Ryan Bourne on the Economic Fallacies of the Pandemic Policymakers
2021-11-14 · Guest: Ryan Bourne (Cato Institute) · 52:39
Economic principles and government pandemic response
Bob Zadek interviews Ryan Bourne, the R. Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute, about his book Economics in One Virus. They explore the critical economic principles that were ignored by policymakers during the COVID-19 pandemic, including the role of price signals in alleviating shortages, the regulatory hurdles that delayed diagnostic testing, and the complex trade-offs involved in lockdowns and the “Value of a Statistical Life” metric.
Topics: COVID-19, Economics, Public Policy, Cato Institute, Lockdowns, FDA, CDC, Value of a Statistical Life, Price Signals, Presumption of Liberty
Speakers: Bob Zadek, Ryan Bourne
The Economic Perspective on the Pandemic [00:22]
Bob Zadek: Good morning, everyone. Welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. This Sunday and always, the show of ideas, never once the show of attitude. Thank you so much for joining me this Sunday morning.
We are starting to dig out from the unpleasantness of the pandemic, which has caused so much health and economic havoc on the world and, of course, on our country over the past 18 months or so. It is still sort of around from an epidemiological standpoint, but its economic effects are hopefully receding. This is a wonderful time to look back and see what we hope government has learned from this experience and what we as voters should have learned—had better have learned—from this experience.
Because so much of the havoc, so much of the negative alteration in our lives, in our economic, social, and medical well-being—so much of it was caused by governmental mistakes. So that one can look back and say, “Wow, we were really harmed by the pandemic,” but that kind of begs the question. We weren’t necessarily harmed by the pandemic; we were harmed to a considerable degree by the mistakes of government in reacting to the pandemic.
Now, mistakes probably can be divided broadly into two categories: mistakes that were made on the health front, on the epidemiological standpoint (that is not the subject of this morning’s show), or mistakes were made from the standpoint of political and economic decisions. Those mistakes are far less forgivable, were more predictable, and if we understand them, we can hopefully, through the ballot box and through different governance, not make the same mistake again. After all, we all know that those who do not learn the mistakes of history are doomed to repeat them.
To help us understand the understandable economic and political mistakes that were made so that we can do our best as participants in the political system to make sure they don’t happen again, I’m happy to welcome to the show Ryan Bourne. Ryan occupies the R. Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute. The public understanding of economics is this morning’s show. He’s written extensively on economic issues in society. He has been widely listened to in mainstream media and in not-so-mainstream media; he’s appeared on BBC News, CNN, Sky News, CNBC, Fox Business Network. He writes a column regularly read and has studied this issue extensively. More to the point, Ryan Bourne has just published an important book, Economics in One Virus, where he examines the economic experience caused by the pandemic. It is readable, it is a must-read, and it will make you so gosh-darn smart about what went wrong, what government did wrong and why, in terms we all can understand. I’m delighted to welcome Ryan to the show this morning. Ryan, welcome to my show.
Ryan Bourne: Well, thank you, Bob, and thank you for that very kind introduction. We’re really appreciative of everything that you do to promote libertarian ideas, so it’s great to be with you.
Bob Zadek: Oh, thank you so much. Well, Ryan, so you have written a book where you have looked upon, looked back at the experience with the pandemic from an economic standpoint and the mistakes that were made. Now, you’ve written the book to try to provide some basic but deeply explored basic economic information which the pandemic provides to us. Now, tell us, if you will, the headline, the helicopter view, if you will, of why you wrote the book and what you have, in my opinion, successfully accomplished as the goal of the book.
Ryan Bourne: Yeah, that’s a great question. I mean, I think that we all recognize, those of us who study it closely, that when governments are formulating policy, they tend to make lots and lots of economic mistakes. They fail to consider the costs and benefits of different decisions accurately. They fail to think about the incentives that different policies create for how human beings will behave. They fail to consider how people’s behavioral change might offset some of the benefits of any decision. And we recognize those day after day.
