In Pricing Lives, Vanderbilt law and economics professor Kip Viscusi doesn’t directly answer either question, but he does hint that the current regulatory environment—and by some association, our tort system—is a result of America’s willingness to pay for more environmental and workforce safety protections. Just as workers are willing to pay to reduce risk and gravitate toward higher paying, low-risk jobs, regulators are employing ever-higher figures for the Value of a Statistical Life (VSL) to justify more stringent regulations. In a sense, American prosperity has given regulators ample evidence to justify a myriad of new rules.
The crux of Pricing Lives rests on the belief that society, and corporate America specifically, should confront the tradeoffs of risk and think systematically about safety, striking a balance between it and possible profits. With a title like Pricing Lives, there is a robust discussion of VSL and its cousin in the regulatory world, the Value of a Statistical Life Year (VSLY). Progressives and some conservatives strongly denounce VSL and its corollaries as placing a monetary value on a human being, a task that they say is impossible and that they would not do directly with their children or loved ones.
In fact, Viscusi and other proponents of cost–benefit analysis note, we frequently place a value on lives, only in an indirect manner. We purchase life insurance with certain monetary values. We typically drive safe cars but not impregnable tanks that would lower the risk of a fatality to near-zero. Courts and juries have monetized the value of a life for centuries.
Lives are monetized frequently. The only question is whether government or corporations are rigorous in their methodology when doing this and transparent about their process. Viscusi devotes a great deal of the book to the auto industry, from the troublesome General Motors ignition switches that resulted in several recalls in 2014 to the infamous gas tank design of the 1970s Ford Pinto. The industry has had several other public gaffes that have resulted in hundreds of fatalities. Yet the book isn’t a Naderesque screed against corporate America, but rather a plea for its wider adoption of cost–benefit analysis.
Surprisingly, corporate risk analysis was arguably more advanced decades ago than it was in the recent ignition switch fiasco. As Viscusi recounts, Ford engaged in a detailed risk analysis of the Pinto’s design, but that analysis was flawed in a number of ways. Most notably, it valued lives based on the level of tort liability damages in wrongful death cases. That resulted in a value of just $200,000 for each burn death. According to Ford’s math, the cost of a design change to prevent ignition of the rear-mounted gas tank was triple the VSL for potential victims. When jurors learned that the cost to fix each car was just $11, the way Ford undervalued each life was laid bare to the public. Eventually, it cost Ford $3.1 million in compensatory damages for one victim, in addition to $3.5 million in punitive damages. Despite the automaker’s attempt to measure and monetize risk properly, Ford made the wrong decision, from which future businesses would learn. Viscusi argues this is to the detriment of both cost–benefit analysis and public health.
Transparency / Imagine if the U.S. Environmental Protection Agency instituted a $20 billion regulation but, instead of releasing a detailed explanation of its cost–benefit analysis of the rule, it just said that Congress and the public should trust its decision. Assuming the regulation survived Office of Information and Regulatory Affairs (OIRA) scrutiny, which is unlikely, a court would probably strike it down in short order. During the regulatory process, industry expects high standards from agencies, at least for regulators in executive branch agencies whose work is subject to OIRA review. However, after the Pinto fiasco, corporations have been more secretive in their risk analysis than government is.
With regulators, the public generally knows the estimate on potential lives saved and how government monetizes this figure for an apples-to-apples comparison with monetized costs. Contrary to progressive critics, VSL does not directly place a dollar value on a human life. Instead, VSL is, in the words of Viscusi, “a reflection of the monetary risk preferences of a particular population and the tradeoffs exhibited during an economic era.”
For example, suppose you’re a 45-year-old skier and you buy a $200 helmet that can reduce your risk of death by 1:50,000. You have implicitly valued your life at $10 million (i.e., $200 × 50,000). In contrast, a young skier fresh out of college, working internships to get by, may buy a $100 helmet that reduces her risk of death by 1:25,000. This equates to a VSL of $2.5 million. This doesn’t mean her life is worth less than yours, but it does illustrate that the willingness to pay for risk reduction is measurable and quantifiable.
