Thursday, February 17, 2011

Back in the News: The Embarrassment Known as the Value of a Statistical Life

Some economic ideas thrive only in the darkness: they are simply too weird and half-baked to withstand public scrutiny. Perhaps no concept better exemplifies this than the value of a statistical life, the sum of money that supposedly measures the value of a life saved or sacrificed by a government program. Few nonspecialists pay attention to the slow trickle of research articles on the topic, although the spotlight descends every few years, usually because of a scandal involving government proclamations that some people are worth more than others. (The prime case was the dispute that broke out over the economic analysis in the third IPCC report, which pegged the monetary value of an American life at ten times that of a Chinese or Nigerian life. The numbers were subsequently crossed out.)

Today’s New York Times draws our attention to the topic in a less charged context, the discrepancy between VSL’s posted by different federal regulatory agencies. It is a small issue in the larger scheme of things but still illuminating in what it reveals about the economic profession. (I should also admit that my interest is probably larger than yours, since I wrote a book on the subject 15 years ago.)

It is quite true, as the article reports, that agencies assign monetary values to human life in benefit-cost analyses. It is true that their numbers are based, more or less, on the work of Kip Viscusi and a few of his colleagues. It is also true that the numbers are drawn from regressions on wages, with the intention of identifying a wage premium for physical risk after controlling for other factors that affect labor market outcomes. Those parts of the story are correct.

What’s more important is what is missing:

1. The theoretical model underpinning all work in the field is vintage 1960s supply-and-demand analysis. There is no search and matching, no transaction costs, no bilateral bargaining, no repeated interaction between employer and employee, no unemployment. None of the VSL honchos, from Viscusi on down, have bothered to try to construct a model of wage compensation for risk using the methods all serious labor economists have now adopted. In fact, they would have a hard time doing this: equimarginal outcomes (of which wage compensation for risk is one) are few and far between in modern labor analysis.

2. The regression methods employed in the VSL studies are primitive and sloppy. They rarely account for obvious endogeneities in observed labor market phenomena. They are notoriously sensitive to omitted variables (as I showed in a paper I coauthored back when.) They don’t even take care of the basics, like accounting for the effects of grouped data (such as average injury rates assigned to individuals according to their industry or occupation) on significance estimates. It’s a real methodological backwater.

3. Practitioners seldom discuss the embarrassing fact that their wage regressions produce different values of life for different subsamples, without any obvious justification. Men’s lives are worth more or less than women. Whites are worth more than blacks. The lives of unionized workers are worth more than those not in unions, except when it’s the other way around. In fact, subsample results jump all of the map, a sure sign that the econometrics are not leading us to a stable underlying relationship.

4. The whole enterprise is conceptually vacuous. Are we identifying the willingness to pay for safety or the willingness to accept risk? (What difference do occupational safety regulations, which ostensibly set the default, play?) Why should wage rate differentials be entrusted with assigning the value of life and health? On what theoretical ground are these choices privileged over all other means of assigning values? How do we reconcile the view that workers are fully compensated for the risks they face at work with the all-too-evident politics of health and safety regulation? Why would workers forego this compensation by demanding tougher regulation? Why don’t employers factor in the ability to pay lower wages when they assess new regulatory demands? Why aren’t they funneling gobs of money to their safety consultants in order to cut wage costs without government prodding in the first place? Why is there such a complete disconnect between the world of the VSL “experts” and the one seen all over the world in the politics and law of workplace safety?

In the wake of the financial crisis, macroeconomists have been on the defensive. How could they have missed the buildup of asset bubbles and financial vulnerabilities, cheering on the very policies that brought us to the brink? But it isn’t only this particular tribe: as the VSL morass demonstrates, there are other clumps of cultishness in the profession—fields and subfields whose reputations are built on mutual citation and a willingness to set aside serious intellectual standards. In the end, the problem is that economics is too often able to insulate itself from hard criticism: there is seldom a career cost to being shown to be in error. The questions on the table are why and what to do about it.

9 comments:

Brenda Rosser said...

As you say, Peter, individuals are financially rewarded for presenting (or deriving) economic theories that are "insulated from hard criticism". If those men and women don't suffer (careerwise) for failure then we should ask what is the real function of these people?

They are defending the existing political and economic structure.

The solution appears to depend upon the willingness of people outside of the economics profession to begin to 'own' and develop this field of inquiry for the direct benefit of themselves and their communities.

Sandwichman said...

Peter: In the end, the problem is that economics is too often able to insulate itself from hard criticism: there is seldom a career cost to being shown to be in error. The questions on the table are why and what to do about it.

Your assumption here, Peter, is that a career in economics is itself obvious and unexceptional.

