Valuing Life

Smoking: Making the Risky Decision

By W. Kip Viscusi
(Oxford University Press, 184 pp., $24.95)

Fatal Tradeoffs: Public and Private Responsibilities for Risk
by W. Kip Viscusi
(Oxford University Press, 320 pp., $37)

Let us begin with a few numbers. On a usual day in America, thirty Americans are killed at work, fifty-six are killed at home, and 133 die in car accidents. About 4,000 Americans die each day as a result of cancer. Tobacco smoking contributes to about 30 percent of these deaths. By contrast, occupational hazards help account for about 4 percent of cancer deaths; medicines and medical procedures, for about 1 percent; pollution, for about 2 percent. If we look at government regulations designed to reduce risks to human life, we will find that expenditures range from $10,000 to more than $1 billion per life saved. Some health and safety regulations save hundreds or even thousands of lives per year, at low cost. Others save less than one life per year, for a price of millions of dollars. The result is a crazy-quilt pattern, with a total regulatory bill well over $200 billion.

If we compare the various risks that we face with the amount that we spend to reduce each of them, we will find it impossible to justify our current system. We do not operate with a clear sense of priorities, and we do not proceed against the most serious problems. To be sure, we are overregulated, but we are also underregulated. Interest groups exercise extraordinary influence over regulatory policy. Regulatory outcomes are often a product of sensationalistic anecdotes rather than a careful investigation of risks. The huge disparities in our laws--some call for absolute protection, others for mandatory technological advances, others for open-ended balancing--cannot produce a sensible system. Often they create chaos and irrationality.

In such circumstances, regulatory reform should be one of the highest priorities of government in general, and of the new administration in particular. With the right tools, we could save millions, even billions of private and public dollars annually. We could make such savings without any loss in regulatory protection. In a period of economic distress and international competition, moreover, there are few more important tasks. We could use the savings to pay for important social programs. We could even (believe it or not) significantly reduce the deficit. With the right tools, we could also offer better protection to our citizens. We could educate people about risks, thus encouraging inexpensive methods of risk reduction. We could direct our attention to serious risks that Americans face on the job, on the highway, at home and in the air and the water. The government can do much more to protect people from pesticides, from industrial air pollution, from tap-water contamination, from indoor air pollution.

From what I have said so far, it should be clear that risk regulation is a natural area for economists. How should we assess the private and public costs of current risks, and of various strategies for risk reduction? W. Kip Viscusi, an economist at Duke University, is well versed in economic theory, but he is also unusually scrupulous about the facts. His new books are distinguished by an insistent focus on the real world. Viscusi wants to know the actual costs and the actual benefits of different regulatory strategies. He wants to ascertain which strategies have worked, and why.

If we are thinking about protecting American life and health, Viscusi is right to focus our attention on smoking, for the risks here are far higher than for most other environmental hazards. The dangers are well documented: about 300,000 smokers die as a result of their smoking each year. On average, smokers lose ten to fifteen years of life. Smokers have a 10.8 times greater chance than non-smokers of dying from lung cancer; a 6.1 times greater chance of dying of bronchitis or emphysema; a 5.4 times greater chance of dying of cancer of the larynx; a 4.1 times greater chance of dying of oral cancer; and almost double the chance of dying of heart disease. Studies also suggest that people exposed to tobacco smoke ("passive smokers") face a 34 percent greater risk of lung cancer than do non-smokers who are not similarly exposed. This means that passive smoking produces about 2,500 fatal cancers each year--a number that exceeds the number of people killed by all airborne pollutants regulated by the Environmental Protection Agency (with the exception of asbestos).

The core of Viscusi's approach can be captured very briefly. In considering what government should do about smoking he argues, we should ask just one question: Are smokers adequately informed of the risks? If people smoke without knowing that it is dangerous, we have a problem: but if they are fully aware, the government has basically done its job. Viscusi's approach leads him to an intriguing empirical investigation of whether people really do know the relevant risks. His striking finding, based on survey evidence, is that people are indeed aware of the risks of smoking. If anything, they believe that the risks are greater than they are. The actual risk that a smoker will get lung cancer because he smokes is somewhere between 5 percent and 10 percent, but people generally think that the risk is 43 percent; even smokers think that the risk is 37 percent.

