Wealth and Recession

by Brian on October 21, 2011

Nate Silver had “a tweet”:http://twitter.com/#!/fivethirtyeight/status/127352379866742784 this morning that’s relevant to a debate that went on here a month or so ago.

bq. The median American’s non-household wealth declined by 14% between 2001 and 2007. So when household wealth evaporated, guess what happened?

I’m not sure of the source of this, so take some of this with a grain of salt. But if it’s true, it is relevant to something Daniel Davies “claimed”:https://crookedtimber.org/2011/09/22/but-whos-the-real-criminal-its-me-isnt-it/ and Brad DeLong “rejected”:http://delong.typepad.com/sdj/2011/09/over-at-crooked-timber-daniel-davies-turns-into-an-internet-troll.html, namely (to quote Daniel) “we are in a recession basically because of the disppearance of a huge amount of household sector wealth”.

I basically think Daniel is right on this, and Brad wrong, for reasons I’ll go into below the fold. And I take it Nate is endorsing Daniel’s line, namely that the recession was brought about by a huge collapse in household wealth.

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I’ve spent the day at a workshop on benefit-cost analysis where a lot of discussion is on valuing policies that reduce risks to life of various kinds.  US policy, for better or worse, is focused on  the idea of Value of a Statistical Life. Typically a policy that reduces  risks of death will be approved if the cost per life saved is below $5million, and not otherwise.  (There are similar numbers applied to publicly funded health care services, prescription  drugs and so on, usually per year of life saved).

A striking thing I found out is that anti-terrorism policies of the Department of Homeland Security are subject to  the same benefit-cost requirements as EPA  and Transport. But Homeland Security is only one way  the  US  government spends money with the aim of protecting Americans against attacks from terrorists and other enemies. Defense spending is far bigger and not subject to BCA, even though money spent on defense is money that can’t be spent on reducing terrorism risk through DHS or more reliably on reductions in environmental, health and transport risk

The numbers are quite striking. The ‘peacetime’ defense budget is around $500 billion a  year, and the  various wars of choice have cost around $250 billion a  year for  the last decade (very round  numbers here). Allocated to domestic risk reduction, that  money would save 150 000 American lives a year.

So, since 9/11, US defense spending has been chosen in preference to measures that would have saved 1.5 million American lives. That’s not a hypothetical number – it’s 1.5 million  people who are now dead but  who could have been saved. I think its fair to say that those people were killed by the Defense Department, or, more precisely, by the allocation of scarce life-saving resources to that Department.
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