Valuing Statistical Lives: The Triumph of a Tool in the Regulatory Arena

In W. Kip Viscusi’s new book on the value of a statistical life — the mortality risk that any benefit-cost analysis should utilize — he describes the triumph of this tool in the federal regulatory arena. Pricing Lives: Guideposts for a Safer Society then goes on to show even greater societal benefits that can be had by broader adoption of this method, one he has pioneered throughout his career.

VSL is now standard practice, “the norm for benefit assessment,” within federal regulatory agencies such as the Department of Transportation and the Environmental Protection Agency, which operate under Executive Orders, in place since the Reagan administration governing the promulgation of regulations, and mandating the use of benefit-cost analysis except where existing statutes do not allow its application. “The current U.S. emphasis in selecting VSL levels is on the labor market evidence regarding wage-risk tradeoffs for dangerous jobs,” writes Viscusi.

The ascendancy of the VSL in regulatory benefit-cost analysis is, in large part, due to Viscusi’s scholarship. His object now is to consolidate these gains and broaden its use to federal programs, not just regulations; corporate safety decisions; court awards for punitive damages in wrongful death cases; and regulatory penalties presently capped, by statute, at unrealistically low levels. Viscusi’s work in this field has contributed to greater efficiency, safety, and equity for his fellow citizens. Much more can be done, he believes, to incentivize and enhance the nation’s health and safety. But first a few basics.

The Office of Management and Budget’s Office of Information and Regulatory Affairs, affectionately referred to by some as “Zuul, the Gatekeeper of Gozer, The Destructor,” is the enforcer that insures that not a single regulation can be promulgated by any cabinet agency, as well as EPA, without first complying with those Executive Orders requiring benefit-cost analysis designed to “maximize net benefits.”

OIRA’s review process of an agency’s submittal includes massive critiques, major re-writes of the regulation and, on occasion, outright rejection. OMB and OIRA are part of the White House and rightly subject to political direction. Yet, the professional staff is made up of solid economists and scientists who take their role in guaranteeing net benefits to society very seriously. Politics will swing right and left according to the elections, but the career staff is an institutional gyroscope keeping the federal regulatory process on course.

The VSL is a key variable in the equation that determines net benefits. If the VSL is low, net benefits are low. If high, benefits will be higher. Before there was VSL, agencies relied on the “cost-of-death” approach, used by courts in tort and wrongful death cases, encompassing only the present value of lost wages, medical expenses and the like. In the early 1980s, Viscusi, now the university distinguished professor of law, economics, and management at Vanderbilt University, convinced the Occupational Safety and Health Administration and OMB to switch to the VSL to ascertain the value of mortality or fatality risk as evidenced by workers’ revealed preferences based on their risk-taking behavior.

“Thus, the value of a statistical life is simply the total amount of compensation required per expected workplace death,” explains Viscusi. “The value of a statistical life reflects the values that the workers themselves believe that bearing these risks is worth rather than an accounting measure or an arbitrary number assigned by a government analyst.”

The rule in question was the OSHA hazard communication regulation eventually approved by the Reagan administration. At the time of the OSHA rulemaking, the VSL was $3 million. Today most studies or estimates of the VSL range between $9 and $11 million. Call it $10 million. “Using this estimate in the regulatory benefits analysis instead of the cost-of-death approach boosted benefits by an order of magnitude,” reports Viscusi.

The sophistication and refinement of VSL studies have improved tremendously due to the advent of the Bureau of Labor Statistics’ Census of Fatal Occupational Injuries, “the gold standard in fatality rate data,” according to Viscusi. The CFOI is based on a comprehensive census of all occupational fatalities, each of which must be verified by multiple sources, including death certificates, thus making possible a much more accurate picture of the risk facing a worker.

Litigators and corporate risk managers will find much to ponder in Kip Viscusi’s advocacy for incorporating VSL into corporate assessments of safety improvements for products and jobs. According to the author, “The VSL estimates provide the average tradeoff between costs and product risks that consumers would make if they were cognizant of the product risk.” Furthermore, “Incorporation of the VSL estimates in product design decisions consequently enables producers to design products with the safety features that consumers would find desirable if they understood the product risks.”

