Ideasroom

Covid-19: How much is a NZ life worth?

Dr Simon Chapple asks: How much should we be prepared to sacrifice economic activity for New Zealanders’ health under the coronavirus epidemic?

The question of how much economic pain we should bear in order to minimise the impact of coronavirus on New Zealanders’ health is a question that should be at the current forefront of public health policy.

The qualitative answer is that we should be prepared to bear quite a lot of economic pain to save the lives of New Zealanders from the Covid-19 pandemic. And this is the view of Minister of Finance Grant Robertson in his speech this afternoon to Parliament: “Whatever costs we are now dealing with pale in comparison to the loss of life and devastation that would come with inaction.”

But what sort of ballpark economic sacrifice should we be preparing to make?

Let’s look at some back-of-the envelope numbers. Stats NZ put our gross domestic product (GDP) – our main measure of economic activity – at around $301 billion in the latest data (March 2019). We also have a current population of about 4.8 million people.

In order to do its cost-benefit calculations for making decisions about the cost of transport fatalities, the Ministry of Transport currently values a life saved by any policy intervention at $4.37 million.

The Australian papers are currently reporting worst-case coronavirus scenarios in which the Australian government is working with 50,000 to 150,000 deaths. On a population basis, this amounts to between 0.2 percent and 0.6 percent of Australians dying, or between two and six people per thousand. The worst-case scenario is, presumably, based on business as usual – there is no adaptation by policy-makers, firms, workers, communities or private citizens to their behaviour in response to the pandemic.

As a naïve illustration of the implications of no behavioural and policy change – the ‘do nothing’ counter-factual – applying these worst-case scenario rates to New Zealand gives somewhere between 10,000 and 30,000 deaths. By way of comparison, the 1918 influenza pandemic killed about 9000 people - or nine New Zealanders per 1000.

Now, multiplying the worst-case scenario deaths by the value of a New Zealand statistical life gives a figure of the amount of GDP we could be prepared to forego, via public policy shifts and private behavioural changes, in order to shift from the worst-case scenario of 10,000 to 30,000 deaths to the best-case scenario of no deaths. That figure is a sacrifice of between $43 billion and $128 billion, or 14 percent to 42 percent of current GDP. That’s quantitatively a very large desirable economic sacrifice, by any standards.

To place the size of this health–economy trade-off in context, the sectors of the economy most impacted by privately and publicly taken virus containment measures are Accommodation and Food Services. In the latest 2018 data, this sector accounted for only about 5 percent of GDP. Thus, it would be rational to let this entire sector be wiped out if it could shift us from the worst- to best-case scenario. This conclusion does not mean one would not take decisions to mitigate these costs on Accommodation and Food Services, because of distributional concerns. It is merely illustrative.

Of course, there is likely considerable uncertainty about the worst-case scenario in terms of numbers of deaths. The worst-case deaths could be higher or lower.

In addition, there are additional health costs not factored into the worst-case scenario for which one would be prepared to pay an economic price to avoid. One of these is of viral morbidity, rather than simply viral mortality. In the worst-case scenario, a lot more people will get sick – many very sick – without dying. Some of these morbidity costs may be permanent, rather than simply accrued during the duration of infection. While we cannot readily quantify this cost with the ease we can with the costs of lives lost, it is also likely to be very high in dollar terms.

And, further, there is the additional cost of human stress and worry that would occur if the worst-case scenario were accepted, both for one’s own health and for relatives’ and friends’, especially if they were in the higher-risk elderly groups.

These ballpark figures reinforce the intuition of many that a very large economic cost should be endured if that reduction leads to significant reductions in New Zealand’s coronavirus mortality. That, however, does not mean we should not take additional policy steps to cushion the impact on those who suffer the economic losses, as the Government has today.

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