The problem is, a lot of the time, voters and even informed commentators don’t have much reason to investigate these in a great deal of detail. They’re usually public policy changes on regulation or taxes that have quite targeted effects on a small number of people, or even if they have broader effects on society, the impact might be small. We tend to adjust our lives around them; we tend to find ways of mitigating their effects. So all these kind of errors that make our lives marginally worse are sort of baked into the system. But yet it becomes, in some ways, rational for us not to comprehend them because acquiring that information is costly to us; we don’t want to spend our lives studying detailed childcare regulations, for example. And so we pretty much leave them alone.
I think why this pandemic has been so eye-opening for many people is that all of a sudden, as a result of this pervasive disruption of this new pathogen hitting, really, really consequential decisions had to be made both at an individual level and at government level about how we live our lives. And the impacts of those decisions have been so widely felt and so consequential for people’s lives—closing down businesses, having to play teacher for your kids because your schools are closed for extended periods of time. These have had massive, massive impacts on people’s lives. And I think that’s an opportunity to actually use the case study of the pandemic to explain to people: these are the sorts of ways that a well-trained, well-informed economist would have approached this question, and this is where what the policymakers actually did was lacking in comparison to that good economic thinking.
Diagnostic Testing and Regulatory Failures [05:51]
Bob Zadek: Thank you so much, Ryan. Now, in listening to you speak, the thought that hit my mind is as follows. We have survived 18 months of chief executives—be they the President, be they governors, be they mayors or the like—being in front of a television camera, and standing to their left or to their right was a medical scientist. Not often wearing a white coat with a stethoscope sticking in the pocket just to give them even more authority, but that’s what they represented. Never once that I can recall was a chief executive standing there and to her left or to her right was an economist.
We have experienced, and I dare say the overwhelming majority, a simple head count is how many people have been affected economically by the pandemic? Infinitely more than those who were affected medically by the pandemic. The numbers are just overwhelming, as in everybody was affected economically, and a far lesser number was affected directly and medically. So since the effect upon more people was economic than medical, why wasn’t the PhD in economics advisor standing at least on the podium, if not with the best camera angle? And had that happened, so many of the decisions, which Ryan, I think, will point out, would very well have been different. One would have at least expected that the chief executive, who receives information from a number of advisors—the very job of chief executive at the top of the pyramid is to process information from all the advisors, giving all of the effects, and then make the hard decision of taking economic data, medical data, all kinds of data—what is the policy? But that wasn’t done. It was only the medical that had the ear of the chief executive.
So Ryan, give us some examples, if you can, of in my hypothetical chief executive receiving information from an economist as well as from a public health professional, how might some of the decisions which were made—and I’m talking about the important ones—been different had at least the chief executive had the input from an economist?
Ryan Bourne: Yeah, it’s a great question. I think, you know, where do you start? Along the line, there’s been all sorts of different mistakes that have been made. We could start before the pandemic, but I think let me talk about a couple.
The first one that I think an economist would have approached differently is after this had hit and we recognized that this was transmitting within the community. I think economists recognize that you shouldn’t let the perfect be the enemy of the good when it comes to testing, when it comes to diagnostic testing for the virus. It was extremely important at a stage where this was spreading on the exponential part of the curve that we sought to identify as many people who were infected or at risk of being infected as possible.
Now, of course, as you know, Bob, and I’m sure you’ve talked about on your show before, the FDA and CDC are responsible for overseeing the process by which diagnostic tests were developed and approved. The CDC messed up its own test, but perhaps more importantly, the FDA actually precluded against the importation of tests that were operating elsewhere and threw sand into the gears of getting diagnostic tests approved. Indeed, tests that were ordinarily able to be carried out by labs, because of the emergency use authorization process, had to go through a quite laborious process of filling in paperwork, which slowed down the rollout of tests.
