The VSL Quandary
By David Henderson
Even the simplest cost-benefit analysis suggests that the US government should be willing to spend up to $65 trillion and lock down the country to avoid extra deaths.
This is from Luigi Zingales, “Captured Western Governments Are Failing the Coronavirus Test,” published at promarket.org, March 13, 2020.
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.
When I posted about this on Facebook, a commenter asked me if my problem was that Zingales estimated the value of a statistical life (VSL) at $14.5 million. I answered that although Zingales, strangely, argued for his $14.5 million number by citing a source that says the right number is $10 million in 2017 dollars, and we haven’t had cumulative inflation of 45 percent in 2.5 years, that wasn’t the main problem. (Later in the piece, Zingales uses a $9 million VSL because a disproportionate number of those who die would be elderly. He gets his $65 trillion by multiplying 7.2 million deaths saved by $9 million each.)
Still I couldn’t put my finger on the main problem. I still can’t.
In the cost-benefit analysis courses I taught at the Naval Postgraduate School over the years, I used the VSL analysis and I typically used a number between $4 million and $10 million for that value.
But even though this clearly was not Zingales’s intent, he has made me question whether I was right to do so.
This is a puzzle to which I don’t have the answer. But go to the paragraph early in my post about a good rule for reasoning about anything. Something is badly wrong with the VSL framework when we’re talking about millions of deaths.