On April 12, in “The VSL Quandary,” I wrote:
That $65 trillion is not a typo. Luigi (who blogged briefly on EconLog) is actually advocating that the U.S. government be willing to sacrifice 3 years of GDP to save what he estimates to be 7.2 million U.S. lives.
But here’s a good rule for reasoning about anything: if your model tells you that you should take measures to save 7.2 million people in a way that will likely cost the lives of over 30 million people, and if a large percent of those 7.2 million are in the pool of 30 million, there’s something seriously wrong with your model.
If the government were to shut down the economy in a way that cost 3 years of GDP, who would produce food, who would ship food, who would work at hospitals, who would produce electricity, and who would assure clean potable water? I think 30 million lives lost, just under 10 percent of the U.S. population, is probably a minimum estimate of the lives lost from the shutdown.
It’s nice to see that UC San Diego economist Valerie Ramey confronted the same issue. In an interview with David A. Price of the Federal Reserve Bank of Richmond, Ramey says:
I am working on a couple of things. One is with Garey [Ramey] again. It’s called “The Value of Statistical Life Meets the Aggregate Resource Constraint.” There’s a concept called the value of statistical life that is used by regulatory agencies; researchers estimate how much wage people are willing to give up not to work in a more dangerous occupation. Ten million dollars for the equivalent of a lost life is a typical estimate. And regulatory agencies in government use those numbers to decide how much to spend to prevent death.
People then started using those numbers to think about COVID-19. One thing we wondered was whether you could actually take those numbers and use them for bigger risks of death.
Here’s the kind of stark example we can use for illustration. Suppose that Martians took the 330 million people in the U.S. hostage and said, “If you want them back, you need to pay a ransom of $10 million because we know that’s how much you value a statistical life.” Well, that would add up to $3.3 quadrillion. But the GDP is only $21 trillion. The total value of the wealth in the United States — if you add up all the capital stock, the minerals, and land — is about $125 trillion. This extreme example illustrates the importance of considering the resources available.
By the way, David Price does excellent interviews.
The picture above is of Valerie Ramey.
READER COMMENTS
Kevin Dick
Jan 21 2021 at 7:45pm
Another way of looking at it is that it’s a mistake to linearly extrapolate the point estimate of a convex function very far.
Various
Jan 22 2021 at 12:29pm
Wow Kevin, that is a very insightful comment. On that thought, perhaps it is possible that humans have a somewhat unconscious and inherent tendency to adjust for convexity. In other words, perhaps they value life highly when losses are small, but adjust downward when losses grow. Just a thought and highly speculative.
Thomas Hutcheson
Jan 21 2021 at 8:21pm
I’d like to see the way the estimate of 65T cost was made.
Jonathan Seder
Jan 22 2021 at 5:15pm
“Lives saved” doesn’t tell the whole story. A common metric used in healthcare planning is a QALY – Quality-Adjusted Life Year. The (obvious) notion captured in this is that “saving” the life of a terminally ill nonagenarian does not have the same economic or social force as saving the life of a child or healthy adult. I don’t dispute that all lives are sacred and have a moral equivalence – but in allocating scarce resources we must make difficult tradeoffs.
80% of Covid-19 deaths have been in people 65 and over, 60% in people 75 and over, and less than 1% in people under 35.
The value typically assigned to a QALY in making treatment decisions is $50,000-$250,000. By my reckoning, the past year’s Covid-19 mitigation measures implied QALY values greater than $5 million – but in spite of that expense, the measures by and large failed to reduce morbidity or mortality.
AMT
Jan 23 2021 at 1:50am
Where are you getting this from? This is a total straw man. Obviously no one with half a brain would shut down the production of necessities for three years and create a famine. Luigi is wrong for other reasons, but not because spending a huge amount of money on precautions would necessarily cause deaths by starvation.
If someone without health insurance needs expensive heart surgery that costs triple their annual income, does that mean they will starve to death later anyway, because they have zero funds available for anything else until that debt has been paid in full? Being willing to pay three years of output doesn’t mean all output from three consecutive years is poured exclusively into that one expenditure. We can choose priorities…like other things that keep us from dying: food, water, medical care, etc.
robc
Jan 24 2021 at 3:13pm
If we spent 100% of GDP on avoiding covid for 3 years, over 300 million Americans would die, not 30 million, so that isnt what was being claimed. A massive reduction in GDP would lead to massive deaths, it wouldnt be from starvation but from other changes on the margin here or there? 30 million? No idea if that is right, but it isnt the strawman you were claiming.
AMT
Jan 24 2021 at 9:14pm
Yes it is. I literally quoted it. I think it is extremely obvious that the vast majority of economic output of modern economies falls into the “luxury” category. Our lives would be far worse without all that output, but they would not end.
Jon Murphy
Jan 25 2021 at 10:28am
Again, to robc’s point, you’re confusing total and marginal. Yes, many people’s lives would not end if the economy totally collapsed. But, on the margin, there will be many lives lost (about 10% of the population according to the estimate). A lot of these “luxuries” include medical care, food safety, climate conditioning (like heat and cooling), and the like.
AMT
Jan 26 2021 at 2:13am
I’ll point out robc is correct that David’s hypothetical, with this 30 million death “estimate” pulled out of nowhere, doesn’t even make any sense given he implies there will be next to no food production for multiple years, so clearly far more people would die in that situation, but I was trying to be as charitable as possible and ignore the glaring internal inconsistency, because even his ridiculous “minimum estimate” has zero logical support. When I said “yes it is” I meant 30 million deaths because we stopped producing necessities is a strawman.
Jon, How exactly am I “confusing” total and marginal? I very clearly argued that we would continue to produce “priorities…like other things that keep us from dying: food, water, medical care, etc.” (I also completely agree that heating, and cooling (to some degree) is a necessity, among multiple others in the “etc.” category.) Thus, according to basic logic, we would never stop production until reaching the margin where that extra output is not a necessity.
Jon Murphy
Jan 26 2021 at 10:41am
Right, but that’s where the confusion lies. The word “necessary” is squishy. It’s a marginal word, but you keep emphasizing total effects (eg. “priorities…like other things that keep us from dying”)
You will find very quickly that once you try to determine what “necessities” are, it’s quite the impossible task. Food is a necessity. Ok. What food? Is ground chuck as much as a necessity as ribeye? Or wheat versus gruel? What level of quality matters? Etc etc etc. All these will have marginal effects (not total, like you argue). The effects will kill people.
AMT
Jan 26 2021 at 12:50pm
Ah I get it now. I don’t understand the difference between total and marginal, because there could be some debate about where exactly the margin I argued for would extend to. Perfect logic! ROFL.
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