Now, why was that important? Well, that was important because it meant early on in the pandemic, particularly in comparison to countries like South Korea, we had far less testing available. And that meant that we weren’t able to identify both who had the virus, but also, perhaps more importantly, areas of the country in which this was really spiraling out of control. And I think one of the consequences of that was when there was a big political demand to shut down large parts of the economy, those shutdowns tended to be far more blanket than they needed to be. They could have been, even if you accept the need for lockdowns (and we can debate that), they could have been far more targeted at that stage than putting, in effect, the whole country or the vast majority of the country under a lockdown then. So that’s one example.
The Market for Masks and Price Signals [08:51]
Ryan Bourne: Another example where an economist would have thought very differently was on mask wearing. You remember back to the public health officials last year—Anthony Fauci and the Surgeon General at the time were explicitly telling people not to go out and buy face masks. Now, I happen to think, as time has gone on, the evidence on the efficacy of face masks is a bit spotty, and I’m not convinced that they deserve their elevated place in public debates as to how best to mitigate this virus. But let’s put that aside. At the time, many people were going out and demanding and buying up face masks because they thought that on the margin, they might provide some additional protection to them or to those they were interacting with.
Public health officials came out and explicitly told people not to buy them, in part because they thought this didn’t spread from people who were asymptomatic—at least that was the official line. But actually, if you pin them down and listen to what they were saying, they were worried that people going out and buying face masks would kind of use up a fixed supply of face masks, leading to fewer being available for hospital and nursing home settings.
Now, an economist would have looked at that and said, “Yes, that may be the case in the very short term, but you know what? If this demand takes off, provided politicians don’t get too involved in the functioning of the market, the price for face masks will go up, and that will really incentivize a big entrepreneurial drive for businesses to expand their production, to run overtime, to invest in new machines, to switch from what they were doing to the production of face masks.” And over time, as indeed we did see in the longer term, that supply response will help meet the higher demand. Now, as a result of the public health and health position seeing this market as a zero-sum game, we had a good number of weeks where we were explicitly being told not to go out and demand face masks that would have worked better than people just walking around not wearing any sorts of protection and engaging in their lives as they did.
So they’re two examples, I think, of where an economist would just think very, very differently. An economist wouldn’t worry so much about tests being really accurate in a setting in which it was important to just quickly identify as many people as possible who were infected. And politicians are very—economists, sorry, are very good at recognizing that markets are dynamic. We shouldn’t think of them as static with a fixed sum of production. And those two, I think, are evident mistakes of how the health industry, the epidemiologists, the public health officials don’t inherently think in the same way as economists do.
Bob Zadek: Now, on your comment on masks, which was quite interesting and kind of obvious once you mention it, but not obvious until it’s brought to somebody’s attention, is that supply and demand—if you allow the markets to behave naturally without artificial interference by government, then that will always adjust. Increased demand will cause an increase—higher price, increased supply, price goes down, everybody gets what they want. But if you artificially affect the demand by convincing people “don’t buy one,” then the market has nothing to respond to because the demand isn’t there, prices don’t go up, and people, manufacturers in the margins, are not incentivized to devote manufacturing capability to making masks because there’s not enough profit in it.
So it’s quite obvious once you mention it, but it is the government interfering with the marketplace instead of allowing the marketplace to respond. So that’s classic economic study applying to the issue of the supply of masks. Now, I will just also mention in passing an observation that I have made is you never have a shortage of anything. In fact, I have found the concept of a shortage of any product to be nonexistent. Here’s what I mean: there’s not a shortage of masks because as people—as there are fewer masks around, the willingness of people to buy one, the demand stays the same, the price goes up. So what happens is the price becomes higher, but there—if you’re willing to pay enough, you can outbid somebody else and you can have a mask. So anybody who wants any commodity could get it; it’s just you have to pay more. So the whole concept of shortage itself, to me, is a bit artificial.
