Washington’s Dangerous New Consensus on China
Don’t Start Another Cold War
The COVID-19 pandemic has raised fundamental questions about how to balance the protection of public health and the protection of the economy. How should authorities weigh the risk of illness and death against the risk of economic damage caused by social distancing and other restrictions that slow the spread of disease?
This question is never easy to answer. Earlier this year, however, when the novel coronavirus was spreading exponentially in major cities, it was not difficult to justify the imposition of lockdown conditions: erring on the side of protecting life and well-being seemed like the only prudent course. But as the contagion’s grip has begun to ease in some places, including the United States, the sense of crisis has abated, and many jurisdictions are reopening, at varying speeds and to varying degrees. This has put renewed pressure on the question of how to measure health risks against economic ones, especially as reopening policies have become fodder for partisan politics.
Fortunately, there is a well-established method of converting the value of reducing health risks into monetary terms, so that policymakers can more easily perform this delicate balancing act. The key is what economists call “the value of a statistical life,” an estimate of the amount that people are willing to pay to prevent an expected death. Perhaps one of the most important benefits of the VSL is that using it often reveals that the dichotomy between risks to health and risks to the economy is often a false one: losses to health are economic costs, and they do as much harm to the economy as other kinds of losses.
Economists often encounter resistance to the idea of placing an economic value on human life. Much of the discomfort arises from the misperception that doing so equates the value of a person’s life with his or her income. That is not the case: rather, the VSL reflects how much people value risks to their own lives as reflected by a range of choices that they make. To calculate the VSL, economists consider a myriad of common decisions that involve tradeoffs between money and small changes in risk. Such decisions are usually made in a market context involving jobs, products, and housing decisions. For example, how much in additional wages can workers demand in order to perform risky jobs? How much more are consumers willing to pay for cars that have additional safety devices? How much of a discount would a buyer expect in purchasing a home near a hazardous waste site?
The most common way that economists estimate the VSL is by looking at the risks that people face at work. In the construction industry, for example, some workers who perform dangerous tasks, such as machine operators, face an annual risk of being killed on the job of one in 2,500— meaning that on average, one out of every 2,500 such workers dies on the job every year. Analyzing large employment data sets reveals that those workers are paid an extra $4,000 or so per year in wages compared to people with similar educational backgrounds, skills, experience, and training who have safer jobs. Economists look at these two figures and see a third one: if all 2,500 of those workers were paid $4,000 extra dollars, and one of them died, it is possible to multiply those two numbers to calculate that the lost life was “worth” $10 million dollars. That number is the VSL. It reflects how much extra wages workers must be paid for each expected death on the job.
My current estimate of the VSL in the United States is, in fact, $10 million—a figure derived from far more complex data and calculations than the hypothetical example above. My estimate is in line with the figures that most U.S. government agencies now use. What that means in practice is that when considering how to calculate the value of a prospective policy to reduce risks, the government assigns a value of $10 million to each death it expects the policy would prevent.
The VSL reflects how much extra wages workers must be paid for each expected death on the job.
One complaint that critics sometimes make about the VSL is that it places the same economic value on the lives of people whose circumstances vary widely. If a particular policy would prevent the death of a very old person or a person with a serious medical condition that reduces his or her life expectancy, should that saved life receive the same valuation as the saved life of a young, healthy person? Some worry that the implication of such calculations is that certain groups of people are less deserving of protection than others.
To avoid such dilemmas, U.S. government agencies do not make such distinctions, as a general practice—and when they have, it has sparked a backlash. In 2003, the Environmental Protection Agency published an analysis of the Clear Skies Initiative, a federal plan to cut power plant emissions. In its analysis, the agency assumed that the VSL assigned to people age 65 or older was 37 percent lower than that assigned to the lives of younger people. Many saw this as an effort to devalue the life of older people: the AARP objected, and newspapers ran headlines such as “What’s a Granny Worth?” The government subsequently abandoned this approach. (In certain cases, however, the government does make exceptions. For example, when the Food and Drug Administration considers a policy that would affect terminally ill patients, it uses not the VSL but rather “the value of a statistical life year,” which it estimates to be $500,000 for each year of life that the policy would add for each patient.)
The utility of the VSL has perhaps never been more apparent than during the COVID-19 pandemic. Debates over social distancing and other restrictions placed on economic activity have been so fierce partly because people lack a common metric for how to value saving lives: it is hard to do a cost-benefit analysis when there is no agreement about how to measure costs and benefits. Using a rigorously developed estimate for the value of a saved life can clarify matters. In the case of the pandemic, using the VSL shows that imposing such restrictions clearly made economic sense and that lifting them too hastily might prove disastrous for the U.S. economy.
Applying the VSL demonstrates that the negative health effects of COVID-19 are real economic losses to society and are just as consequential as the lost productivity caused by social distancing and other restrictions intended to prevent the spread of the disease. In March, the federal government estimated that such measures would save at least one million American lives. At a value of $10 million per life, the total benefits of those policies would amount to $10 trillion, or about half of U.S. GDP, making it clear that social distancing and lockdowns were justified not only by the lives they saved but by the massive economic damage they prevented.
The utility of the VSL has perhaps never been more apparent than during the COVID-19 pandemic.
Other countries could undertake similar calculations. However, the VSL in other countries will vary in a manner that is roughly proportional to their average incomes. I estimate the VSL to be $2.5 million for China, $6.1 million for Spain, $6.4 million for Italy, $7.1 million for the United Kingdom, and $7.6 million for Canada. In an abstract sense, people in those places surely value their lives as much as Americans do. But because they have lower incomes, they have fewer resources to devote to safety efforts and consequently have lower VSLs.
Although applying those lower VSLs in such countries would make reductions in their mortality risks worth less than if they used the U.S. figure of $10 million, the scale of their economies is smaller, as well. As a result, the cost of the economic dislocations caused by social distancing and other restrictive policies will be lower in those countries than in the United States. And in all of those places, using the VSL leads to the conclusion that strong initiatives to stop the spread of COVID-19 would be well worth the economic cost. The same is even more clearly true in countries in Latin America and other places that are now witnessing a sharp increase in cases.
As countries, states, and cities move to reopen, the first activities they should restart are the ones that yield the greatest payoffs relative to the increased health costs that will be generated. The economic benefits of high-risk activities—for example, allowing people to attend professional sports events in stadiums—would have to be extremely large to warrant the likely high costs. In the absence of certainty about the consequences of such decisions, using the VSL is a powerful way to remind policymakers and citizens that every loss of life is not just a tragedy for individuals, families, and communities but also a major economic cost for the whole of society.
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