We are in the middle of a flurry of decision-making on how to deal with COVID-19. After much resistance, officials are now canceling public events, closing schools and discouraging other activities that put us in contact with each other. Travel restrictions and possible shutdowns of workplaces, as we’ve seen in Italy, may be up next.
It’s interesting we haven’t heard anything about benefit-cost analysis in all this. Nearly all economists profess to think that BCA is the single best decision method. Almost every introductory economics textbook is built around benefit-cost thinking, and for decades federal regulations have mandated BCA for proposals with significant economic impacts.
But now we are facing immense choices—what could have a more drastic impact than shutting down most of the economy by fiat?—and BCA is nowhere to be found.
As a public service, here’s a quick and dirty. Coronavirus policy is primarily about saving lives, right? So, if you believe in this sort of thing, the official “value of a statistical life” (VSL) as determined by the Environmental Protection Agency is $7.4 million. According to BCA wisdom, we should spend up to this amount to save the life of a currently unknown (statistical) person, but not a penny more.*
In order to get a first impression, suppose the more stringent measures proposed will shave 1% off US GDP for the year. Based on last year’s figure, that would eliminate $214 billion in economic value. Using the value of life metric, that means we shouldn’t do this unless we expect to save at least 28,919 lives. If not, let’em die.
Actually, I think it’s likely that we will see even greater economic costs from stringent social distancing policies, especially taking into account that the economy would probably have grown by a couple percent or so this year had the virus not struck. Maybe these actions would pass the BCA test, maybe not.
Personally, I think it would be madness to stick a monetary value on people’s lives and base our policy choices on whether the dollars on one side of the ledger outweigh those on the other. I wrote a book about that a while ago. The considerations that lead us to think primarily in public health terms at a time like this apply just as well to other issues, from food safety to climate change. The economists who crank out monetary values of life and believe all choices should be based on benefit-cost thinking have not yet had the integrity to step forward and make their case. This silence speaks volumes.
*On a technical point, economists at EPA and elsewhere argue that the VSL should vary based on the population at risk. Since mortality from the novel coronavirus is higher for those in the highest age brackets, and death from the disease would eliminate fewer years of life for them than for younger people, their VSL should be lower. It may also be the case that mortality will be lower among those with higher incomes, who can afford better preventive measures and treatment, further depressing the relevant VSL metric. But these considerations would require even more lives saved to justify the expense.
Here is the thing, you really can not do a cost benefit analysis in public health because there is no choice to be made. Your GDP is going to fall regardless of what you spend on saving people’s lives and the more people die the more GDP will fall. Do you really think that if the government does nothing and maybe 2 million people die that it will be business as usual? Particularly if our medical system essentially collapses? What do you think is going to happen to the consumer confidence index? At least some of the dead will still be working at least some in higher level positions, how is that going to impact productivity? The way we should be looking at this is doing everything we can to slow the progress regardless of cost and the benefit will not be the lives saved but the percentages of GDP saved.
Hi Peter. I had noticed the lack of CBA thinking with respect to coronavirus response as well. Are you opposed to all consequentialist thinking, or do you favor a different framework for thinking about tradeoffs and assigning values? CBA proponents would point out that we don’t want to up-end our social and economic life to save just a few lives – for example, we would do less if the coronavirus were substantially less contagious and had a lower mortality rate. I assume you would agree with that.
Of course there are tradeoffs to consider in policies to mitigate Covid-19, as there are in just about everything. That includes economic impacts. What I think is indefensible is the view that all such impacts can be given a monetary value so a formula can spit out the “optimal” course of action. Even worse is the notion that these values should be derived from market behavior rather than deliberation.
The economic consequences that should be taken into account are not percentages of GDP but matters like adequate living standards during periods of enforced social distancing, keeping businesses, with their accumulated knowledge and organizational capacity, afloat during the interim, etc. What matters is not how much reduced restaurant dining will cut into GDP but how restaurant workers can stay whole and restaurants can stay ready to resume operations once the crisis abates. When you think about it this way, VSL has no relevance at all.
Right on cue, via the NYT:
https://www.nytimes.com/2020/03/16/us/coronavirus-hype-overreaction-social-distancing.html?action=click&module=Top%20Stories&pgtype=Homepage
Eric:
Good catch . . .
A common procedure is to obfuscate by using less-intuitive measures – for example the NHS’s QALY or Quality Adjusted Life Year – as one of the gauges. “Quality Adjusted” readily encompasses vast gobs of incomprehensible faculty-lounge gobbledygook. This is consistent with virtue-signaling indulged in on the theory that there are no tradeoffs, only Manichean moral imperatives.
Of course, we peons make such tradeoffs implicitly every time we back the car out of the driveway, or cross the street on the way to the bus stop, or even go down the porch stairs. Presumably, if the VSL, or the value of a QALY, were quasi-infinite, we would lock ourselves down for life in isolated bunkers (having no stairs) on the chance of some random fall, virus, or bacterium carrying us off.
There aren’t any right answers, so the discussions will only multiply and perhaps become more argumentative as this drags on, perhaps for many years. I do suspect the practical, implicit tradeoffs will change as people go stir-crazy from isolation and start defying their doctors, politicians, and fusty academics.
Paul:
I think the assumption(s) in your last sentence is/are correct.
A bit hard to do an analysis when you are guessing at the order of magnitude on so many of your inputs.
Terry, if anyone starts a sentence with it COSTS to save a life and equates that with a REDUCTION of GDP, I think they need a lesson in what GDP is. GDP is basically a measure of costs. The costs to GDP are from work not able to be done.
Sorry I was a bit unfair to Terry having reread his comment. I apologise. It is a bit of a bugbear of mine that people really really do not understand that one man’s cost is another man’s income.
I admit I was being a bit cavalier in equating “costs” with “reductions in GDP” in the OP. Technically, the cost is the present value of the reduction in current and future consumer + producer surplus. In practice, however, BCA practitioners *do* use reductions in income as a metric, and national income is the cost lever behind so-called risk-risk analysis. Virtually the entire public face of BCA (as reported in the media and promulgated by think tanks and advocacy groups) is in terms of GDP. Note, to take just one example, of the way costs are reported in BCA’s of action on climate change.
But yes, if you go by the textbooks — the welfare foundations of BCA — only the welfare triangles should matter.
Was the “herd immunity” argument by the UK government an expression of BCA?