Lockdowns: Marginal Benefits and Unseen Costs [12:04]
Bob Zadek: Now, Ryan, in the big issue—or one of the really big issues—was of course the government, without the benefit of masks, didn’t have information about which subsections of the population needed more protection or should be treated differently than others. And therefore, without that information—the information which testing would have supplied—the government imposed the, of course, we all know about it, the global lockdown. Now, the lockdown had profound harm on American citizens and those who are living in our country, indeed in the world as the lockdown was spread throughout the world. So it may or may not—you’ll have comments on this—had an effect upon the virus, but the one thing there’s no “may or may not” is it definitely had an effect upon economic life. Now, give us an economist’s view of the tool of the lockdown to deal with a—an emergency, if you will, in the country, which is the collective harm caused by an epidemic, and compare that with the collective harm caused by the lockdown. And how would an economist have advised the chief executive at least to approach the issue of the lockdown?
Ryan Bourne: Yeah, I think that’s a really great question. To a certain extent, I think that you have to think about a lockdown as a kind of bundle of different regulations. Obviously, we had the closure of so-called non-essential businesses, incorporated school closures, and in many states incorporated stay-at-home and shelter-in-place orders, as well as numerous other restrictions. You know, thinking about the Governor of Michigan banning people from buying non-essential items within stores that sold essential goods and all sorts of other quirky regulations.
So ideally, we would approach this by looking at the marginal benefits and marginal costs—i.e., looking at the benefits and costs of each of these individual regulations and how they interact with each other. But let’s put that aside for a second because I think you’re asking a kind of bigger picture question here. I think that it’s incredibly difficult, and I understand why many people were reluctant to engage in a direct kind of cost-benefit analysis of the first lockdowns. My instinct, looking at the data and numerous studies, is that on the margin, they probably did lead to less disease transmission and fewer deaths than would have occurred without them. But as you say, that is not a slam dunk in favor of supporting them.
Those benefits do tend to run up pretty quickly because as human beings, if you observe our behavior in markets, we tend to value our lives pretty highly. So if you multiply a modest tens of thousands of averted deaths by a value of a statistical life, which stems from labor market studies—that is the value that we put on mitigating death risks—you tend to get a very big number. So on there, you know, if you think there were some benefits, the benefits run up pretty quickly.
As you say, though, I think a lot of people haven’t approached this issue in a well-rounded way. And I think as a result of that, they’ve both overestimated the benefits of those lockdowns and downplayed some of the risks and costs. Why have they overestimated some of the benefits? Well, a lot of the time when you look at what people do when they calculate the benefits here is they compare the outcomes from epidemiological models if we lock down against what would happen if we just didn’t react to the virus occurring and being here in the country at all. And that, of course, is an absurd comparison to make.
In reality, we know that even prior to lockdowns being implemented, lots of businesses were investing in means of operating more safely or differently than before. Over time, we would have seen businesses adopt kind of testing or masking or various other means of mitigating the risks of this disease. So the correct comparison is not to compare the outcomes in a lockdown or the projected outcomes in a lockdown against what would happen if we just didn’t react. We’re human beings and we’re adaptive and inventive, and so you have to take that into consideration and just try and work out what the uplift in the number of lives saved would be from a lockdown against all those other voluntary forms of mitigation. So that’s the benefit side.
On the cost side, what lots of people do on this is they look at the downturn in GDP and compare the downturn in GDP value cumulatively over time against the value of the lives saved. I think, again, that’s incredibly simplistic. There are lots of values of things that we lost over the past 18 months that aren’t priced in markets. You know, if someone as an individual is forced to miss, through lockdown regulation, their grandparent’s funeral, that doesn’t appear in GDP but has a massive impact on their lives, tends to be a source of huge regret. And so we have to try and incorporate some of the values of the lost liberties we’ve seen.
