Center for Business & Public Policy
Collaborative blog exploring the relationship between market forces and public policy.

Last year, my colleague Don Fullerton blogged about the tradeoffs between dollars and lives saved inherent in doing public policy.  The short version: we don’t have unlimited resources.  Potential government policies differ in the cost of saving a life. We should look for the policies that save the most lives at the lowest cost.

Today, I want to discuss a slightly different take on this problem that was raised in a recent New York Times article.  The article approaches the problem from the other direction.  Namely, how much should we be willing to spend to save one life?  This question is critical for deciding whether or not a particular policy should be enacted.  For example, consider a new workplace regulation that would increase safety.  If the regulations cost $10 billion and save 100 lives, then it spends $10 million to save one life.  Government agencies take this number and compare it to a benchmark “value of a statistical life” (VSL) to decide whether the policy should be enacted.  So, if the VSL is $5 million, the policy that spends $10 million to save a life should not be implemented.  If the FSL is $15 million, it should.

This is an approach to policy making that makes a lot of sense and has been increasingly adopted in recent years.  So, what’s the problem?  Well, suppose you have a vested interest in passing a policy (or not), irrespective of the costs.  An easy way to do this while still ostensibly adopting the cost-benefit approach is to simply adjust the VSL.  If you have a policy that spends $7 million to save a life, then you need to adopt a VSL greater than $7 million in order to enact the policy.  If you don’t want the policy to be enacted, adopt a VSL less than $7 million.  In the end, we have ideology thinly masked by science, or at least math.

The Times article has a number of examples of such changes.  In particular, they discuss how the VSL used by various agencies has increased between the Bush and Obama administrations.  For example, the George W. Bush administration’s EPA put the VSL at $5 million, while the Obama EPA puts it at $9.1 million.  The result?  More EPA regulations on things like air pollution.  The Bush FDA had a VSL of $5 million, while the Obama FDA uses a value of $7.9 million.  Again, the result is more regulation.

Now, the consistently higher VSLs adopted by the current administration could be consistent with a number of stories.  In particular, they are consistent with causality running in either direction.  Either Democrats put more value on statistical lives saved and so they advocate bigger government, or they advocate bigger government and so they choose a bigger VSL in order to justify it.  Further, the same argument could be made about the Bush administration.  Perhaps the small government Republicans used a VSL that was too low to justify laissez faire policies.  (The article quotes Kip Viscusi, a leading academic thinker on the VSL as saying that he thought “agencies have been using numbers that I thought were just too low.”  Viscusi advocates a VSL around $8.7 million.)

Changes in the VSL can change policies,  as the article illustrates:

“It looks like they just cooked the books — they just doubled the numbers,” said Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association, a trade group for the trucking industry, which faces higher costs under some of the Transportation Department’s new rules. The Bush administration rejected a plan in 2005 to make car companies double the roof strength of new vehicles, which it estimated might prevent 135 deaths in rollover accidents each year.

 At the time, Transportation officials figured that the cost of the roofs would exceed the value of lives saved by almost $800 million. So the agency proposed a smaller increase in roof strength that might save 44 lives a year.

Last year, the Obama administration imposed the stricter and more expensive roof-strength standard, and it published a new set of calculations showing that the benefits outstripped the costs.

Most of the difference came from the increased value of human life. By raising that number to $6.1 million from a figure of $3.5 million in the original study, the Obama administration rendered those 135 lives — and hundreds of averted injuries — more valuable than the roofs.

In addition to problems related to changing the VSL in order to advocate a particular policy position, there are further inefficiencies raised by the fact that different government agencies are using different VSL numbers to guide policy.  So, if FDA places the VSL at $8 million and the EPA puts it at $9 million, then we may find that EPA is spending money to save lives that would save more lives if routed through EPA for environmental projects instead.

So, why not set uniform standard?  It comes back to policy advocacy (note: OMB policy quoted here  was enacted in 2004 and continues to be in effect.  So, it is bipartisan):

The Office of Management and Budget told agencies in 2004 that they should pick a number between $1 million and $10 million. That guidance remains in effect, although the office has more recently warned agencies that it would be difficult to justify the use of numbers under $5 million, two administration officials said.

Close observers of the process point to two reasons for the variation in numbers. First, they say that setting a single standard is not worth the high-stakes battle that would be required with advocates on both sides. The Obama administration, like its predecessors, has preferred to deal with the issue informally, on an agency-by-agency basis.

Second, they say the lack of a standard preserves flexibility.

Flexibility, yes.  Consistency and efficiency … not so much.