Since the Japanese earthquake and, earlier, the global financial tsunami, governments have been pressed to guarantee their populations against all risks exposed by those extremely low probability events. But should they? Guarantees require the building up of a buffer of idle resources that are not otherwise engaged in the production of goods and services. They are employed only if, and when, the crisis emerges.

The buffer may encompass expensive building materials whose earthquake flexibility is needed only for a minute or two every century. Any excess bank equity capital also would constitute a buffer that is not available to finance productivity-enhancing capital investment.

The choice of funding buffers is one of the most important decisions that societies must make. If policymakers choose to buffer their populations against every conceivable risk, their standards of living would almost certainly decline. It is no accident that earthquake protection of the extent employed in Japan has not been chosen by less prosperous countries at similar risk of a serious earthquake. Buffers are largely a luxury of rich nations. It does not matter whether we perceive an increased buffer as part of a nation’s capital stock, or as part of the net equity of the country. They are the same magnitude from different perspectives. Consolidated, the net capital stock of a nation must equal the sum of the equity of households, businesses and governments, adjusted for the nation’snet international investment position.