Tuesday, September 4, 2012

The Value of Money

What goes through your head when you see the words, "a hundred dead bodies on the floor"?
Perhaps you imagine three classrooms full of children killed by a psychotic murderer. Maybe it is an entire church full of people killed by a tornado. Maybe it is the aftermath of a battle, or a plague.
In any case, you will imagine a mind-bending scene of horror and devastation. You will see lives ruined, a vast tragedy of erased human potential, an uncountable loss of joy and happiness and beauty.
Now, what goes through your head when you see the words "a billion dollars spent"?
Probably there is very little reaction. You might imagine piles of money. If it is governemtn money you might gripe about taxes, but probably your brain connects this phrase to nothing with any emotional resonance.
I see these two things as identical. Anyone who truly understands math, and public finance, and the Value of a Statistical Life, will also see them as identical. In this post, I hope to explain why you should also think of money in this way.
Economists are sometimes accused of putting a price tag of human life. This is not true. We do not assign the price, we simply measure the price that other people assign. People trade off money and risks to life all the time. Risky jobs pay more. Cars with more safety features are more expensive. Houses in neighborhoods with less crime cost more.
It does not matter if people actually know or understand the risks. We do not have to assume that they are calculating things rationally and carefully. The important fact is that when people have more money, they die less often. They take safer jobs, buy safer cars, eat healthier food, and so on.*
For example, suppose there is a car safety feature that costs $1000 and reduces the odds of dying by one in ten thousand. Then think of how much money it would take to save someone's life. If you gave a thousand dollars each to ten thousand people, and they all used that money to buy a safer car, then one fewer person would die. You would have spent ten million dollars to save a life.
The amount of money it takes to save a life in this manner is called the Value of a Statistical Life. Economists study occupational wages, decisions about medical care, and so on, to find this value. The Value of a Statistical Life in developed countries is somewhere between six and ten million dollars. I'll use ten million, because more recent studies tend to show higher numbers and it makes the math easier.
Everything I have said so far is basic textbook economics. Now I need to highlight the consequences of these facts. Imagine that the government collects a $1000 tax from each of ten thousand people, and they react by purchasing a car without the safety feature. One more person will die. Collecting that tax has resulted in a dead body on the floor, or in this case the pavement.
Given that the value of a statistical life is ten million dollars, every ten million dollars the government collects in taxes will, statistically, kill someone. You cannot escape this fact by taxing rich people. If the rich have less money, then they spend less, which means less money for all of the people they hired or bought things from.
This is not evidence on favor of anarchism. All of the governments of modern democracies save far more lives by existing and operating than they kill by collecting taxes. But it is a useful and powerful way to think about the money the government spends.
When you see that a government program cost a billion dollars, remember that the taxes it took to fund that program resulted in a hundred dead bodies on the floor.
For example, the Mars Science Laboratory cost $2.5 billion. That is two hundred and fifty human beings sacrificed for science. This fact by itself does not mean that the program was a bad idea. I do not automatically dismiss the argument that bringing pride and joy to millions of people, while adding to our civilization's knowledge of the universe, is worth two hundred and fifty bodies on the floor. But we should be aware of the cost, and we should be having that discussion.
It is wrong and dangerous to think "it is just money" and argue that some other moral consideration justifies spending massive amounts of money. Money means life. Spending money means spending lives. If you argue that money should be spent for something, you should be prepared to argue that lives should be sacrificed for that thing. 
*Sometimes people choose to spend their money in ways that add value to their life rather than simply avoiding risks. But for an otherwise identical quality of life, more money means less risk.

1 comment:

Nick Laurence said...

I think the connection between spending and human life isn't quite as straight-forward as you put it. To use your example, the cost of $10 million dollars spent by the government is not one life; it's whatever else we would've bought otherwise. If the untaxed dollars had been used to buy that $1,000 safety improvement, AND if the government spent that 10 mil on nothing productive, then sure, your argument stands. But given human nature, that seems unlikely. It could be spent on cigarettes and alcohol. Then this whole idea concept gets flipped on its head...especially when the government starts spending that money on safety improvements.