On top of that, of course, there’s the issue of how do we account for some of the longer-term costs, such as over a year and a half in some cases of lost schooling on potential lifetime earnings, if you believe that that schooling has beneficial impacts on human capital accumulation. And also some of the longer-term costs on entrepreneurship as well, because I imagine that coming out of this, many people who would have been incredibly entrepreneurial before and been risk-takers and willing to set up a business would never have even conceived of the possibility of a state government shutting down or severely curbing their operations for long periods of time.
So you really have to think through all of the both the short-term costs and the longer-term costs. And some of this is really difficult to do. Let me give you an example of where it becomes really difficult. I’ve heard a lot of people come out and said, “Well, one of the big costs of lockdowns is that many people have, as a result of them, not gone to appointments for non-COVID medical conditions or diseases, and as a result, we’re kind of stacking up huge long-term problems in terms of non-diagnosed cancers and forms of heart disease and other things.” And I have no doubt that a consequence of the pandemic has been to exacerbate a lot of those problems.
The issue is, how do you compare a world in which you do extensive government lockdown against no government lockdown? Because if I’m right and on the margin, lockdowns do help to a certain extent to reduce cases and deaths, they also then mean fewer people in hospital with COVID. Now, if you didn’t do those lockdowns, there’d be more people in hospital with COVID. And so what would that do to hospitals’ willingness to admit patients for other conditions? It may well mean that they’re willing to admit even fewer than they were when people were staying at home.
So there’s some issues where there’s big gray areas. I think overall, my broad view is that lockdowns on the margin probably did bring have public health benefits, some public health benefits. These public health benefits were nowhere near as big as suggested by many people. And that many people ignored some of the longer-term costs in terms of lost schooling, lost entrepreneurship, and kind of social scarring—things that don’t show up in market activities. And I expect when we—when somebody looks at this closely and in the round, the balance of those benefits and costs will be much more finely balanced, if not balanced against full lockdowns especially, than many people suggested the kind of consensus view of 2020. And I think already you’re seeing people recognize some of those longer-term harms.
The Presumption of Liberty [17:41]
Bob Zadek: Ryan, you asked in your presentation of a second ago, you asked what sounded like a rhetorical question. I’m going to make it unrhetorical in the sense that I’m going to answer your rhetorical question. You said something like—and I’m paraphrasing—“How do we balance—‘we’ being important—how do we balance the effect of missing a grandparent’s funeral versus increasing to some degree the risk of getting COVID? How do we balance?” And that was a rhetorical question. But I’m going to answer it.
“We” collectively don’t have to answer it. That is, to me, a profoundly personal question. And the way “we” balance it is we let the individual decide. And some individuals will opt for the increased safety of not getting COVID; others will opt for, as we all do, the increased risk because the personal benefit is greater than the risk. We do that every time we engage in a somewhat risky activity. When we ski or skydive, whatever we might do, we have decided we are subjecting ourselves to a risk, but the benefit as we see it—we could be wrong, but the benefit as we see it—is worth it. We make that decision hourly in our lives.
So how off am I—and this is now also rhetorical, apologies—by suggesting, Ryan, the to some of our listeners foreign suggestion of let individuals decide? The government ought to provide the very best information available, in addition to information being available outside of government, but the government’s duty is to make sure if there is a duty, everything we do is on an informed basis, but the decision is personal. So how does an economist approach that suggestion in terms of overall well-being for society?
Ryan Bourne: Yeah, that’s a great question. It kind of leads me into something that I missed. So let me detour a bit and then I’ll come back and answer your specific question there. So a big unknown about that costs and benefits of lockdowns, of course, was those benefits of lockdowns, those purported benefits that I talked about, are predicated in the long run of there being availability of these high-efficacy vaccines that we appear to be lucky to hold. Because of course, if the vaccines had never come along, then deaths and infections delayed by those initial lockdowns, by and large, would have been merely delayed by the lockdowns; they wouldn’t have been long-term lives saved.
