Valerie Ramey Has the Same Quandary I Do
By David Henderson
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.