Economics provides insights on weighing trade-offs in uncertain times like these. Society does not weigh all risks equally and ethical values confound the assignment of dollar values to different outcomes, especially loss of life. People tend to be risk averse; we hedge our bets against the odds of bad outcomes. This is the basis for the profit potential of insurance companies. Studies indicate that high values are assigned to precautions against bad outcomes that are irreversible. Furthermore, economics distinguishes between risks that individuals weigh against their own, private consequences and risks that our choices foist on others.
Social processes are needed for identifying levels of collective risk acceptable to the citizenry, through policies such as highway safety, food and drug protections, safe drinking water, etc. The costs of securing an acceptable threshold of risk are used to reveal society’s trade-offs between dollars budgeted and preventable deaths avoided. This technique, called revealed preference, yields a range of estimates on the Value of a Statistical Life (VSL). Ethical controversies are recognized and this measure is not presented as putting an absolute, true price on life. The pro-business American Enterprise Institute recommends a VSL of $10 million.
Using this value to generate estimates (admittedly crude) sheds light on the opinions of some that the economic losses from the precautions we are taking are worse than the disease itself. The dramatic reductions in death toll estimates from ever-improving pandemic models indicate that our sacrifices are paying off. An approximate result is that we have cut the death toll in half thus far. Given the Minnesota death toll stands a bit over 300 it could be argued that we have prevented another 300 deaths these past two months, yielding an estimated $3 billion in benefits of lives saved. Over two months this is larger than the economic output of many sectors of the Minnesota economy. Health economics includes among the benefits of containing epidemics the prevented morbidity (illnesses) as well as mortality (deaths) making these estimated benefits from our sacrifices much higher.
Among others, Minnesota’s own public health expert, Dr. Michael Osterholm, continues to warn against relaxing precautions too early. As Dr. Anthony Fauci states: “the virus makes the timeline.” Based on science, Dr. Osterholm sees a realistic timeline to mass production and distribution of a vaccine as 18 months. Hence, at two months in, he warns that we are in the first inning of the game and if we let our guard down we risk jumping up to the trajectory of the disease that predicted a US death toll over 1 million. Avoiding this death toll, with associated non-fatal COVID 19 cases, yields an economic value in the range of the entire country’s annual GDP.
Laws of nature dictate that loss of human life is irreversible forever. Laws of economics show that loss of a job or business, while tragic, can be reversed. We are challenged to adapt our behaviors and our policies to minimize the economic hardship and build on the initial federal, state and local efforts to move us through the stages from economic relief to stimulus. Studies find that economic hardship brings a mental and emotional burden, especially a damaged sense of self-worth for some. Hopefully this burden will be lessened given it is not a personal failing but the result of the pandemic.
A strength of our market economy is the mobility of moving parts. In a typical year, millions of businesses close and millions of new businesses are started. During this crisis the closures are at catastrophic levels and the start-ups are few. But smart economics can move us through the timeline -- set by the virus -- to make the trough less deep and move us more quickly to recovery.
It will help to focus on the basics: Supply and Demand depend on adequate borrowing capacity of producers and purchasing power of consumers. Sound science and public-private partnerships toward best-practices and creative education can restore comfort of workers with their workplaces and potential buyers where they seek goods and services – health care services being paramount among these. Sectors will work through the stages in resuming economic activity based on the ability to provide an acceptable threshold of risk to a critical mass of people. Those who include human values in dollar values will be rewarded.
Patrick Welle, Ph.D., is an Emeritus Professor of Economics & Environmental Studies at Bemidji State University.