Kobe’s Dead Are Economic Policy Victims : Housing: With high-rise building limited to restrict consumption, residents were crammed in unsafe dwellings.

The confirmed death toll from the Kobe earthquake, now close to 5,100, is more than 80 times that of the Los Angeles earthquake a year ago.

Why did Kobe suffer so badly?

Some of the reasons have already been publicized. Kobe took a stronger jolt than Los Angeles. And the Kobe authorities seem to have been singularly unprepared for a major earthquake. But there was another, much more important and controversial factor at work in the disaster that has hitherto been overlooked--Japan’s counterintuitive industrial policy.

Tight controls on land development form an important part of Japan’s industrial policy. And thanks in large measure to these controls (and specifically to a virtual total ban on high-rise apartment buildings outside a few city-center neighborhoods), countless Japanese citizens still live in traditional wooden houses that are egregiously vulnerable to earthquakes. When the ground shook on Jan. 17, the roofs of many such houses in Kobe caved in, trapping residents. Fire did the rest.

The fate of these houses contrasted markedly with that of Kobe’s few modern high-rise apartment buildings, which held up very well. So why, in a country famous for an acute shortage of land, does the Japanese government discourage the development of safe high-rise structures?

The policy is often mistakenly attributed to bureaucratic gridlock or dysfunctional politics. But in fact there is nothing irrational or unintended here: The truth is that the high-rise restrictions are enforced by Japan’s top economic bureaucrats as a way of limiting the amount of living space available to the Japanese people and thus of suppressing consumption. In economic terms, low consumption is another way of saying high savings, and high savings in turn go a long way to explain Japan’s persistent balance-of-payments surpluses.

The most obvious savings effect is that Japanese citizens have to accumulate large down payments before they can take out mortgages. They must tightly curtail their spending on luxuries in order to repay these mortgages. Families who spend as much as half of their income servicing mortgage debts have little discretionary spending power to buy California wine or French cheese. Japan’s cramped housing also physically limits the potential market for American and European furniture and appliances, which are usually too large for Japanese homes.

The big winner from the government’s land policy is corporate Japan. Japan’s major house-building companies are typically Japan Inc. entities, owned by the big banks, insurance companies and manufacturers. These companies profit massively from a land market skewed in their favor and their gains are applied in expanding Japan’s industrial capacity.

The effect of the land policy on the savings rate is hard to exaggerate. One indicator is a study conducted in the 1980s by the Industrial Bank of Japan, which found that Japan’s land-price distortions accounted for fully one-third of the excess of Japan’s savings rate over America’s.

What should Americans make of all this? For a start, they should resist the temptation to wax indignant: However grisly it may seem, there is nothing new about an economy in which economic expediency is weighed in the balance against people’s lives (the dearth of preventive medicine in the United States provides an American analog).

The correct course for the United States is to accept East Asian mercantilism for what it is--and to embrace a policy of managed trade in which Tokyo and Washington would achieve access to each other’s markets on a negotiated basis.