Monday, August 6, 2012

EPA on Value of a Life

What is the value of a human life? For U.S. regulatory purposes, the Environmental Protection Agency has a FAQ page up on the subject. Here's the bottom line:

"EPA recommends that the central estimate of \$7.4 million (\$2006), updated to the year of the analysis, be used in all benefits analyses that seek to quantify mortality risk reduction benefits regardless of the age, income, or other population characteristics of the affected population until revised guidance becomes available ..."

On what sort of numbers is that estimate based? EPA offers this illustrative calculation:

"In the scientific literature, these estimates of willingness to pay for small reductions in mortality risks are often referred to as the "value of a statistical life.” This is because these values are typically reported in units that match the aggregate dollar amount that a large group of people would be willing to pay for a reduction in their individual risks of dying in a year, such that we would expect one fewer death among the group during that year on average. This is best explained by way of an example. Suppose each person in a sample of 100,000 people were asked how much he or she would be willing to pay for a reduction in their individual risk of dying of 1 in 100,000, or 0.001%, over the next year. Since this reduction in risk would mean that we would expect one fewer death among the sample of 100,000 people over the next year on average, this is sometimes described as "one statistical life saved.” Now suppose that the average response to this hypothetical question was \$100. Then the total dollar amount that the group would be willing to pay to save one statistical life in a year would be \$100 per person × 100,000 people, or \$10 million. This is what is meant by the "value of a statistical life.” Importantly, this is not an estimate of how much money any single individual or group would be willing to pay to prevent the certain death of any particular person."

Other studies look a jobs that pose different mortality risks, and seek to estimate how much additional pay is required for people to take such jobs. Again, the willingness to take a certain amount of money in exchange for a change in the risk of dying can be translated into an estimated "value of a statistical life."

The estimate raises obvious questions, but hard experience has taught me that the obvious questions for me are not always the obvious questions for others! For many people, the obvious question is whether it isn't just morally wrong to put any value on life. To me, that question missed the point. Every time we set a rule or regulation at one level, and not another level, we are implicitly making a decision about the value of a human life. Think the speed limit should be slower, or faster, or the same? No matter your choice, you are implicitly setting a value on human life vs. other tradeoffs of time and money.

For me, one interesting question lies in the EPA assumption that every life has the same value, regardless of age or health characteristics. Thus, society should be willing to spend the same amount to save the live of an 80 year-old, a 40 year-old and a 10 year-old. EPA has some difficult history here. Back in 2003 it proposed a cost-benefit analysis of an air pollution regulation in which the statistical value of a life saved was lower for those over 70 than for those under 70. After a public outcry, this distinction was eliminated. Studies (like this one) show only weak support for the idea that those who are actually old or sick would place a lower value on their own live: indeed, some of those who are extremely ill tend to place a higher value on their lives in survey data. But when government is drawing up rules and regulations, it may choose other priorities.

Another interesting distinction about what value to place on life saved in the present vs. lives saved in the future--perhaps even several decades in the future. Ben Trachtenberg outlines some of these issues in a recent note for the UCLA Law Review. In the past, standard practice at the EPA and the U.S. Department of Transportation was that the value of lives in the future, like all costs and benefits arising in the future, was adjusted downward by a "discount rate."" He writes: "Because, however, lives saved in the future were given the same nominal value as lives saved in the present, the real value of future lives was substantially eroded by discounting to present value, generally at annual rates of 3 and 7 percent. In other words, if a life saved today is worth \$8 million, a life saved in ten or twenty years would be worth far less. A discount rate of 7 percent erodes half the value of a life expected to be saved in 2022 and three-quarters of one expected to be saved in 2032."

However, the rules have now changed. "Before subjecting lifesaving benefits to the same discounting applied to other costs and benefits, the agencies adjust the values upward to reflect the expected higher income (and associated willingness to pay to avoid risks of harm) enjoyed by future persons. This seemingly minor procedural change can radically alter the expected benefits of major regulations ..." I suspect that this adjustment will prove quite controversial: after all, it suggest that future lives of those yet unborn have a higher value, before applying a discount rate, than present lives.

Yet another set of intriguing questions have to do with the fact that not all regulatory agencies use the same value for a statistical life: the EPA, the U.S. Department of Transportation, and the FDA use values that can be millions of dollars apart.

These issues matter because for most individuals and countries, the value of your life is the single largest asset you have. If my life is worth the EPA-approved \$7.4 million, that is substantially higher than the value of any assets I am likely to accumulate in my life. A couple of weeks ago I posted about an effort by a group at the United Nations called the International Human Dimensions Program to measure the extent to which economic growth was sustainable by estimating the value of human capital, produced capital, and natural capital across countries in the Inclusive Wealth Report 2012.

That report included one of those thoughts that seemed obviously true, once someone had pointed it out. They excluded "health capital" from the calculations, because including it would have swamped everything else. " "Health capital of a nation’s population reflects the expected discounted value of years of life remaining. This is, understandably, a large number; indeed, we find that health capital makes up more than 90% of the capital base for all countries in the study. In the nations under study, the amount of health capital that each person owns outweighs all other forms of capital combined. Given a population, slight changes in mortality rates result in more or less health capital each
year."

Gains to health and life expectancy are extraordinarily important, but in a world of inevitable costs and tradeoffs, values and limits must still be set.