The opposite is the case. It is the very professionalization of economics that insulates error from hard criticism or consequences -- provided the error in question is a most salutary one (from the perspective of the profession and its benefactors).

The problem is in the nature of a priesthood, not in the particular transgressions of this or that group of priests. As an outsider with a critique, I have experienced this viscerally in interactions with progressive economists who profess their allegiance with the ideal of greater leisure but bristle at my subversive interpretation of the history of economic thought.

Sandwichman said...

Or to put the matter in sharper relief:

Given a choice between accommodation to a profession that insulates error from hard criticism or disbanding the profession BECAUSE it insulates error from hard criticism, which would the "good economist" choose?

Peter Dorman said...

Sman,

I'm under the impression that other fields, especially the hard sciences, are not like this. Am I wrong?

Brenda,

Professionals in occupational health and safety (the slice of reality these value-of-life numbers are said to come from) ignore people like Viscusi. Regulators, however, seem desperate for these pseudo-scientific inputs. My sense is that they are permanently on the defensive, constantly going up against business interests. They want to be able to say that they are "forced" by "the science" to issue any regulations at all. Being able to put everything, including life and health, in monetary terms is part of being able to make this claim.

Sandwichman said...

Hmmm... physics and weapons research? medicine and pharma... etc.

Nobody's pure.

pe said...

Peter, I would be grateful if one day, you could find time to expand on the comments you have made in a way that simple enough for a non specialist to understand. pe

Kien said...

Hi, Peter. I recently came across the term Value of Statistical Life in a 2010 paper by Arrow, Dasgupta, Gouder, Mumford and Oleson on "Sustainability and the Measurement of Wealth". Thanks to your post, I now realise that VSL has many problems. That said, in the context of trying to measure "health capital", do we have any alternatives to VSL? Incidentally, Arrow et al report that health capital is more than twice as large as all other forms of capital combined (including reproducible capital and natural capital). Measuring health capital more accurately seems an important project. Would it be right to claim that VSL-based measurements represent the lower bound? Or are you inclined to just take the view that an additional year of life is "priceless" and simply cannot be traded with other forms of wealth?

Brenda Rosser said...

Peter Dorman: "..Being able to put everything, including life and health, in monetary terms...

This feels very familiar. I've spent the last 14 years highlighting the absurdity of the pseudo-science of 'risk management' and 'risk assessment' with respect to industrial pesticides.

It seems that most 'science' today is funded for the specific purpose of permitting the unacceptable.

A old posting of mine on the subject:
http://tasmaniantimes.com/index.php/weblog/comments/george-river-pesticide-spray/

George River pesticide spray


It has been clear since July 2006 that the bureaucrats in Tasmania, and federally, had no intention of moving away from the extremely dangerous 'business-as-usual' catastrophe.

In fact, the situation has worsened now that the Australian Pesticide and Veterinary Medicine (APVMA) raised the legally 'acceptable' height of the aerial spraying helicopter from 3 metres to 15 metres above the ground to accommodate the 'forest' industry.

"A helicopter a 'mere' 15 metres above the ground means that the most voluminous fine droplet drift of these dangerous pesticides will fall 5 to 10 times that distance away. 75 to 150 metres by my calculation. This is both well within and on the OTHER side of the 'exclusion zone' ..recommended by the ASCHEM in Tasmania!

That is, houses and water bodies within 150 metres of the aircraft will often receive more chemical exposure than the target crop. This in almost ideal aerial spray conditions! " (flat land, level aircraft, appropriate nozzle etc).

Katabatic winds and tilted aircraft associated with hilly terrain will ensure the distance of maximum chemical drop will vary and UNAVOIDABLY travel much further than this in Tasmania's typical geography.

Peter Dorman said...

pe:

I suppose the place to start would be Markets and Mortality, which I wrote 15 years ago and which recently came out in a paperback edition. (I was not informed of the new edition by Cambridge U Press and had no opportunity to update the book.) My thinking, and the accumulation of critical research from other sources, would lead to a different set of arguments today, however.

Kien:

This is a great question. I faced this myself several years ago when I needed to put a monetary value on the health costs of hazardous child labor for the ILO (International Labor Organization). There is a lot to say about this, more than I can get into here, but the bottom line for me was to put out an estimate that incorporated only potential financial flows or direct equivalents (wages and in-kind receipts, taxes) and not monetized subjective states (suffering from ill-health, psychic loss from the death of loved ones). The intermediate metric was the WHO's DALY (disability-adjusted life-year). There were great difficulties in going from exposures (numbers and types of hazardous jobs) to DALY's, and from DALY's to potential economic outcomes. All the same, it is better to do the right thing inexactly than the wrong thing perfectly. The ethical and psychological harm of hazardous child labor was not monetized. For details, see the appendix on health cost calculation in the report Investing in Every Child, published by the ILO.