The Biden Administration’s “modernizing regulatory review” initiative offers a rare chance to correct historical mistakes in the federal regulatory framework. Central to this effort should be revisiting the “value of a statistical life” (VSL) concept—a monetary value attached to human life for regulatory analysis purposes. Although widely used in regulatory decision-making, the measure is inappropriate for most of its current uses in cost-benefit analysis. Furthermore, by rectifying careless analytical practices related to the VSL, regulatory benefits analysis more generally is likely to be improved well beyond the analysis of mortality.
The first major concern with current VSL practices is that regulators incorrectly assume that there are no externalities associated with individuals’ spending decisions. This assumption is false, and this is most evident when assessing end-of-life scenarios. Does it make sense to spend $10 million to extend someone’s life by five minutes? Even if this outcome is consistent with what the individual wants, the individual’s preferences are manifestly at odds with what makes sense for society.
The five-minute example is extreme, but it demonstrates a point: The VSL fails to account adequately for the opportunity cost of funds, particularly as pertains to savings bequeathed to one’s heirs. These savings externalities do not only occur at the end of life; they are pervasive across a person’s entire lifespan.
VSL advocates sometimes respond to the obvious problems found in these end-of-life scenarios by recommending the use of the “value of a statistical life-year”—an annualized version of the VSL—but this substitution is a political band-aid rather than a methodologically sound solution. Rather than tweak a flawed measure to obtain a number that is less absurd, it would be far more sensible to employ an economically defensible value of life from the outset.
A related concern is that one person or group’s preferences is imposed dictatorially on everyone else when setting policy based on the VSL. Even putting aside whether this is ethically defensible, it is economically inefficient. Federal agencies take willingness-to-pay (WTP) estimates from one—presumed efficient—market and then apply them in other contexts. The likelihood, however, of any particular market’s marginal WTP value equaling the efficient value is basically zero. Savings externalities of the sort found with the VSL are the general rule, not the exception, and they will tend not to be internalized in the marketplace because our descendants are not around to engage in market exchanges with us.
Read the full article on the Regulatory Review.