And I think that brings us quite nicely into the question you asked, Bob, because you’re right that one of the key insights from economics since the marginal revolution in the 19th century has been that value is subjective. I have an inherent idea of things that are of high worth or utility to my life, and they’ll be very different from what you regard as high value or high utility to you. And those values are very different depending on time, place, and circumstance. I might not value much having an umbrella with me on a hot day in the Caribbean, but if I’m in the middle of a rainstorm in Florida, I may well value having that umbrella very highly.
And the implications of this observation are pretty profound because it means by and large, unless there’s some reason why our activity affects other people, our starting point should always be that human beings deciding what is best for them will tend to themselves will tend to produce better results than any sort of top-down planning. The second implication, of course, is that we tend to only engage in voluntary activity, whether that be deciding where to work or deciding what to buy, because we tend to value the product higher than the price that we have to pay. So trade—looking at value in this way—trade is mutually beneficial. So both of those things point towards the need for a market economy where individuals are making decisions for themselves.
I do think in this instance, COVID was slightly different and presented us with a slightly different scenario to us just deciding what to do ourselves. Why is that? Well, it’s because, especially early on when we didn’t know who was infected and we didn’t really know who was most susceptible to the disease—we knew about the demographic risks being higher for elderly people but didn’t know which, you know, people with other vulnerabilities were potentially very much at risk. My behavior potentially had big consequences for other people. So if I decided to go—was feeling slightly under the weather, decided to go out into a bar, potentially spread COVID to a number of people, they might go home and visit their grandparent, and that could have a very, very high human cost if COVID was transmitted that way.
And as economists, we call this a kind of externality problem. And what I mean by that is it’s a kind of third-party effect of our decisions or behavior on other people for which it’s very, very difficult to think of a means of compensating them. It’s, you know, we don’t know really where when we do catch diseases, we don’t know a lot of the time with respiratory diseases where we caught them. And again, absent having that testing and knowing who was infected or infectious to others, that externality problem was pretty pervasive early on.
Now, does this matter? And does this mean government have to get involved? Well, as a society, we’ve kind of come to the view that when it comes to relatively low-risk diseases like colds and even flu, that we set the default to be that we should all just live our lives as normal and take whatever precautions we want. I think COVID across the population as a whole is much deadlier—or, you know, before we had the vaccine, was much deadlier than flu. So at some stage, policymakers decided we flipped from the default assumption being a right to a normal life to the default assumption being the need for collective action. And admittedly, that line of where you cross is blurry. You know, is it something five times worse than flu where we decide that this is a collective action problem? Is it three times? Is it two times? I don’t think we’ve got to grips societally in thinking through what threshold would we decide that we flip from treating future diseases like cold and flu to treating it like COVID.
Of course, now, now that everybody has had the opportunity to be vaccinated with vaccines that, although they appear to wane in terms of their ability to prevent us being infected, appear still to be highly efficacious in stopping severe disease and death. Now we’ve all had the opportunity to get those vaccines over a number of months. I think our default setting should entirely retreat back to treating this as cold and as flus because we’ve severely mitigated the risk of the worst outcomes. And to the extent that some people, you know, are refusing to get vaccinated or can’t get vaccinated for whatever reason, if we’re going to have any public health measures, that type of focused protection on those people is so obviously the right decision now.
Now, we can debate and argue as to whether a more focused approach would have been better early on. I very much think that we should have engaged in what I describe as focused prevention rather than focused protection. I think it’s very, very difficult in an interconnected society where people inevitably have to interact for numerous things to kind of rope off large parts of the demographics of the population, especially when we had a great deal of uncertainty as to who was really, really vulnerable from this. I think, you know, I think we should have focused much more heavily on using the medical tools at our disposal, like testing and widespread availability of rapid testing and things like that, to try and mitigate risks. But that central question, I think, comes back to what you were asking, which is: yes, our default is usually that these are subjective value things. COVID was an externality problem. But the threshold by which we start judging things as an externality problem rather than just assuming that we stick to our base principle of individuals having the right to live their lives as they see fit, I think is very blurry. And I think as a society, we have to kind of confront that at some stage and acknowledge when do risks become truly collective? Because with colds and flus, we don’t treat those diseases like that.