A “principal theme” of Pricing Lives “is that companies should confront pertinent tradeoffs directly and think systematically about product safety; striking a responsible balance between safety and other competing concerns such as cost should be a fundamental component of corporate operations.”

Corporations like Ford and GM were hit with numerous “blockbuster” punitive damage awards in the courts in which their risk benefit-cost analysis and risk assessments, based on the old cost-of-death calculations, were used as evidence of their callousness and evil-doing. As a result, “There has been complete abandonment of systematic risk analyses,” writes Viscusi. While he opposes the cost-of-death method as tremendously undervaluing risk, and counsels use of the VSL by corporations, he believes the law should exclude them from evidence, allowing for a “safe harbor” or otherwise protecting the use of these analyses to encourage better consumer safety and safer products. “What is needed is fundamental legal reform to facilitate company efforts to utilize the VSL estimates in the context of systematic risk analyses,” he concludes.

“Ideally, companies should not be found liable for punitive damages if they used an appropriate VSL and adopted all safety measures for which the expected health benefits exceeded the cost,” says Viscusi. He also speculates that some sort of regulatory compliance defense might be invoked or codified, say, if DOT required risk assessments of auto manufacturers using VSL. He also recommends that punitive damage awards be equated with the VSL in cases where they are appropriate.

Regarding the deployment of VSL to governmental programs, beyond just the regulatory process, the reader should not miss Viscusi’s devastating critique of EPA’s Superfund program, outrageously inefficient and not focused on the poorest and most at-risk populations. “Actual costs per expected case of cancer averted exceed $1 billion per case of cancer for two-thirds of the Superfund sites,” a figure much higher than the $10 million VSL.

“Giving priority to imaginary risks over real risks is not innocuous,” says Viscusi. “It leads to a policy strategy that is a form of what I have called ‘statistical murder,’ as lives are being sacrificed to address mythical risks.” The author goes on to list five lessons he draws from his study of the cleanup of hazardous waste sites by the Superfund program.

EPA does not factor in the number of people exposed to the risk, whereas a benefit-cost approach would, by incorporating the impact on the exposed population in any benefit assessment. The agency also over-emphasizes hypothetical future risks over actual risks facing disadvantaged populations. Viscusi cites Supreme Court Justice Stephen Breyer’s famous description of EPA proposing a $9.3 million cleanup to protect “non-existent dirt-eating children” given that a swamp existed on the site. See his seminal 1993 book Breaking the Vicious Circle: Toward Effective Regulation.

EPA’s studied disregard for the size of populations exposed to risk disadvantages large exposed populations including minorities and low-income groups “by equating the importance of protecting large numbers of people actually exposed to the risk with a single hypothetical future individual who may never face real risks.” Thus, as stated in Viscusi’s Lesson 4, “Efficiency can promote equity.” And, based on a study of 150 Superfund sites by Viscusi and Hamilton, there is this:

“If the EPA only addressed those sites with a cost per case of cancer averted of $8.2 million or less (in 2015) dollars, it could eliminate 97 percent of the cancer cases that could be addressed by cleaning up all 150 sites, and do so at 3 percent of the total cost.” Viscusi’s main point is that more efficient policies promote equity because less affluent members of society have greater risk exposures.

Pricing Lives also addresses many technical issues of interest to economist and risk assessors, such as whether or not to discount the VSL because of age, increase the VSL for affluent people — yes, if they are paying for the safety measures as on airlines — and generally fine-tuning the many varieties of VSLs available to regulators and managers.

While it is “entrenched” in the regulatory process, Viscusi argues forcefully that VSL has hardly exhausted its possibilities for meliorating human welfare in the operations of firms, the courts and governments worldwide. “Utilization of the VSL establishes an efficient monetary guidepost for safety in a variety of contexts, not just regulatory analyses.”

Pricing Lives, coming upon a lifetime of outstanding scholarship, may be just the push the Nobel Prize committee needs to give Professor Viscusi the recognition he deserves.