1

Why Economists Measure Human Lives in Dollars

It’s a highly imperfect exercise—but could actually save more people. James Broughel is a senior research fellow and Michael Kotrous is a program manager with the Mercatus Center at George Mason University.

It might feel heartless when President Donald Trump muses about whether the “cure is worse than the problem,” as though a plunging stock market and a patchwork of business and travel shutdowns could possibly outweigh the lives saved by America’s response to the Covid-19 pandemic. And it might feel uncomfortable to think about the response as a tradeoff between saving the economy and saving lives.

But we really are facing that tradeoff, and, in fact, economists make a routine practice of comparing dollars with lives. There are costs and benefits to every policy decision, and by valuing human lives in dollar terms we can arrive at a way to measure those costs and benefits against each other.

As human beings, we tend to see life as having almost infinite value, but it’s also worth remembering that money spent to save one life has an opportunity cost: It could have been spent in another fashion and—if spent more efficiently—saved even more lives. Resources are never unlimited, and without assessing the dollars-to-lives tradeoff, it’s likely that policymakers will fail to save as many lives as they otherwise could.

When it comes to policy, and especially an urgent and life-altering policy issue like the current epidemic, the problem with this kind of cost-benefit calculation isn’t in the idea, it’s in the execution. Even for run-of-the-mill policies, it’s tricky to assess whether a policy does more good than harm. With respect to Covid-19, an exhaustive cost-benefit analysis is even harder because of limitations in our ability to track the disease’s spread, predict the human response to it and analyze the effects that policy will have in slowing its transmission.

Acknowledging these challenges, here’s what the numbers look like, as best we can determine.

On the cost side of the ledger, it is difficult to disentangle the costs of the shutdown policy from the costs of the coronavirus itself. Many of Trump’s supporters talk as though the economy would fully re-open if the restrictions were lifted. But even if governors around the country lifted their emergency orders overnight, would life return to normal, and the stock market revive fully? Likely not. There would still be a new and dangerous virus in the country. Aside from the thousands, maybe millions, who became sick, many more people would still stay home while the risk of infection remains high.

To get a handle on the costs of current policies, one must identify the elusive “counterfactual” scenario—what would happen if the government did nothing. If we assume that most people would choose to stay home regardless of any government action, then the costs of government orders to stay inside and close businesses could be close to zero. At the other extreme, Federal Reserve analysts have estimated that GDP could decline by as much as 50 percent in the second quarter of this year. If we assume that it’s really government orders driving this behavior, and otherwise people would be going about their business, then the cumulative cost of the government’s response is vast, as much as $2.5 trillion just in this quarter. The cost over the long-term would be even higher.

The true cost likely falls somewhere in between these extremes. The debate in Congress about the proper amount of stimulus might be instructive. One way to look at the $2 trillion stimulus package passed last week is as an attempt by the government to make Americans whole for the costs of being forced to stay home by government orders. Provisions of the stimulus bill directly address these costs—increasing unemployment benefits and broadening eligibility for millions of recently unemployed Americans, as well as loan and grant programs that may allow small businesses to make payroll during the shutdown.

Then there is the benefits side of the ledger, which is also difficult to gauge. A study from Imperial College London estimated that as many as 2.2 million Americans might die as a result of Covid-19, but this was an early estimate that basically assumes no behavioral responses from the public as the disease devastates the country. Even if we assume that number is a reasonable upper limit on how many people might die, there’s still the question of how effective government policy will be in changing the trajectory of the pandemic’s progression and saving lives. Some epidemiologists believe that as soon as the social distancing efforts end, the virus will return with a vengeance.

Here’s where assigning a dollar value to life-extending benefits enters the equation. One common way to do this is by using the “value of a statistical life,” or VSL, which reflects what current citizens are willing to pay to reduce their own risk of death. (It’s usually estimated by looking at how much extra compensation workers in dangerous professions get paid.) Estimates of the VSL vary, but tend to average about $10 million for Americans. If we assume, for example, that the government’s response to Covid-19 prevents an enormous death toll of 2 million citizens, the value of all those prevented deaths could be as much as $20 trillion.

However, the value of a statistical life is not universally accepted by economists. For one thing, what an individual is willing to pay to reduce risk might be very different from what society should pay. A person nearing the end of life might find it rational to expend all of his or her wealth on potential life-extending treatments. But society, which will endure past any of our individual lives, ought to be more frugal with its finite resources.

An alternative approach to the VSL is to consider the productive contributions associated with extending life—that is, the economic value people are expected to contribute. Such an approach is commonly employed when valuing the benefits of regulations that enhance our health. For example, an environmental policy that prevents asthma attacks or non-life-threatening illnesses might end up saving society money by reducing hospital stays or emergency room visits. Compared with the VSL, this approach provides more of an apples-to-apples comparison between benefits and financial costs. It accepts that the true value of a life is likely undefined, but we are at least able to estimate the economic value each person creates.

One 2009 study estimated the total value of worker production at different stages of life, including the value of “nonmarket” roles such as staying at home to raise kids. The authors estimated that the present value of future worker contributions ranged from about $91,000 to $1.2 million in 2007, depending on the age of the worker.

Age is an important factor in the coronavirus pandemic, too. The CDC has reported that, as of March 16, 80 percent of U.S. deaths from Covid-19 have been people ages 65 or older. Combining the CDC’s numbers with the aforementioned estimates of the value of worker production at various ages (and updating them for rising productivity and inflation since 2007), we end up with an expected value of forgone earnings for victims of Covid-19 of about $414,000 per person. Even this estimate of benefits—already drastically lower than the VSL at $10 million—likely overestimates the economic value of workers in cases when the cost of replacing them is relatively low.

In other words, the economic benefit of preventing all those potential deaths depends on which controversial measure you use: In this case, upper-bound estimates of mortality benefits associated with government interventions range between $20 trillion with the VSL approach and $828 billion if the worker production approach is extended to 2 million lives saved. Twenty trillion dollars is roughly the value of an entire year of the nation’s GDP; $828 billion is considerably less than the value of Congress’ latest economic stimulus bill.

There are other costs and benefits to account for as well. On the one hand, a prolonged shutdown of the economy could increase some health risks for those who lose their jobs, a knock-on cost of impoverishing so much of the citizenry. On the other hand, Covid-19 has been shown to cause significant lung damage among some of those who recover; reducing those cases is another potential benefit of government action. An economic shutdown could even have unexpected benefits—for example, a decrease in air pollution or the number of car crashes.

To go strictly by the numbers, Trump may well be right that the government “cure”—in the form of restrictions on commerce and movement—might be worse than the Covid-19 disease. But it’s also possible, given what we know, that everything the government is currently doing is worth it, and relatively inexpensive to boot.

Cost-benefit analysis can offer us a way to think about decisions, and put some boundaries around the likely outcomes. But even in simpler circumstances, it cannot always provide bright-line recommendations. And it can’t answer our deepest and most profound questions. In some cases, the calculus has to be driven not by a set of numbers, but by our values.