The price of life
LOCKDOWN COSTS ARE REAL. BUT ARE THE BENEFITS?
Not long ago New York Governor Andrew Cuomo said “we’re not going to put a dollar figure on human life,” implying that no amount of money will stand in the way of curbing the spread of COVID-19. It’s a common sentiment expressed in different ways, as when Prime Minister Justin Trudeau and other Canadian politicians say their governments will do “whatever it takes” to ward off the pandemic. In other words, saving lives is beyond price.
But the premise is false. In economics, in government, and in private business, dollar values are put on lives as a matter of course — in healthcare decisions, highway regulations, environmental law, and even during a pandemic. We let people die all the time — in accidents, from disease and flu, from on-the-job risks, from pollution.
In the context of today’s global economic battle against COVID-19, perhaps no subject is of greater importance than the presumed value of lives saved. Trillions of dollars in forgone economic activity and forthcoming government borrowing are being dedicated to preventing pandemic deaths.
Is the massive assignment of money and wealth via unprecedented decisions to lock down much of the world economy justified in terms of lives saved and health costs averted?
This hard question may not be top of mind today but it will dominate the work of historians, economists and government commissions in the future. The final answer will not be as clear- cut as many assume.
First the costs. The ultimate dollar value of costs will eventually be relatively easy to calculate. Until then, rough estimates are the best numbers available.
In Canada, for example, a lowball early cost estimate might be something like $ 600 billion for this year alone. The IMF estimates a 6.5 per cent decline in GDP this year ($160 billion), with possibly more losses into next year. Then there’s about $300 billion in federal and provincial government borrowing to fund massive new spending. Another $ 150 billion in lost future growth would raise the total cost even higher. The value of Bank of Canada monetary activities, which could show up in future inflation, could push the total even higher. The final number could easily top $700 billion in Canada — roughly a third of GDP.
In the United States, estimates of the cost of fighting the pandemic run to more than $ 9 trillion, including $ 2.5 trillion in Trump- andPelosi- driven government spending, with more expected any day. Globally, the total cost of the international lockdowns will soar into tens of trillions of dollars.
Assuming these large dollar-cost estimates are reasonable approximations, what are the associated dollar benefits?
The leading method for measuring such benefits is to do exactly what Cuomo says we should not do: assign a dollar value to the lives saved by the economic lockdown.
I cannot find any academic or government-based cost- benefit work on Canada’s pandemic- fighting operation. In the United States, however, several papers have appeared over the past month that provide an early indication of how governments in Washington, Ottawa and the provinces may attempt to justify the high costs of the battle against COVID-19. Though it was painful and disruptive, they will claim, the lockdown delivered major benefits that likely exceed even the very high costs of the lockdown.
In one of the U. S. papers — Does Social Distancing Matter? — two economists at the University of Chicago’s Becker Friedman Institute for Research in Economics — Michael Greenstone and Vishan Nigam — applied a concept known as the Value of a Statistical Life to the United States and came up with some large benefit numbers. They concluded that “a moderate form of social distancing is projected to reduce fatalities by 1.7 million in the next six months and that would produce economic benefits worth $7.9 trillion.”
To emphasize the scale of the benefit, they added that $ 7.9 trillion is equal to one-third of U. S. GDP and is “larger than the entire annual federal budget.” In other words, under the Value of a Statistical Life model, dollars attached to the saving of lives produce a bonanza that neutralizes the costs of fighting coronavirus.
But the $7.9-trillion benefit is far from money in the economic bank. It rests on multiplying numbers from two different and highly speculative models — one epidemiological and the other economic — that are open to serious debate.
The epidemiological number is the 1.7 million estimate of the number of American lives to be saved by the social distancing lockdown. As with many other comparable research and reports examining the benefits of the lockdown, the Chicago economists’ estimate for the number of lives saved is derived from work by Prof. Neil Ferguson and his colleagues at Imperial College London. They estimated that if nothing were done to mitigate the spread of the coronavirus — an unlikely development — upwards of two million lives would be lost in the United States alone. The Imperial College numbers, which assume an infection fatality rate of about one per cent, have been questioned. Debate over the one per cent projection continues to rage within science circles, the media and around the world.
Under the Imperial College one per cent death rate, if 170 million Americans were infected with COVID- 19, about 1.7 million would die. But what if — as some scientists say is possible — the actual potential death rate is 0.1 per cent for a total potential 170,000 deaths? That’s a grim number, but it would totally undermine the great lockdown benefit calculation. At a fatality rate of 0.1 per cent, the economic benefits number would crash down to less than $1 trillion. Even at a 0.3 per cent fatality rate, the benefit is $2.7 trillion, still well below the estimated cost.
The Chicago economists use the Imperial College- based 1.7 million lives saved as their base, but they carefully distance themselves from the projections. Their conclusions, they say, “are only as reliable as Ferguson et al.’s projections.” They then move on to apply the aforementioned Value of a Statistical Life ( VSL) concept to estimate the benefits of the hypothetical saving of 1.7 million lives. After working the models, the economists estimate the average statistical value of each life saved is US$4.65 million, for a grand total U.S. economic lockdown benefit of about $8 trillion.
Where does the average value of these hypothetically-saved lives come from?
Putting a dollar value on a life is a messy economic business that has divided policy- makers, economists and regulators for several decades. The main measure used is VSL — the Value of a Statistical Life. Greenstone and Nigam, the Chicago economists, use the value employed by the U. S. Environmental Protection Agency, which sets the value of lives of people aged 18 and over at US$11.5 million — though it can be adjusted to account for people’s age and ( therefore) remaining life expectancy (which is why the VSL they use was just US$ 4.65 million: most COVID- 19 deaths are of older people).