According to the conventional picture, smokers are tools, addicts or automatons, blindly following glossy advertisements and ignoring information about risk. Viscusi thinks that this picture is all wrong. In the light of his findings, he says that our real goal should be to make sure that the market tot risks works well. To this end, government should try to ensure the spread of accurate information about risk designed to tell people the truth about risks rather than to persuade them to slop smoking. Government should encourage competition in the market for slier cigarettes. It should create a uniform vocabulary containing warnings about differing risk levels for different cigarettes. Finally, it should test cigarettes on its own or develop standards for enabling companies to do so. Through these routes, government can promote an efficient market for smoking--one in which companies compete with one another, smokers are informed, people are flee to choose and government avoids paternalism, which is the special bane of economists.

Fatal Tradeoffs generalizes many of the claims in Smoking. It is organized into three parts. First, Viscusi tries to figure out how we should value losses of human life. To this end, he explores how much workers "demand" from employers in order to be subject to risks of death and ill jury. How much is a salary increased for a worker who faces risks? Viscusi concludes that the usual worker receives compensation for a fatality of somewhere between $1 million and $2 million, and about $10,000 for non-fatal injuries. These results are based on actual worker choices to take jobs in risky employment. Outside the labor market, the implicit value for life, calculated by examining the "price premium" for more satiety, ranges from $600,000 (for smoke detector installation) to $4 million (for automobile accident risks). Viscusi also offers evidence from surveys in which people are asked about the dollar amounts they would require to face added risk. Here the amounts generally fall within the range of $3 million per statistical life.

Next, Viscusi tries to understand how people react to risks. His primary claim is that people often perceive risks mistakenly but not randomly. For example, they tend to overestimate the risks of low-probability events (at least if these are highly publicized, such as airplane crashes or nuclear power plant disasters) and to underestimate the risks of high-probability events (such as stroke and heart disease). People also tend to use a "reference point," based on their current conception of risk levels. Even when given new information, they tend to stick close to the reference point, and this can produce big errors. And people show a status quo bias, in the sense that they will require a lot of money to be subject to a risk not present in the status quo, while they will pay relatively little to eliminate an equivalent risk in the status quo. This asymmetry helps to explain the seemingly inexplicable fact that our government regulates new risks--in the environment, the workplace and elsewhere--much more stringently than it regulates existing ones.

Finally, Viscusi looks at the real-world effects of risk regulation. He shows that the Occupational Safety and Health Administration, at least in the last two decades, has had a small but significant beneficial effect on workplace injuries. Many lives have been saved. By contrast, there is no clear evidence that the Consumer Product Safety Commission has increased safely for consumers. In a provocative chapter on the Reagan and Bush years, Viscusi concludes that the record was extremely mixed. The first Reagan effort was based on a belief in across-the-board regulator relief rather than sensible regulatory reform guided by a careful assessment of the real consequences of different approaches. Deregulation became a goal in itself, unaccompanied by a clear understanding of what government should be doing. Viscusi agrees that an important executive order by Reagan that required cost-benefit analysis produced some improvements. Still, Reagan and Bush did not attempt to change the governing law, and they took insufficient steps in the direction of cost efficiency and cost-benefit balancing. Thus we lost the impetus toward meaningful regulatory reform.

In issuing recommendations tot the future, Viscusi emphasizes that private markets fail to deal adequately with risks, especially in the area of environmental protection. Laissez-faire is a nonsensical prescription. But regulatory approaches should always be based on a selection of the most cost-effective option. We should base our efforts on a careful balancing of both costs and benefits. Viscusi recommends fundamental legislative reform, which he thinks necessary to achieve the appropriate balancing.

These are careful and informative books. They are filled with interesting ideas and (even better) a wide range of empirical evidence. Viscusi offers much to ponder for anyone interested in environmental protection, consumer safety and workplace risks. Moreover, his prescriptions make a good deal of sense. They could even help form the basis for a bipartisan--even a nonpartisan--effort to reform our laws and our practices and finally come to terms with the pervasive risks to life and health.

And yet there is a basic theoretical weakness in both books. Viscusi's entire framework is based on neoclassical economics. He does not seriously defend that framework; at times he takes it as self-evident, and seems unaware that it is a framework, requiring a defense against alternatives. (This is an occupational hazard for economists. I doubt that there is any point in regulating against it.) In a nutshell, the framework is this: government should try to reproduce the outcomes of well-functioning economic markets. To be well-functioning, a market requires both adequate information and true competition. If people are perfectly informed about risks, and if they run those risks anyway, government's task is at an end. It must respect the preferences that reveal themselves in private consumption choices. Government should ensure that consumer satisfaction with respect to risks (like consumer satisfaction with respect to everything else) is achieved. It should, like Nabisco or Diet Rite, see consumer satisfaction as its whole raison d'etre, its guiding aspiration.

