloway said in early 2013 that the money would go to “restore neighborhoods, re-open businesses, and better protect our coast and coastal communities from the dangers of climate change.”

In the New York area alone, more than 300,000 housing units were damaged or destroyed by Hurricane Sandy (with repair costs estimated at $9.6 billion), but city officials predict that only 10% to 15% will agree to city or state buyout offers. The storm has totally transformed the real estate market in some Northeastern shoreline communities. Although most homeowners are rebuilding, new buyers are asking questions about flood map zones, federal insurance and building elevations — and if they don’t like the answers, they’re looking for property elsewhere.

President Obama’s Hurricane Sandy Rebuilding Task Force issued a report in August 2013 that documents $110 billion in damages from 11 U.S. climate-related natural disasters in just the last year ($69 billion of that from Hurricane Sandy). The report, which embraces resilience as the new planning paradigm for disaster relief, makes sobering reading. It recognizes the elevated risk to shorelines from climate change, and suggests that such recognition be incorporated into all future relief planning. And it says that there may be limits to rebuilding efforts — despite new, stronger building codes that require elevating buildings above the high-water mark.

“Over time,” the report noted, “the ability to incrementally increase the height of flood control structures may be limited. Some communities are already facing limits to their ability to adapt to risk, presenting challenging questions for policy makers about managing consequences…. Understanding the limits of tolerable risk is an active area of research and public debate.”

Taxpayers, opined the Times in an editorial on the federal report, “should not be paying to rebuild and then re-rebuild as the sea level rises. Even those politicians who say they still don’t believe in climate change must see that the system needs fixing.”

Insurance and Catastrophe Planning

The shock of responding to such a severe and fast-moving event as the Japanese earthquake and tsunami has heightened emotions and complicated rebuilding plans. Howard Kunreuther, a Wharton professor and co-director of the Wharton Risk Management and Decision Processes Center, argues that people “aren’t prepared for low-probability, high-consequence events — the likelihood is very small, so it’s below a threshold level of concern. The general feeling that an earthquake of that magnitude coupled with a tsunami was not going to happen.”

For companies, including those in Japan, Kunreuther adds, “The event is seen as so catastrophic, there’s no reason to prepare for it. Small companies may not take protective measures because they can’t afford it — if a major event occurs, they’ll just go under.”

Kunreuther argues that short-term insurance is part of the problem. “The industry has traditionally looked at annual policies,” he says. “But there is very little concern over climate change or other long-term effects in setting rates with one-year policies. We have been arguing for five-year policies so the costs can be spread over multiple years — but there’s not a lot of movement on that.”

Robert Meyer, a Wharton marketing professor who also is co-director of the school’s Risk Management and Decision Processes Center, says that simply having flood insurance available, even at federally subsidized rates, is no guarantee that people will buy it — only 13% of American homeowners have such policies, for instance. New Jersey Manufacturer’s Insurance, which has 280,000 homeowner policies (and paid out $241 million in Sandy-related claims), said only 11,000 (or 4%) of them include flood coverage. That percentage didn’t change after Hurricane Sandy, said spokesman Pat Breslin.

Chile Sets an Example

According to Meyer, “If you give people discretion on whether to buy flood insurance, they won’t make the right decision. Even people who have been through hurricanes forget pretty quickly if they weren’t badly affected.  You need strong leadership at the very top, and you need very strong building codes. If new nuclear plants are built in Japan, it will have to be to very high standards.”

“If you give people discretion on whether to buy flood insurance, they won’t make the right decision. Even people who have been through hurricanes forget pretty quickly if they weren’t badly affected.” — Robert Meyer

Meyer cites the positive example of Chile, most recently hit with an 8.8-magnitude quake in 2010. According to Bloomberg.com, “Since 1960, when the country suffered a 9.5 magnitude quake, the largest ever recorded, Chile has steadily improved building codes to protect lives and property. In 2010’s temblor, only five commercial buildings designed with the help of structural engineers were destroyed, according to a report by the U.S. Geological Survey.” One building, the $200 million Titanium Tower, incorporated the latest earthquake technology (including shock-absorbing steel dampers) and survived with no structural damage.

Nonetheless, Meyer says it’s impossible to build infrastructure to survive severe, 1,000-year natural disasters, even if the political will existed. “New York City is a great example. It’s sitting right on the water, one hurricane away from a $100 billion disaster. But with the probability of such a storm at 1.0, it’s very difficult to get people to take action. After Sandy, an unused airport was used to store 15,000 storm-damaged cars, and yet people with vehicles or fleets of them took no action to prevent them from getting flooded.”

According to Meyer, the risk management center has responded to that problem by building online simulations that “can realistically give a sense it what it would be like to experience a serious hurricane. It helps people develop options for protective action.” That’s in line with the federal Sandy report, which found that many residents of storm-prone regions are unaware of the risks they face, or how severe the consequences might be.

Looking forward, the case against reoccupying some hard-hit coastal regions of both the U.S. and Japan — despite their high value on many levels — can be compelling. As adopted policy, however, it is fraught with political consequences and strong emotions. Rebuilding efforts will go forward, in both countries, but with greater awareness of risk, and with limits on insurance coverage and the location and design of rebuilt buildings. In some cases, federal safety nets will be gone. Given that, the marketplace is likely to play a major role in determining the future of shoreline communities.

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