The Value of a Statistical Life [21:00]
Bob Zadek: I have two responses, and then I have another topic which is really important that I’d like to discuss in a moment. But first, just a response. In terms of letting people live their lives, let the decision be personal rather than governmental—of course, I agree. In the early stages, we had no information. But again, early on, we had a much better indication as to who was vulnerable, who was not vulnerable, but we still for months and months afterward the lockdown continued when we had the information. So there certainly came a point that people could be given the information and left for themselves to decide, as we do in our everyday lives, how much risk are we willing to expose ourselves to because of the benefit we get to offset the risk. So that could have been left to us also.
As you and I and many of our listeners know that Friedrich Hayek and others have taught us that government will never acquire the amount of knowledge and the quality of knowledge that will equal the knowledge that individuals collectively acquire by their own interactions. There’s just too much information government will never have that individuals do have. So the result of individuals experimenting and businesses experimenting would have produced more information quicker.
And in terms of when we sort of—how do we know when government should act and should compromise liberty or not? I would just defer to Professor Randy Barnett and others who use this wonderful phrase, “the presumption of liberty.” That is, the default is we assume people are free to act, and it is the burden on government to prove—not to guess, but to prove—that the collective benefit of denying liberty is greater than the collective benefit of allowing people to act. So we—it still has to be decided, but in making that decision, there should be a presumption.
So we kind of agree on the ultimate point; we might disagree very, very slightly in the margins—the word you’ve used more than once in the show—we might disagree in the margins. Now, in your book, you raise an issue that is somewhat difficult to talk about, but it has to be; you cannot have this conversation without talking about it. And in the book, you frame the issue around former Governor—remember him?—Cuomo. He was, those of you with a good memory, there was a time he was the Governor of New York. And Andrew Cuomo, when he was Governor of New York, defending his authoritarian behavior, he said that he will do all that he can to save even one life because he said even one life basically has immeasurable value. That is to say, he teed up the question that resulted in a lot of somewhat serious public discussion about the value of one human life.
Now, that’s a painful conversation; I dare say nobody listening to this show can pick a number, which is how much a human life is worth. But in fact, the study of economics when applied to this conversation requires that, because of what Ryan said, which is you have to make a calculation: how much must you spend to save one life, and is that expenditure—public expenditure—worth the money and does it make sense? So tell us, Ryan, because you did such a wonderful job in your book of discussing this really hard topic, which the chapter in your book was “How Much Would You Spend to Save My Life? An Introduction to the Value of a Statistical Life.” It was a wonderful discussion, Ryan. Please share it with our friends out there.
Ryan Bourne: Yeah, sure. And I think we do, by the way, agree pretty wholeheartedly on the lockdowns question just before I get to this, because I think the strongest case for any sort of extreme measures like that was very early on when it was done on a precautionary basis, or just before the vaccines being rolled out when you knew any life saved today would be almost guaranteed given these high-efficacy vaccines. Everything in between, you know, I was highly critical of the continued kind of blanket measures. So I think we’re on the same page of that. And I think people really underestimated businesses’ incentives to invest in less costly ways of mitigating the virus.
Now, this value of a statistical life question is a very difficult one. Every day we engage in activities where we take death risks, and we weigh up those death risks against the benefits to us of engaging in the activity. You know, I drive on a—well, I haven’t driven for a long time, but you know, I might drive on a highway on a snowy and icy day, but I weigh up the risks of being involved in an accident against the benefits of getting to my location. If we wanted to, at a societal level, eliminate all death risks from driving, we could mandate that everybody drives at two miles per hour, but clearly that would have massive costs.
