What? We’re Being Marked Down?
July 19th, 2008 . by economistmomFascinating story in the Washington Post this morning, coming a day after a very related conversation I was having with a friend regarding how economists analyze environmental policy. We humans have been devalued/marked down!
Last week, it was revealed that an Environmental Protection Agency office had lowered its official estimate of life’s value, from about $8.04 million to about $7.22 million. That decision has put a spotlight on the concept of the “Value of a Statistical Life,” in which the Washington bureaucracy takes on a question usually left to preachers and poets.
This value is routinely calculated by several agencies, each putting its own dollar figure on the worth of life — not any particular person’s life, just that of a generic American. The figure is then used to judge whether potentially lifesaving policy measures are really worth the cost.
A human life, based on an economic analysis grounded in observations of everyday Americans, typically turns out to be worth $5 million to $8 million — about as much as a mega-mansion or a middle infielder.
Now, for the first time, the EPA has used this little-known process to devalue life, something that environmentalists say could set a scary precedent, making it seem that lifesaving pollution reductions are not worth the cost.
As I was explaining to my friend, who was asking why we typically see estimates of the economic costs of climate change policy but not estimates of the economic benefits, it’s never really possible to get a true ”apples to apples” comparison in the cost-benefit analysis of environmental policy, because the costs of policy are usually much easier to measure (via actual market values/prices) than are the benefits (which usually involve valuing things where no market exists).
My very first economics publication was during my first government job at the Interior Department during the Reagan Administration in the mid 1980s (remember James Watt?). My boss and I worked with the U.S. Fish and Wildlife Service to try to come up with an economic measure of the costs of allowing the Army Corps of Engineers to dredge and fill wetlands for conversion to agricultural land. The benefits of destroying the habitat were easy to quantify, based on the profits that could be earned in farming the land. The costs, up until then, were demonstrated by the Fish and Wildlife Service’s photos of dead ducks. My boss and I tried to quantify the value of avoiding the habitat destruction by, rather ironically, measuring the value that sportsmen placed on being able to hunt for (i.e., kill) the ducks on that habitat. Obviously that’s not the only value people would have attached to preserving the habitat, but it was the most reliable market value we could gather. You can hold up photos of dead ducks and ask people what they’d be willing to pay to avoid those ducks dying, but it turns out it’s hard to know whether those answers would be honest (when we wouldn’t actually go back to those people and ask them to pay up once the habitat was saved). So the costs of habitat preservation always seem more concrete than the benefits.
I told my friend that with climate change policy, it’s SO much tougher than that small wetlands issue, because the already wide range of possible estimates on how much people value avoiding too much climate change has to be multiplied by the (even wider?) range of uncertainty on the science of climate change. And while it’s clear that images of the polar bears stranded on floating ice rafts evokes strong emotions from people, I’m not sure economists have translated those feelings into dollars yet. (I’m sure John Whitehead on the Environmental Economics blog knows the latest on this.) If we have a hard enough time keeping the value of a human life straight, could we value a polar bear life with much confidence?
Of course, all these policies with benefits that stretch very far into the future are difficult for policymakers to deal with–not just because politicians are understandably nearsighted, but because the value we place on such policies is not just sensitive to how much we value a human life, but on how much we value the well-being of future human lives relative to the well-being of current human lives–what economists like to call the “social discount rate.” In policy evaluation, gains to future generations are usually “discounted” relative to gains to current generations, and how the cost-benefit calculus works out is very sensitive to the choice of this discount rate. But this is a whole can of worms that I don’t want to open up right now, fearing it could lead to another heated discussion about Social Security.
sure could
but at least you recognize that the discount rate is in the eye of the beholder. not sure you could explain that to Andrew Biggs.
trying to set a dollar price on the destruction of habitat is a wrong - headed way to go about it.
i realize that no economist will accept that thought,
but the fact is that once you start valuing things in terms of what someone “would” pay for it, you are twice removed from reality.. “would pay” is remvoed from “paid.” and how much money would you take for your daughter, anyway?