Where does that relatively large value come from?
One of the pioneers in the development of the VSL concept is Vanderbilt University economics and law professor Kip Viscusi. In his 2018 book Pricing Lives: Guideposts for a Safer Society, Viscusi opens with what amounts to a direct hit at the you- can’tput- a- price- a- life mantra. “I receive frequent calls from journalists wondering if I was aware that the government is placing a dollar value on human life. The alarmed journalists believe that they have uncovered a scandal akin to the death panels that some people envisioned would accompany national health insurance.”
VSL is complicated, but in a phone call Viscusi explained it simply. “So there’s a group of 25,000 workers, each of whom faces an average risk of death of 1 in 25,000. For that group, an average of one of them will die — and that’s actually the level of risk that a typical
United States worker faces on the job. If each of these workers gets paid $ 400 to face that risk, then for this group of 25,000 workers, the extra wage they would get to face that risk would be $400 times 25,000 workers, or $10 million.”
What that calculation tells us, said Viscusi, is that the workers need $ 10 million to cover the value of the statistical life of one expected death.
But where does the $ 400 come from?
“So we get data on hundreds of thousands of workers … to look at how much money workers make, what their job characteristics are, what industry they are in and occupation. You match to the worker the fatality rate for their industry and occupation. And then, statistically, you can determine how much of the pay they get is attributable to the higher fatality rate.”
Viscusi is convinced that his VSL valuations should be applied in all life- valuation situations throughout the United States, Canada and around the world, including during the coronavirus pandemic. The U.S. EPA has been using it for a while.
The basic question, said Viscusi, is “how much are we willing to pay to reduce the risk of death.” In other words, how much are we as taxpayers willing to pay to save the lives of others?
Despite the mind-blowing economic calculations and modelling assumptions involved, the multimillion-dollar VSL numbers are widely cited. A recent report from a “sustainable policy” thinktank concluded that air pollution kills 7,700 Canadians per year. At a VSL of C$ 4.8 million per death, it claimed the total cost of pollution deaths approached $ 37 billion. Should Ottawa therefore impose regulatory and other costs equal to an increase of more than 10 per cent of its current federal spending in an attempt to eliminate a few thousand pollution deaths?
Critics of the VSL approach say no. The big dollar values are overestimated, they say. Regulators, politicians and activists, eager to pass laws and impose mandates, may be misapplying VSL to boost the benefits they can claim for their favoured policies.
Economist James Broughel, a senior fellow at the Mercatus Center at George Mason University, says the VSL is “particularly ill- suited” to air pollution policy- making and to measuring the benefits of the pandemic lockdown. In a new paper — Rethinking the Value of Life: A critical Appraisal of the Value of a Statistical Life — Broughel reaches a harsh conclusion. The theoretical problems with VSL “are myriad, suggesting its use is producing misleading policy recommendations. At the very least, these issues should generate discussion. In the end, however, the VSL may simply be an analytical contrivance too problematic to provide a meaningful answer to the enduring question of how to value a human life.”
In an interview, Broughel said the application of VSL to the COVID-19 risk of death also runs against the purpose of VSL, which is to help policy- makers justify small changes in mortality risks.
With the lockdown being the biggest government intervention since the past world war, high VSL numbers seem destined to become the foundation for future Canadian government claims that it has produced major measurable benefits that may even exceed the lockdown’s costs.
The federal government has already set the stage for such a big benefit claim. On April 9, Public Health Canada released a so-called “Technical Briefing” that contained “data” based on the Imperial College one- per- cent death rate estimate. Assuming 80 per cent of Canadians would be infected, if nothing were done to stop the coronavirus the death toll in Canada could run to 300,000.
The latest numbers suggest Canada’s COVID- 19 death toll will be an order of magnitude lower than 300,000. If the final number of deaths ( currently more than 5,000) rises to 20,000, then Canada’s governments might try to claim to have saved up to 280,000 lives at a Canadian VSL price- per- life value of, say, $5 million. Total benefit: $ 1.4 trillion. ( See table.)
If the Canadian lives-saved estimate were cut in half to 140,000, the government’s benefit claim could still run as high as $ 700 billion — about equal to the latest guesses at the economic costs.
But all such benefit claims remain doubtfully based on an equation linking two artificial constructs: Total benefit = number of lives saved x value of a life. The Value of a Statistical Life, while accepted in official circles, remains uncomfortably high through many age groups. The Chicago economists even broke down the average estimated value of each statistical life saved by age. A 12- year- old has a statistical value of US$ 15.3 million, a 40- year- old $ 13.8 million, and a 77-year-old libertarian columnist would have a value of $3.7 million.
The greatest uncertainty today, however, is the infection fatality rate, which will remain unknown until millions of Canadians are tested, or at least a good sample is tested, to determine actual exposure to the virus.
If the actual Canadian infection fatality rate of COVID-19 turns out to be well below one per cent, as some scientists believe is possible, the benefits evaporate. A fatality rate of 0.1 per cent, implying up to 30,000 potential deaths, suggests a maximum benefit of $150 billion, assuming all lives are saved. If the fatality rate is 0.3 per cent, then the number of lives saved (90,000) would imply a total VSL benefit of $ 450 billion, well below even the $600-billion lowball estimates of the cost of the lockdown.
These are admittedly simple back- of- the- envelope numbers — and that’s the problem. Eventually, we will get some real data on both costs and infection rates. When the final numbers are available, however, chances are the total cost to Canadians of the Trudeau “whatever it takes” lockdown will have been high and very real, while the benefits were mostly statistical.
Let Canadian COVID-19 testing begin!
Trillion-dollar COVID costs to save lives could exceed benefits by a large margin.