Comments on William D. Nordhaus, “Irving Fisher and the Contribution of Improved Longevity to Living Standards”

I very much enjoyed reading William Nordhaus's paper. Being utterly ignorant of the health economics literature, I learned a lot about it from the paper. In reading it, a number of questions came to my mind. Let me state them in the expectation that Nordhaus and others will respond. Nordhaus considers several interrelated issues: to wit, tradeoff between "health and wealth," as he puts it, in an individual's intertemporal consumption optimization decisions; valuation of life; measurement of income given that the length of life is uncertain; and lastly, adequacy of conventional national income measures and associated growth accounting exercises in reflecting improvements in health and longevity of the population. Taking the last issue, the health sector is no different from service sectors such as education for which national accounts data measure the out-of-pocket cost of inputs but do not include other costs such as the opportunity cost of time spent away from work while being educated. The opportunity cost of time while receiving health care is the analogy of the value of time spent by students in educational institutions. These costs do not necessarily equal the value of the services to the users. Health expenditures are in part like expenditures on repair and maintenance of capital, and in part like investment expenditures that yield their returns over the future. In principle, health maintenance expenditures are no different from economic depreciation of equipment (except that maintaining (or failing to maintain) an individual's health may have externalities) and should be netted out in calculating income as, of course, Irving Fisher had proposed. Now, some of the returns to investment in an individual's health do not accrue to the individual, and some are not in the form of marked outputs. For this reason, the cost of inputs associated with the investment component of health expenditures need not be the same as the present value of future of total returns (market and nonmarket, individual, and social) from the investment. Once again, this is analo-gous to the investment component of educational expenditures. For example, the estimates of Jorgenson and Fraumeni (1995) of the output of the education sector, measured as the present value of increments in lifetime labor incomes (including nonmarket incomes), are considerably larger than the estimates based on cost of education by Kendrik (1976). Nordhaus has long been critical of the fact that conventional measures of national income at constant prices do not correctly reflect productivity gains, and I agree with him. This criticism applies also to the contribution of the health sector. Nordhaus estimates the value of improved health using two alternative approaches. In the first, he estimates the number of deaths (per person in the population) prevented by reductions in mortality rates arising from improved health care and then multiplies them by an estimated value of a life. The product yields the value of health improvement per person. In the second, the value of improved health is the product of the increase in life expectancy times the value of an additional life-year. Both methods yield similar estimates for the value of health improvements. While recognizing the wide variations in the estimates for the value of life based on labor market studies of mortality risk versus wage tradeoff, he settles on $3 million per death prevented. This he identifies with the current risk-current income trade-off parameter in his model of individual intertemporal welfare maximization. By the same token, this $3 million also implies a value of an additional life-year as a function of the discount rate. I am not entirely persuaded by this procedure, mainly because it seems to equate the mortality-consumption tradeoff of a single representative agent of the model, in which mortality is represented by a constant instantaneous probability of death regardless of age, with the corresponding tradeoff for an average individual (in terms of mortality experience) in a changing population of heterogeneous individuals. …