The Covid-19 pandemic has raised fundamental questions about how to weigh health and the economy. He also raised another crucial question, namely, how authorities should weigh the risk of illness and death against the risk of economic damage from measures to slow the spread of the disease.
This question is never easy to answer. Earlier this year, however, when the new coronavirus was spreading exponentially in large cities, it was not difficult to justify the imposition of conditions to block economic activities. Shifting the weight on the scales of protecting life and health seemed the only acceptable course.
But as the grip of the contagion began to loosen its grip, in some countries, including the United States, the sense of crisis has eased and many businesses have reopened with varying speed and degree.
This has again brought to public attention the question of how to assess and balance health risks and economic risks. The issue has polarized in public opinion among supporters of the different priorities between health and the economy.
The statistical value of a life saved
Fortunately, there is a generally accepted statistical method of converting the value of reducing health risks and saving lives into weightable terms. Thanks to this method, policy-makers can assess the delicate balancing act between health and the economy with full knowledge of the facts and in terms of costs and benefits.
The statistical parameter we are talking about is what economists call “the statistical value of a life” or VSL (from now on we will use the acronym). The VLS estimates in monetary terms the value required to avoid the probable death of a person.
One of the most important advantages of the VSL is that its use often reveals that the dichotomy between health risks and economic risks is a flawed construction: losses from disease are in effect economic costs. They are just as bad for the economy as other types of losses.
Risk assessment
Economists often encounter difficulties in placing an economic value on human life. Much of the unease arises from the erroneous perception that in doing so one can equate the value of a person's life to his or her income, thus contravening a principle of equality which is constitutive of modern societies born out of democratic revolutions.
There's not that much at stake. Rather, the VSL is a measurement that reflects the value people place on the risks to their lives as a result of a series of choices they make along the way. To calculate the VSL, economists consider a series of common decisions that in themselves involve a trade-off between money and changes in personal risk.
Such decisions are usually made in a market context involving occupational choices, products and housing decisions. For example, how much can workers ask for in terms of additional wages to carry out risky tasks or professions? How much are they willing to pay for cars that have extra safety features? How much depreciation would a buyer of a home near a power pole expect?
Risk assessment at work
The most common way economists evaluate VSL is by looking at the risks people face at work. In the construction industry, for example, some workers performing dangerous tasks, such as machine operators, have a rather high risk of dying on the job. The annual average in the construction industry is that one in 2500 workers may die on the job.
Analysis of large datasets on employment reveals that these workers receive approximately $4000 more annually in wages than people with similar educational, skill, experience and training backgrounds, but with jobs or at lower risk.
Economists comparing these two figures and derive a third: if all 2500 of these workers were paid $4000 more and one of them dies, it is possible to elaborate these two numbers to calculate that the life lost is worth 10 million dollars (2500×4000). That number is the VSL, i.e. the statistical value of life. It reflects the value of the extra cumulative wage for each life lost at work.
The value of the VLS in the United States
My estimate of the VSL for the US is, in fact, $10 million, a figure that comes from far more complex data and calculations than the hypothetical example above. My estimate is in line with the estimates made by most US government agencies.
In terms of decisions, this translates, in practice, to the fact that when calculating the impact of a potential risk reduction policy, decision makers assign a value of $10 million to each death that policy successfully prevents.
Criticisms of the VSL model
One criticism leveled at the VSL model is that it tends to place equal economic value on the lives of people whose situations are very different. If a particular policy prevented the death of a very old person or a person with a medical condition that seriously reduces their life expectancy, should this saved life receive the same rating as the life saved to a young, healthy person? Some fear that such a calculation discriminates against some groups of people who are considered less deserving of protection than others.
To avoid this dilemma, US government agencies, as a general practice, do not make such distinctions. But when it happened, there was a strong reaction.
In 2003, the Environmental Protection Agency released an analysis conducted by the Clear Skies Initiative, a federal program to reduce emissions from power plants. In its analysis, the agency assumed that the VSL assigned to people over the age of 65 should be 37% lower than that assigned to the younger population.
Some have seen this approach as an attempt to devalue the lives of the elderly: the AARP (American Association of Retired Persons) has strongly objected, and newspapers have published headlines that are rather aggressive towards the agency's hypotheses.
The government then abandoned this approach. In some cases, however, the government continues to make exceptions. For example, when the Food and Drug Administration considers a hospice policy, it does not use the VSL, but rather “the statistical value of a life year,” which is estimated at $500.000 for each life year the policy would add. to each patient.
The utility of the VLS for a cost-benefit analysis
The utility of VSL has perhaps never been more evident than during the Covid-19 pandemic. The debate about social distancing and other restrictions on economic activity has been fierce, also because people do not share a common metric and scale of values on how to evaluate saving lives: it is difficult to do a cost-benefit analysis when there is no shared starting point on how to measure them.
The use of a rigorously elaborated estimate to attribute an easily comparable value of a life saved can greatly help in making shared decisions in critical moments. In the case of the pandemic, the use of the VSL shows that the imposition of restrictions clearly had a crucial economic fallout and that their hasty lifting could have been just as disastrous for the economy itself.
The application of the VSL demonstrates that the negative health effects of Covid-19 constitute real economic losses to society with effects comparable to the lost productivity caused by social distancing and other restrictions aimed at preventing the spread of the disease.
Social distancing avoids economic damage
The US government has estimated that restrictive measures have saved at least one million lives in the United States. At a lifetime value of $10 million, the combined benefits of such policies would equal $10 trillion, or about half of US GDP.
This data makes it clear that social distancing and isolation are justified not only for public health reasons, but also for the massive economic damage they have prevented.
The value of the VLS in the various countries
Other countries may make calculations based on a similar metric. However, the VSL in different countries will vary approximately in proportion to their average income. The VSL is estimated 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 $.XNUMX million for Canada.
In a more general sense, people in those countries place a value on their lives that is quite analogous to what Americans place on it. But because they have lower incomes and there are fewer resources to devote to security efforts, therefore, statistically, the VSL estimate is slightly lower.
A benefit that may be worth the cost
Since the scale of these countries' economies is smaller, the cost of the economic consequences caused by social distancing and other restrictive policies is lower in the United States. This state of affairs suggests that the use of VSL leads to the conclusion that strong initiatives to stop the spread of Covid-19 are worth the economic cost.
The same principle is even more true for the countries of Latin America and other places that are seeing an acceleration of the pandemic.
As towns, regions and cities reopen, the first businesses expected to resume are those that deliver the greatest benefits compared to the increase in healthcare costs that the resumption of such activities could generate.
The economic benefits of high-risk activities — for example, professional sporting events in stadiums — would have to be extremely high to justify the likely high costs involved.
In the absence of certainty about the consequences of such decisions, the use of VSL is an authoritative way to remind politicians and citizens that any loss of life is not only a tragedy for individuals, families and communities, but also a significant economic cost to society as a whole.
Source: "Foreign Affairs", 17 June 2020