Diane I would be more than happy to host your personal take on Social Security financials or a semi-official or even official take from Concord over at Angry Bear. And from what I see both Brad DeLong or Mark Thoma would too. We don’t have to mess up your parlour, there are plenty of places which would post anything you send us and confine the furniture breakage to our houses. Just because we might tend to be unruly guests doesn’t mean we can’t be gracious hosts.
RSVP
Hey Diane,
Two things. First, I think it is important to remember what happens when economists don’t provide input about the value of reducing mortality (maybe that is a better term than VSL) for policy analysis. Decisions are made that reflect a wide range of societal values and implicitly put bogus numbers on values of life, ranging from hundreds of thousands (damning good policy) to billions (passing bad policy). See:
George Van Houtven and Maureen L. Cropper, When is a Life Too Costly to Save? The Evidence from U.S. Environmental Regulations
Journal of Environmental Economics and Management, Volume 30, Issue 3, May 1996, Pages 348-368.
Second, contingent valuation methods (CVM) have been succesfully used to provide policy relevant information about species valuation for policy analysis. CVM studies are based on hypothetical willingness to pay questions, sure, but the recognition of hypothetical bias (i.e., we’ll say we’ll pay more than we actually would) has led to techniques that mitigate the bias.
Repeating the point above, without objective information about the public’s values for species protection, we’re leaving the decision solely to the political process. Decisions will be made with a wide range of species values that may not reflect the public’s underlying values. I’d rather have a policy process that incorporates the public’s values in some way.
Another thing, based on the methods use to come up with numbers for the value of mortality reductions, there is no reason why the values should fall with methodological refinement. If economists and others are better able to come up with dollar-risk tradeoffs the policy process should incorporate the improved estimates. I’m not sure what improved estimates the EPA found, but we shouldn’t jump to conclusion that the lower VSL is due to the environmental politics of recent years.
And another thing:
The contingent valuation method (CVM) has been successfully use to provide policy relevant information about the public value of species (e.g., a John Loomis meta-analysis in Ecological Economics about 10 years ago). The CVM is based on hypothetical statements about willingness to pay, sure, but the method has been refined to mitigate that bias. Repeating the point above, with information about public values, we’re totally relying on the political process to allocate habitat resources. I’d rather that the politicians be also faced with a somewhat more objective benefit-cost analysis.
Thanks, John! I certainly agree we economists should be doing our best to help policymakers weigh costs against benefits, and am reassured to hear you think the valuation techniques have improved over the years. So, what do you think IS the value humans place on those polar bears?
Bruce: I will host the “party” here at my place, in due time and perhaps in little installments. Thanks for the invite to use your place though.
–Diane
putting a “price” on environmental mitigation fails on two counts
the first is that it is a “what if” price, which is not even a good first guess about what people would actually pay…
second.. if the free market were capable of valuing the environment, there would be no need for the “what if” price.. we would simply buy the protection we need.
third…. the people have no idea what the real cost of letting the destruction of the environment proceed. they will only recognize the true value of “the environment” when there is no more left to buy.
economists.. or businesses… can do a fine job of setting prices in the marketplace. but not everything is a marketplace.
once, again, how much would you take for your daughter?
then how much should “the government” pay to protect your daughter?
turns out that last question doesn’t have to be answered. because the government already protects your daughter at a price where the question doesn’t even come up. and so far as i know, no one is seriously proposing the government pay for a bodyguard for your daughter at a price that impoverishes taxpayers.
so… to try to say it clearly… a cost/benefit analysis is stupid because it is impossible. we simply don’t know the real costs.
and the benefits are invisible to most of the people who are being asked to pay.
the polar bears are priceless. we don’t have to double the national debt to preserve them. we could look around and realize that the process that is killing them is killing us. if not in the ultimate environmental disaster, then one day, one hour, at a time in the sick way we live our lives.
go ask the people at las vegas what “value” they put on their slot machines.
of course you don’t have to ask. the figures are readily available.
but is this truly the “value system” you hope your children live by?
