TCS Daily

$6.1 Million Men

By Iain Murray - March 24, 2003 12:00 AM

Unnoticed in the media feeding frenzy surrounding the war has been a decision by the White House to ask the Environmental Protection Agency (EPA) to reconsider the value it puts on a human life. The EPA has decided that each human life is worth $6.1 million. This may seem cold or unfeeling, but it is a central question in the murky science of cost/benefit analysis. The Bush administration now says that the value is too high. This has plenty of implications for environmental policy, and the administration is probably right.

When the public sector is considering investing money, it has to go beyond simple projections of profit and loss. For instance, if a government is considering building a light rail scheme it will look at construction costs and the revenue stream generated by the business. Generally, however, the revenue stream will be smaller than the cost of construction. The private sector would not, therefore, go ahead with the project. The public sector, on the other hand, has more considerations in mind than profit. For example, a light rail scheme might benefit the community as a whole by attracting drivers off the road and onto rail, thereby reducing road congestion, meaning faster journeys, but also reducing the number of deaths from traffic accidents. If the value of these benefits added to the revenue stream exceeds construction costs by a sufficient margin, then the public sector may well decide to go ahead with the project. It is, in a sense, buying the benefits for the community.

Because one consideration is saving lives, the public sector therefore has to come up with a figure that it can use to assess the economic value of a life. This is a difficult thing to do, but one way to do it is to assess how much economic activity an individual will undertake in his or her life - how much income will they earn, how much will they spend or invest and so on? This is generally the approach used in transportation economics and the standard value used by the U.S. Department of Transportation is $2.7 million.

This figure is less than half the EPA's figure. As the DOT says, there is great academic controversy over how life should be valued, which means that different agencies can have legitimate disagreements over which value they choose to employ. But that choice has important implications. If the number of lives in question is large enough, then it can sway the case for or against a policy or expenditure decisively.

It is this issue that seems to have prompted the White House to ask the EPA to think again. The policy in question is Clear Skies, hailed at its unveiling by Christie Whitman in February 2002 as a market-based solution that avoided rigid regulation. A strong plank in its argument was the health-related benefits of $93 billion by 2020, a figure that far outweighs the $6.5 billion cost of the plan.

Much of this, however, is based on that disputed $6.1 million figure put on the value of life. Yet here the issue gets even more complicated, because much of that health benefit relates to the elderly. Huge numbers of elderly Americans die every year as a result of respiratory infections. Air pollution certainly contributes to this, although not as much as many claim. Yet, unfeeling though it may seem to state this, those whose lives will be saved by cleaner air may well die six months later when they catch a cold. It is therefore rather overstating the case to ascribe a value of $6.1 million to each of the lives saved.

In these cases, there is another method of valuing lives other than the economic benefit. It is to ask people how much they value their own lives. One study, for instance, which has been disputed by its own author, found that elderly people will only pay $0.63 to save their own lives for every dollar a younger person is willing to spend. The EPA applied this logic to reduce the value of life to $2.3 million for an elderly person, and then decided further that heart disease would fell every elderly survivor after an average of five years, reducing the value of life more to $1.4 million.

When the EPA looked again at the numbers using this value, they concluded that health benefits amounted to only $14.1 billion by 2020. The case for the initiative was still robust, but far less healthy than it had seemed before.

It is probable that many of the huge dollar values claimed in benefit for environmental initiatives are susceptible to the same problem. The White House was right to ask the EPA to look again at this issue. A more realistic, if seemingly hard-hearted, approach to the value of life can save taxpayers billions of dollars in unjustified expense.

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