Due to the COVID-19 crisis, a little-known economic concept has entered the public eye. While statistics like GDP, the unemployment rate, and the inflation rate have been in the public consciousness for years, the value of a statistical life, or VSL as it is often termed, has mostly flown under the radar. The VSL is used by economists to gauge the value of changes in mortality in an economic analysis. It’s a dollar value applied to lives expected to be saved by expensive public policies, in order to determine whether the costs are “worth it.”
Today, the debate about social distancing—and the inevitable tradeoffs between money and lives that social distancing creates—is leading to greater awareness of the VSL. If more people come to understand the limitations of a concept that governments rely heavily on, it will be a good thing.
The VSL often generates controversy when people learn about it: “The government is putting a dollar value on human lives?!” Well, yes—prevailing academic thought suggests it’s about $10 million on average for Americans, and the government has used such an analytical device for decades when evaluating the consequences of health, safety, and environmental policies.
The “Dictatorship of the Present”
One basic premise behind the VSL, and behind cost-benefit analysis more generally, is that the preferences of present citizens should dictate policy. At first glance, this sounds reasonable. Who could oppose making people better off according to their own values?
The problem is that the preferences of current citizens and the well-being of future citizens aren’t always the same thing, and they often clash. Just think about the growing national debt. Sure, we can borrow more to consume today, and that might be perfectly fine with a majority of people in 2020, who don’t seem inclined to change it. But it comes at the expense of future generations—and not just because of debt that will one day have to be repaid. Much government spending also lowers consumption in the future by redirecting our money today away from productive investment and thereby slowing growth; that makes future citizens worse off.
It’s not that the well-being of future citizens counts for nothing in a cost-benefit analysis. But in the economic models that underlie the VSL and cost-benefit analysis, the well-being of future citizens often matters only to the extent that it matters to present citizens. Such a situation is sometimes referred to as a “dictatorship of the present.” Present workers might value leaving a bequest to their successors or exhibit some other degree of altruism, but that’s typically as far as it goes. In economics jargon, usually the well-being of future citizens does not enter the “social welfare function” directly. Instead, the present generation gets to be the dictator of policy for the time that it is alive.
Here’s how this works in practice: Economists do a statistical analysis to assess people’s preferences about a risk. They identify what current citizens are willing to pay to reduce the risk in their own lives, or how much money they are willing accept to bear more of it. Then those individuals’ preferences are used as a stand-in for society’s preferences in a cost-benefit analysis. If a policy costs more to present citizens than they value the risk reduction, it can be deemed inefficient using the VSL, and hence not worth addressing.
Downplaying the True Costs
But in general, when costs will be paid (in one form or another) by future citizens, policies look much more favorable. That’s because present citizens don’t value distant future costs very highly (nor do they place much weight on benefits that take a long time to pay off). As a result, the VSL tends to recommend heavy investments in risk reduction for present citizens, with the costs being passed on to people in the future.
The crux of the problem is that the VSL describes the private benefits of reducing risk for certain individuals, but it doesn’t come close to describing the complete social benefits. This is a big deal because in a cost-benefit analysis, resources are supposed to be valued according to what society—or the sum total of all individuals—would be willing to pay for them on the margin, not what this or that specific individual or group would be willing to pay.
If one group can’t participate in the market for a good—say because its members haven’t been born yet—but is impacted by the sale of the good, this creates an externality. To get a number that’s useful in a cost-benefit analysis, one needs to simulate what would happen if the various impacted groups could trade with one another.
When individual and social values deviate in this way, it’s known as a market failure. And when a market failure heavily informs an economic analysis, this leads to inefficient policy recommendations.
Bad Analysis Leads to Bad Policies
Consider what would happen if economists created a cost-benefit analysis based on prices from a market that was dominated by a single monopoly producer. The price of the good the monopolist sold would likely be too high relative to how society values it. The analysis wouldn’t just be incorrect; it could lead to ill-informed policy that spreads inefficiencies from a market that is failing badly to many other markets. This is precisely what happens when policy makers act based on analyses which use the VSL.
The most charitable way to view the VSL is that it captures the preferences of some small sliver of society. If these preferences were all that mattered—or if we could correct the tendency to discriminate against future generations—perhaps the VSL could be a useful tool in cost-benefit analysis. But when the preferences of that small sliver are imposed on everyone else in society in a dictatorial faction, it tends to justify gratuitous spending for the benefit of the small group. Much like with the national debt, we lavish benefits upon ourselves at the expense of our children and grandchildren.
The public is gaining unfiltered access into the economist’s workshop as a result of COVID-19. As they peek behind the curtain to see the levers being pulled in a cost-benefit analysis, there is a lot they may find objectionable. At the top of that list is likely to be the VSL, and for good reason.