In the area of risk regulation, there are some initial oddities in Viscusi's presentation. Even within his own framework, he underemphasizes both the problem of information and the effects of one person's risks on others. Viscusi's own data on smoking show that many millions of people, smokers and non-smokers alike, continue to underestimate the risks. The fact that, in responding to survey questions, most people seem to have an accurate picture, or even overestimate the risks, does not mean that all is well if many people are insufficiently aware of the dangers. In a world with Medicare and Medicaid, moreover, the illness of any one of us is a bill for many or even most of us. In such a world, one person's decision to run a risk imposes costs on many other people. Certainly we should try to redesign our insurance and welfare programs to create better incentives for people to take care of themselves, but whatever we do, it seems likely that taxpayers will pay for people who need medical assistance.

In the particular context of smoking, there is an important additional consideration, given that passive smoking is a significant source of harm. Even if we accept Viscusi's basic premises, we must use steep excise taxes to ensure that the high social costs of smoking are built into the product's price, and are paid for by the company and the smoker rather than by the rest of us. Viscusi's own evidence shows persuasively that this can be an effective response to smoking and to other risk-creating activity. His treatment of risk regulation devotes too little attention to the possibility that an interventionist system of "risk taxes" or license fees (for high-polluting gasoline, greenhouse gases and much more) could well be justified as a means of stopping people from imposing dangers on the rest of us, or from making the rest of us poorer.

But Viscusi's premises are even more dubious. He seems to think that a democratic system should try only to mimic the outcomes of well-functioning markets. This is an odd conception of democracy, which few serious theorists of democracy have held. Viscusi is entranced with the economic notion of "consumer sovereignty," in which government respects the consumer's willingness to pay for various goods (including risks to life and health), and bases all its policy judgments on that foundation. But the notion of consumer sovereignty is quite distinct from the notion of "sovereignty" as a democratic aspiration. For a democracy, the sovereignty of the people entails respect for the public's deliberative judgments as these have been reached on the basis Of a principle of political equality (that is, not merely on the basis of market considerations). It does not entail treating people as consumers with respect to everything of importance, including their lives and their health.

To be less abstract: Viscusi thinks that his empirical evidence shows that the value of a life is somewhere between $1 million and $3 million. He thinks that we can prove that workers "value their lives" at a certain amount by seeing how much employers have to pay workers to get them to run certain risks. This is false. Employment decisions usually reflect no considered judgment about the valuation of life. Workers may run a risk, but not because they believe their life is really "worth" $1 million. They run a risk, rather, because they need a job, and because a job with certain benefits and certain risks is the best job that they can find. For a worker who needs to feed her family, a decision to run a 1 percent risk of fatality in return for $5,000 does not mean that the worker "really" thinks that her life is worth $500,000. Perhaps the worker has inadequate information about risk levels; perhaps the worker, even if well informed, is unwilling to think seriously about the fact that she has placed her life in real danger. (This is a far from uncommon human reaction.) It is true that employers must pay more to get people to take risky jobs, and it is even true that some workers trade off health and other benefits, but the typical worker (or consumer) cannot fairly be charged with having reached any judgment on how much her life is worth. For this reason, some of Viscusi's ingenious and rather obsessive arguments about how much people value their lives ultimately appear a bit fantastical, more in the spirit of Jonathan Swift than Adam Smith.

Markets operate against large inequalities in the distribution of wealth, and they are based on the principle of "one dollar, one vote." Democratic politics, by contrast, operates on a principle of political equality, by the idea of "one person, one vote." Hence the outcomes will be very different. Moreover the results of politics often reflect something other than the economic self-interest that is characteristic of market behavior. Quite apart from inequalities in the distribution of wealth, political behavior at its best involves a process of deliberation and reason-giving that should play a large role in our decisions about risks to life and health.

It is wrong, therefore, to think that government's only task is to replicate the performance of well-functioning markets. Of course, lift" cannot be valued infinitely by those designing environmental regulation. This would be a recipe for irrationality (and national bankruptcy). Of" course, politics often contains large distortions of its own. But a democracy has a broader deliberative function. It should be helping to decide what levels of risk people should be facing in different places, not merely taking private preferences as a fixed basis for policy, or treating market choices as if they reveal a context-free judgment about what lives are worth. There is no algorithm or formula to make such a decision for us. Much will depend on the setting in which the risk is run. A voluntary risk is different from one faced involuntarily. It matters, too, whether exposure is an essential part of desirable human activity, whether the risk affects average people, whether alternatives are available and so on.