This begs the question about inequality and varying VSLs for different countries. For instance, the U.S. VSL, according to Viscusi, is roughly $10 million; in Australia it’s $7.1 million. India and Pakistan report VSLs of $4.9 million and $12.3 million, respectively. Given what we know about willingness to pay, Viscusi notes these figures are “implausibly high.”
It is fear over implausibly high or low VSL figures that has driven much of corporate risk analysis into the ground, or at least into the shadows. Public backlash against Ford’s shoddy math has made corporations fearful of these calculations and weary of ever presenting them to a judge or jury.
Viscusi argues this is a grave mistake; both corporations and the government should be rigorous in their risk analysis. Speaking directly to progressives weary of VSL, he notes that a properly vetted cost–benefit analysis can produce more stringent regulatory outcomes. A good analysis can generate more protective regulatory standards even if there is a dollar value placed on each life at the outset. This may sound like music to the ears of some trial lawyers and progressive regulatory activists, even if they detest cost–benefit analysis.
Moving the regulatory levers / For libertarians, there are several notes of caution. As many have noted, the VSL has been crawling upward for several years. Now at roughly $9–$10 million across the federal government (although not uniform across all agencies), it was just $3 million in 2005 according to a Department of Transportation final rule. Moreover, since 1995 there have been only 105 final rules that have cited a VSL, including 33 from the DOT and 21 from the EPA. This raises a series of questions: For regulators suddenly willing to embrace statistics and economics, can they manipulate the VSL to produce favorable regulatory outcomes? Why has the VSL tripled in roughly 10 years when U.S. household income has not made nearly the same gains?
Viscusi doesn’t answer these questions directly and they are not the focus of the book. However, just as juries want to know how the sauce is made for corporate cost–benefit analysis, the public has every right to know if the VSL is used as a backdoor tool to justify additional regulatory standards. Rarely is the VSL challenged in court when confronting landmark regulations, and perhaps that should change. For corporations, the Ford Pinto disaster gave birth to a practice libertarians and progressives should both detest: fear of rigorous and transparent risk analysis.
GM’s ignition switch controversy is an example of a company running from cost–benefit analysis. Mindful of the Pinto experience, GM apparently decided not to undertake a quantitative analysis of the risk it faced versus the cost of recalling the affected cars. The automaker even avoided the use of qualitative terms that described the real safety risk. The result was 124 lives lost, resulting in part from a corporate culture fearful of quantifying the value of saving lives. Instead of showing the government and potential juries their work on an appropriate VSL and the risk of fatalities, the public learned of “judgment words” banned from corporate communications. These included: “you’re toast,” “powder keg,” “potentially disfiguring,” and “rolling sarcophagus.”
There should be general agreement across the ideological spectrum that GM’s time would have been better spent hiring economists and mathematicians to evaluate the tradeoffs of a potential recall. Courts, the public, and regulators rightly savaged the automaker for its decisions. Perhaps the silver lining to the catastrophe is that corporate America will begin to embrace cost–benefit analysis as a tool for better decision making and to guard against such brand-damaging episodes.
Viscusi does offer one idea that may provide a path for corporations interested in risk analysis but weary of formally publishing a VSL. He suggests the government grant “safe harbor” in legislation for VSL calculations. In other words, plaintiffs would not be permitted to introduce evidence on corporate risk analysis. Companies would, however, be allowed to introduce evidence of reasonable estimates of VSL and VSLY. This may be a practical solution for the wider adoption of cost–benefit analysis, but the trial bar would likely stand in the way of such a provision.
In conclusion, most rational followers of the regulatory state will cheer for more widespread use of risk analysis. If greater corporate adoption of the practice leads to fewer lives lost—and somehow, fewer lawsuits—all the better. However, there is a real fear that regulators and trial lawyers could wield an expanding VSL to push for their preferred regulatory standards, higher tort damages, and the aim of reducing inequality through regulation. American ingenuity has produced a great deal in the last 150 years, including one of the highest VSLs on the planet. Let’s hope regulators don’t wield the VSL to impede further progress.