sorry to keep beating on this.
but when you ask the wrong questions you get the wrong answers.
coberly: By “wrong questions” you mean my “economist questions”?…
You seem to be challenging the entirety of economics and its attempts to attach monetary value (implicit “prices”) to the choices we make. But how do we cope with a world with scarce resources and unlimited wants if we are not able to collectively evaluate how much things cost or benefit us, as a society? I would never suggest that economic values alone are what should rule our decisions, but it has to be part of how we set policy. What is the alternative “value system” you think our society ought to live by, if economic values are meaningless? How do we make collective decisions as a society if other ways of “valuing” things are not universally agreed upon, given our scarce resources, and given that we do not live under a “benevolent dictatorship?” I might agree with you that “polar bears are priceless” but that doesn’t mean that it makes sense for us as a society to devote an unlimited amount of resources to saving their habitat, because there are many other uses of our resources that other people in our society would feel are “more priceless” than the polar bears.
mom,
economics has its place. trying to apply its methods to things that are priceless is an exercise in hubris.
it turns out that by saving the habitat of the polar bear we are very likely saving the habitat of humans.
are you advocating, short of that, that those people who value polar bears at more than “the market value” but don’t have the money, should simply be ignored by those who have the money to buy the habitat and turn it into more money?
you may have noted that we have elections in this country to decide issues that are not easily decided by market pricing.
and it won’t take an unlimited amount of resources to save the environment. quite the opposite. it will take an unlimited amount of resources not to save the environment.
an economist might guess what the “market value” of a commodity is. but once he is part of a faction SETTING “the market value” he is just another politician, neither wise nor honest.
we once had a market system for determining the value of child labor in coal mines. approved by all responsible economists. we actually fought a hugely expensive civil war over the market value of forced negro labor,
don’t want to go on too long here… but you have to begin to recognize that these are not market questions, and if they were, the people who come up with schemes to set values INVARIABLY overlook the real costs and benefits.
“we actually fought a hugely expensive civil war over the market value of forced negro labor”
Erm, no we didn’t. The Civil War was indeed mainly about slavery - but it wasn’t about the “market price” of slaves. South Carolina didn’t seceed because Lincoln was going to change the cost of buying a slave. It was about the right to own slaves at all. Don’t muck up your argument by making poor analogies like that.
As for the EPA… I think I agree with you generally that setting a $ on human life is a pretty messed up way of going about things. However, I do think that cost-benifit analysis has its place in what the EPA does… just not when it comes to imminent risks to human health (like when humans are being exposed to a contaminant known to be harmful - then it’s not about $ - go deal with it. NOW). Most environmental cleanups, however, involve weighing various cleanup options with varying (estimated) costs and (estimated) benifits.
“and it won’t take an unlimited amount of resources to save the environment. quite the opposite. it will take an unlimited amount of resources not to save the environment.”
I’m quite sympathetic to this line of argument. I do believe that the cost of preventative measures will be less than the cost of polluting and then having to go and try to clean up the mess/deal with the consequences. However, that doesn’t mean that evaluating cost estimates for various policies is fundamentally wrong-headed.
Rob
you could be a friend, so i don’t want to alienate you, but
i have nothing against evaluating costs. i have a lot against a formulaic way of fooling yourself about what you are doing. as the article states, we have lowered the cost of killing people. that should alert you that this is not about “evaluating costs.” this is about rationalizing killing people…bringing the price down so corporate profits (after taxes) go up.
as for the Civil War… it really was not about the right to own slaves. Lincoln was not going to abolish slavery. he was going to limit its introduction into the free territories.. and, as was very likely, into the free states. and the cost of slave vs free labor was very much the bottom of the issue.
so before you accuse me of making a poor analogy, make sure you know enough about the history to know whether it was even an anaology, and not a plain statement of fact.
but note that while “the south” was concerned about the value of its proppity, the war ended up costing both the South and the North more than the “value” of of all the slaves put together. some of us can be grateful that the decision was not made by economists.