These criticisms may seem unhappily abstract. But if" we put 'considerations of this sort together with what Viscusi and others have shown about risk regulation, we can begin to discern a concrete and dramatic agenda for government reform. That effort should have five elements: (1) an open and democratic discussion of the choices at stake in risk regulation: (2) a large-scale shift from "command-and-control" regulation to economic incentives for achieving democratic goals; (3) a new emphasis on receiving and disseminating information, and hence on personal responsibility for risk reduction; (4) a more systematic and long-term set of priorities; and (5) better government institutions.

Most fundamentally, we need to pose and answer some basic questions. In the light of what we know about the risks from the greenhouse effect, what sorts of sacrifices--in the form of increased prices or banned products--are we willing to make? How much should we pay to reduce, say, sulfur dioxide levels by 10 percent? Congress and the president should make these decisions openly. In the past, we have pretended that greater protection has no costs, or yielded to powerful groups on various sides, or blamed some evil person said to be entirely responsible for our problems (the automobile industry, the loggers, the environmentalists). A weighing of the good and bad consequences of government action is an inescapable part of law, environmental or otherwise. This weighing should be done explicitly and publicly.

Democratic goals should be set democratically, not through a mimicry of markets. Still, in trying to achieve democratic goals, we may borrow from the economists and insist that innovative market-based incentives are generally the best strategy. Such incentives could include cash rewards for reducing risk and cash penalties for imposing risk (as in the "green taxes" so popular in Europe but now absent from American environmental policy). Lamentably, Congress has often favored not incentives, but "command-and-control" regulation, in which government selects the particular means for achieving environmental ends. This form of regulation is both ineffective and inefficient. Our government must intervene, at state and national levels; but it should use flexible and inexpensive tools. Our present approaches are wasting literally billions of dollars. By far the better approach is to use economic incentives to encourage environmentally desirable conduct, and to let the market decide on the question of means. A cash penalty for pollution is a wonderful way to stimulate new environmental technologies.

A system of revenue-neutral (or revenue-enhancing and thus deficit-reducing) incentives is surely to be favored on economic grounds. Indeed, the tax system might well be reformed so as to decrease taxes on individuals and corporations while increasing taxes on risk-creating activities. (Europe offers several examples, such as carbon taxes in Finland and the Netherlands.) Even more important, a system of incentives is much better from the standpoint of democracy. Economic incentives place the right question squarely before the public: How much risk reduction do we want, and at what price? Such a system allows far less room for the interest-group maneuvering that has so often undermined environmental policy. The very generality of the question makes it much harder for government to offer special favors to industry. Whenever government is dictating means, special favors are all too common.

It is also crucial for government to provide and to seek sound information about risks and to encourage a sense of personal responsibility for environmental protection and other forms of risk reduction. Happily, economic incentives tend to create the right reactions on this score. If polluters will have to pay for the harm they cause, we can be assured that all relevant interests will be concerned to find out exactly what that harm is, and to minimize it.

I have suggested the need for a large-scale reallocation in our priorities. Too often our system has been weirdly episodic, producing a "pollutant of the month" syndrome that devotes limited dollars to the wrong problems. We need to know which risks are most severe, and we need to address these risks. Current knowledge shows that smoking is by far the most serious cancer threat; we should take steps (including persuasion and steeper excise taxes) to diminish that threat. Excessive and underpriced automobile use is a large source of pollution, of mortality and of millions of serious injuries each year. A stiff gasoline tax, perhaps accompanied by income tax relief for lower- and middle-income taxpayers, would be an appropriate response. At the same time, a new reform strategy would ensure that we cease to devote large resources to relatively small problems. Some EPA and OSHA rules actually spend many hundreds of millions of dollars to save a minuscule number of lives. Our limited public and private funds should be used for more serious problems, such as tap-water contamination, increasing energy efficiency, promoting renewable energy sources and converting from agricultural pesticides to other, safer methods of controlling pests.

And we need new institutions. When it comes to risk regulation, both the legislature and the executive branches are too fragmented. This fragmentation prevents sensible reform. Congress should create a new "risk oversight" committee, designed to give a clear overview of existing problems, to show what we are getting for the money we spend and to make recommendations for reallocating priorities. Similarly, a highly professionalized institution within the executive branch should be created to compile and disseminate information about risk levels and expenditures, to draw attention to high-priority items and to supervise executive branch decisions in order to ensure coordination and rationality.

These are only a few of the ways in which we might make long-needed changes in the laws and the regulations governing solid waste, hazardous waste, clean air and clean water. The really important tact is that we now have a rare opportunity to promote environmental welfare while promoting economic goals. We must not let it slip away.

By Cass R. Sunstein