Is the government ascribing the wrong monetary value to the cost of human living?

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Australia’s decision to restrict physical movement during the COVID-19 crisis has been largely confirmed by the evidence. On a per capita basis, the United States still experiences roughly the same number of deaths per day as Australia as a whole.

In Sweden – which pursued a private rather than government-coordinated lockdown – the the death rate is 418.9 per million, more than 100 times that of Australia, yet its central bank is forecasting worse economic results than Australia this year and next.

This decision was also justified on all reasonable grounds. cost-benefit analysis (CBA) of the lives lost under an unmitigated ‘herd immunity’ strategy to partial lockdown, and the additional economic costs of a lockdown as opposed to the overall economic costs of COVID-19.

Yet this type of ACA requires the value of human life to be quantified in dollars – a figure the Australian government estimates at $ 4.9 million.

But there is good reason to believe that the “Statistical Life Value” (VSL) number used by the Australian government is far too low.

The $ 4.9 million figure is not based on any stated criteria or even Australian data. The base was simply that it is “plausible”.

This despite the international figures for countries such as the United States being considerably higher, and the author of the Australian government document said himself that international figures supported by economists at Harvard Joe Aldy and Kip Viscusi, who estimate the real number to be between $ 5 million and $ 12 million, should be given more weight because they are real experts.

Considering the exchange rate between the US dollar and the Australian dollar, this implies that the Aussie VSL should actually be between A $ 7.7 million and A $ 18.5 million, or 1.6 to 3, 8 times the figure used by the government.

If the Australian government used the most credible figures internationally, it would have important policy implications for health, occupational health and safety, transport and environmental regulations.

Suppose, for example, that VSL numbers are used to determine which drugs are covered by the Pharmaceutical Benefits Scheme. This calculation involves a trade-off between the cost of the drug involved and the probability that it will save a life, as well as the VSL.

A higher SVV means more drugs would be covered, which would lead to improvements in health but impacting the government’s bottom line.

However, when calculating the benefits of the lives saved, one could argue that the value of the lives saved should depend on the age of the person in question. The question of whether all lives should be valued equally by society is a philosophical and value-laden question – one that should and does make us uncomfortable.

But if one wants to calculate the value of a Statistical Year of Life (VSLY), the arithmetic is more subtle than some people – including some with advanced degrees in economics – seem to like.

For starters, there is a large amount of literature that seeks to measure LSV based on a range of characteristics, including age. This literature finds that VSLs have an inverted “U” shape, VSLs often being peaking in the 40-50 age group then decreasing during the following years of working life.

The fall slowly decreases compared to the rate of increase in early life. Older workers have a higher VVS than younger workers.

To understand this, it is important to remember that SVL measures what individuals are willing to pay to reduce the risk of death. Many studies induce this willingness to pay by using market data, in particular labor market data.

There are other approaches based on the stated preferences of the surveys, but hypothetical surveys often suffer from framing issues as well as the difficulty respondents have in understanding the consequences of small changes in risk.

In addition, economists are generally skeptical of simply asking someone an important question rather than seeing what their behavior – something called “revealed preference” – tells us about their preferences under. -jacent.

So why does VSL peak in middle age? This is because there are two competing effects of age.

The first is evident that, other things being equal, people value a longer life more. But all the rest is not equal. A life with higher human capital, better job and more money is better.

The latter effect generally increases with age, while the first “lifespan” effect decreases mechanically with age. These two forces are unleashed to produce an inverted U-shaped VSL.

To account for the age distribution, we would actually need to calculate a VSL for all ages. But the Australian government recommends using a single number, $ 4.9 million, to approximate the age distribution. This number is the value of a “typical 40 year old man” who has a life expectancy of 80 years, that is, he expects to live another 40 years.

The government estimates this value by assuming a value equal to 40 years for each future year of life (contrary to the conclusions just discussed) and discounting these future years at 3% per year. The number that makes the present value of those years of future life equal to the SVV of $ 4.9 million is $ 213,000.

The government’s method and basic economics make it clear that simply dividing the VSL by 80 to estimate the VSLY, as some have proposed during the current pandemic, is downright incorrect.

But things are even more complicated. To state that saving a 78 year old person if the life expectancy is 80 years saves two years of statistical life is also incorrect.

You have to consider life expectancy provided you reach this age. So, going back to our original calculation, even if we take the VSLY at $ 213,000 and note that the life expectancy of an 80 year old in Australia was 89.58 years in 2015, then save that person 80-year-old would be worth around $ 2 million.

Of course, when thinking about COVID-19 policy, it’s important to have the right counterfactual. Under collective immunity, young people would make up a larger fraction of the total number of deaths than under the lockdown that we have pursued.

Young people have a much longer life expectancy. For this reason, they will be disproportionately important and significantly increase the calculated benefits.

And it does not measure what family and loved ones would be willing to pay to save the lives of loved ones, which various studies suggest giving corrections from 1.1 to 1.4, or what an individual would pay for. reduce the risk of infecting many others with a deadly virus.

If this all sounds very complicated, well, it is.

The Australian government’s figure on the VSL is between 1.6 and 3.8 times too low. It does not take into account the impact of deaths on people other than the deceased. And, even if one wants to adjust the value of life for the years left to live, then an 80-year-old man is, according to arithmetic restrictions, still about 40% of a 40-year-old man. years.

Taking all of this into account suggests that the Australian government should rate the life of an 80-year-old man between 70% and 215% of what he does. And for a 40-year-old man, the government understates his valuation 1.7 to 5.3 times.

Using the correct number would have huge implications for the drugs the government pays for, and for many other public policy decisions, from mandatory vehicle cameras to speed limits.

Giving monetary value to life is both uncomfortable and difficult. But when a cost-benefit analysis is required, it also has far-reaching consequences.

Richard Holden and Bruce Preston are professors of economics at the UNSW Business School and the University of Melbourne, respectively..

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