So how do we go about weighing up the risks of certain activities against how much people are kind of willing to pay or willing to sacrifice for them? And economists have tended to look at this question by observing what happens in labor markets. Many people have very risky jobs, whether it’s working in mines or, you know, in the olden days engaging in high-rise building construction, and those jobs bring elevated risks of death or injury at work. And so we’re able to kind of calculate the differential in wage between those jobs and jobs with extremely similar skills and demands to work out what we describe as the compensating differential. That’s the difference in pay resulting from the uplift in risk.
And if you divide across a population the average amount that somebody has to be paid to bear a risk at work by the elevated death risk itself, that gives a value which is known as the value of a statistical life. That is how much would collectively a group be had to be paid to bear a certain risk at work. And those numbers from those types of studies tend to be very high. The main economist who looks at this pretty in detail is this guy called Kip Viscusi at Vanderbilt University, and he reckons that for very low risks at work, observed behavior suggests that collectively we put a value on about of about $10 million on any life—on any life mitigated by some regulation or whatever.
So it got me thinking, does that really make sense for COVID-19? Now, there’s an obvious problem straight away in that these figures come from labor market studies, and many of the people most affected by COVID-19 or at highest risks are elderly people who aren’t in labor markets. I found some literature which shows that elderly people tend to be willing to pay less on average than middle-aged people to bear any given risk. And when you think about talking to an elderly relative about how much they would be willing to pay to avoid death for a given number of years, I suspect you’d get vastly volatility in answers relative to somebody middle-aged.
So you think about all these issues and you think that some of the people most at risk potentially had much shorter time, unfortunately, left on earth than people facing these similar level risks in labor market studies. And economists who have adjusted for some of those factors have actually thought that we should reduce that $10 million figure probably by two-thirds—between a third and two-thirds—so taking it down to something more like $3 million per life saved. And when you do that, the cost-benefit calculus of things like lockdowns begins to look very, very different, and the benefits obviously are a lot smaller.
But this is a very thorny question. Some people don’t like differentiating this value of mitigating death risk by age. But our own behavior in our own lives and our own preferences across large groups of people—and you necessarily have to aggregate some of this, unfortunately; you can’t just do it all by subjective value when you’re talking about public policy decisions—but when we account for all of that, the benefits of things like lockdowns tend to be much lower than perhaps some of those initial studies that used the very kind of crude top-line value suggest.
Bob Zadek: And if politicians—we only have about a minute to go—if the politicians, chief executives, and mostly chief executives, would have considered this approach, put us in their brain, how would they have reached a decision about lockdowns, shutting down—I hate the phrase “non-essential businesses,” I hate to even use that phrase—how might they have reached a different conclusion about policy had they applied this value of a statistical life? We have about a minute, Ryan.
Ryan Bourne: Yeah, well, I think the value of a statistical life is still very high. So I think the first thing you’d do is look to alleviate the worst death risks possible. And I think there’s lots of things that could have been done early on in terms of reducing risk in nursing homes—not sending people back from healthcare settings to nursing homes, insisting on masking, paying people to live within nursing homes, staff to live within nursing homes for numbers of weeks to avoid people coming in and out regularly. But beyond that, I think they’d have been much more skeptical about these crude blanket lockdowns across the whole of society. And I suspect that we’d have had more targeted measures in terms of, particularly on the business side, not trying to identify businesses between essential and non-essential and instead thinking about the risks of COVID given what we knew about how this spread.
Bob Zadek: This is Bob Zadek. We’ve been spending an hour with Ryan Bourne. Ryan studies public understanding of economics at Cato, has recently written on the subject, Economics in One Virus. Please follow Ryan at Cato and support Cato anyway that you can. They provide wonderful scholarship. This is Bob Zadek, thanking my friends out there for giving us an hour of your time and if you’ve enjoyed this show or not, please so indicate on my podcast by checking the right number of stars and offering your comments. Thank you so much to Ryan, thank you to Cato, and thank you to my friends out there for giving us an hour of your valuable time this Sunday morning. Have a good rest of the week.