The ethics of compensation

by Takamitsu Sawa

On the evening of Sept. 10, I watched a NHK “Special” television program titled “The Ultimate Choice: Michael Sandel’s global classroom.” The theme of the 75-minute program was who should pick up the bill for reconstructing areas devastated by natural calamities like earthquakes and hurricanes, and especially compensation for disaster victims.

The moderator of the program was Dr. Michael J. Sandel, a political science professor at Harvard University whose classes have been attended by more than 1,000 students, a record high for any chair at that university. The transcript of his lectures called “Justice” has been translated into Japanese, making his name well known in this country.

Joining Sandel were eight students each from Harvard, Fudan University in Shanghai and postgraduate schools in Tokyo, and they had heated discussions on reconstruction of the northern Japanese regions hit hard by the March 11 earthquake and tsunami, and the ethics related to it.

At the outset of the program, Sandel pointed to the different ways victims of two other natural disasters were compensated: Hurricane Katrina, which played havoc with the southern United States in July 2005, leaving about 2,000 people dead or missing, and a powerful earthquake that hit China’s Sichuan Province in May 2008, leaving some 87,000 people dead or missing.

In the Katrina case, the U.S. government allotted $135 billion in compensation, which was distributed to the bereaved families of dead victims in proportion to their respective income levels before death. In other words, the lower the victims’ incomes were, the smaller the amounts their bereaved families received were. In China, the Beijing government obligated affluent local governments near the devastated region to provide financial aid.

In the case of the March 11 quake and tsunami, the Japanese government has shouldered the cost for the construction of prefabricated temporary housing for those who have lost their residences.

Sandel asked the students who they thought should bear the cost of compensating for the damage to homes and buildings in the March 11 disasters — estimated to be ¥17 trillion — and for the loss of human life, and what kind of distribution of the compensation would ensure justice and fairness.

In the case of death in a traffic accident, the amount of compensation is paid in proportion to the income the victim was earning while alive. This is based on the theory that it is fair to make up, with compensation, for the portion of the victim’s lifetime income that has been lost by his or her death. Should the same principle be applied to deaths caused by natural disasters?

In a traffic accident, the obligation to compensate the victim falls on the person who caused the accident and that person’s automotive insurance company. In the case of an earthquake or tsunami, however, the obligation to compensate will have to be imposed on the national and local governments on the principle of social contract. This is because there are no individuals or groups of individuals responsible for the disaster.

I feel that it is unreasonable to pay different amounts of compensation according to the levels of victims’ lifetime incomes since the governments that bear the cost of compensation did not cause the disasters.

Sandel then asked the students about payments of compensation for houses damaged by natural calamities. A majority of the students thought that the compensatory payments for deaths should not be differentiated from individual to individual. But as to compensation to damaged houses, a majority of them said that such compensation should be differentiated.

Here is what I think. With or without differentiation, it should not be expected that compensation to any family whose residence has been damaged should top ¥10 million. This is because government budgets are under severe constraints. If that is the case, the amount of compensatory money any family is to receive will constitute only a small proportion of the amount needed to rebuild their home.

It is reasonable to assume that those who own expensive houses also possess large financial assets and that the assets owned by people living in cheap houses are small. In my view, therefore, it is desirable to give the same amount of home-damage compensation to both the rich and poor because this will help both of them quickly rebuild their dwellings, which in turn would expedite the overall reconstruction of the devastated areas.

If the government is responsible for paying the compensatory money, the next natural question would be how to finance it. As Japan is faced with huge sovereign debts, there appear to be only three choices: (1) increase taxes, (2) issue new government bonds, and (3) sell government assets, including stock shares of former state corporations that have recently been privatized.

If the first alternative, i.e., tax hikes, is to be pursued, a hard decision would have to be made as to which specific tax — the consumption tax, the corporate tax and the personal income and resident’s taxes — should be increased by how much. Prime Minister Yoshihiko Noda has already instructed his Cabinet not to consider raising the consumption tax — 5 percent at present — apparently because the Democratic Party of Japan suffered a resounding defeat in last year’s Upper House election when his predecessor, Naoto Kan, campaigned on the slogan of increasing the consumption tax. The defeat led the opposition force to grab a majority in the Upper House.

At present, it seems that the government is inclined to raise local and personal income taxes over the next 10 years to cover compensation payments to the victims of the March 11 disasters, including the Fukushima nuclear fiasco. Another proposal calls for the government to sell off its shares in Japan Tobacco Co., which amounts to 50 percent of the firm’s total shares. The company was privatized in 1985.

Many students attending Sandel’s TV class opposed new bond issues to finance the reconstruction and compensation payments on grounds that it would only pass on the fiscal burdens to future generations. Moreover, in view of the fact that Japan’s sovereign debts — the outstanding bonds that have been issued by both the central and local governments — have become worth more than twice the nation’s gross domestic product, incremental bond issues in huge sums could very well lead to serious consequences like a plummeting of bond prices, high interest rates and a major recession.

It is utterly impossible to expect that Tepco alone can pay all the costs for cleaning up the mess created by the nuclear fiasco and paying compensation to victims from the accidents even if it sells off all of its assets. This has led to the creation of a new entity to assist in paying indemnities to the victims of nuclear power accidents, with the government chipping in ¥7 billion and the 12 utilities that own nuclear plants chipping in another ¥7 billion. This scheme resembles the one the Chinese government adopted following the Sichuan earthquake. It obligated local governments near the disaster areas to financially support the victims. The ¥7 billion contributed by the utilities resembles insurance premiums for risks that may arise out of future nuclear accidents.

As far maintaining justice and fairness is concerned, it is no easy task to determine who should, and in what manner, bear the costs for reconstructing the areas hit by the earthquake, tsunami and nuclear disasters. Yet unless a decision is made and translated into action promptly, the reconstruction work may drag on for more than a decade.

Takamitsu Sawa is president of Shiga University, Japan.