Some Economics of Pandemic Vaccination

Some Economics of Pandemic Vaccination

Some Economics of Pandemic Vaccination

The Oxford Review of Economic Policy has published a 10-paper symposium on the “Economics of Pandemic Vaccination.”

Here, I’ll focus on the first overview essay, by Scott Duke Kominers and Alex Tabarrok, titled “Vaccines and the Covid-19 pandemic: lessons from failure and success” (Winter 2022, 38:4, pp.  719- 741). They write: “The expected costs of a future pandemic easily exceed a trillion dollars, thus justifying large expenditures and thought. Our knowledge of pandemics and their costs has been hard-won. What have we learned from global failures and successes in combating Covid-19?”

The makers of vaccines capture only a very small share of the benefits of the vaccines. Thus, their incentive to produce such vaccines is much less than the social benefit of the vaccines.

The vaccine industry, however, can only capture a tiny fraction of the gains from successful vaccines. Calculations from Susan Athey, Juan Camilo Castillo, Esha Chaudhuri, Michael Kremer, Alexandre Simoes Gomes, and Christopher M. Snyder (2022, this issue) and Castillo et al. (2021) suggest that vaccines had a value on the order of $5,800 per course when the price was running at just $6–$40 per course. As a result of the ‘enormous gulf between social and commercial incentives’ (Nordhaus, 2004Ahuja et al. 2021), there was an important role for government investment in vaccine research and development, as well as in production capacity.

The government incentives for vaccine production need to include speed, not just volume. Imagine that the government wants a company to produce 100 million doses of a vaccine. However, the preference of the government is to produce all 100 million as soon as possible, which means the company would need to ramp up production very fast–and then production would drop off. Thus, the company would prefer to spread out production over time, so it can make longer-lasting use of smaller production facilities. Thus, appropriate government policies involve both “push” policies to create a vaccine and “pull” policies to encourage rapid and large-scale production.

Every country underinvested in vaccines–in fact, the US did more to encourage vaccines than most.

It is important to note that underinvestment was not simply a US problem—every country underinvested in vaccines (Ahuja et al., 2021). In fact, Operation Warp Speed was by far the largest vaccine investment programme globally, so whatever problems reduced the effectiveness and scale of the US response may have been far larger elsewhere. Global underinvestment in vaccination may in part have been a result of human psychology—voters tend to reward politicians for dealing with emergencies, but not for avoiding them (Healy and Malhotra, 2009), and in the case of Covid-19, the scales in question may have been especially hard to contemplate. Human psychology may also help to explain why it appears to have been harder to spend trillions on a war against a virus than on wars against other people.

The role of the Defense Production Act in requiring firms to produce inputs for the vaccines was mixed, and deserves additional study.

Operation Warp Speed was about more than just spending. The US Department of Defense and the Defense Production Act also played key roles. The Defense Production Act is a 1950 law that gives the US president significant authority to direct civilian production to uses deemed necessary for national defence. This is sometimes mistakenly thought of as a type of command and control—an order to produce—but in practice, the Defense Production Act was mostly used to supplement the market process due to some of the limitations of investments in capacity. …

The Covid-19 pandemic necessitated vaccination on a larger scale than ever before, and thus many inputs were in net under-supply. Yet instead of allowing the price of vaccines to rise and feed into input prices, governments held prices low, and subsidized some stages of production such as clinical trials. … But governments are unlikely to have the requisite knowledge to see and coordinate the entire supply chain and its multiple substitutes, complements, and opportunity costs (Hayek, 1945). Operation Warp Speed used the Defense Production Act to imperfectly and temporarily substitute for the signalling and incentive role of prices. Instead of prices being transmitted along the supply chain, the Defense Production Act authorized priority ratings to be transmitted along the supply chain—thus, a firm given a priority rating of DO (critical to national defence) could (indeed, it had to) pass that priority rating on to its input suppliers, who in turn would pass the rating on to their suppliers, and so forth.

The Defense Production Act may have been useful in this regard, but it was not without cost. Bown (2022) notes that because the Defense Production Act forbade firms from raising prices, it likely reduced incentives to invest in new capacity, muting the long-run supply response—and, as Covid-19 wore on, the ‘long run’ quickly became the present. The Defense Production Act also allowed less substitution across inputs than might have been possible using market-clearing prices. For future pandemics, it will be important to figure out the ideal balance between using market forces and government management to drive vaccine supply.

There is a problem in the pandemic of how to decide when a certain possible treatment should be pursued further, or set aside. The problem is that there is a limit on the number of treatments that can be evaluated. If you give up on a possible treatment too soon, that’s obviously bad. But if you keep pursuing a treatment that doesn’t work, there is a tradeoff of not pursuing an alternative that might have worked. How do you know when to stop?

When the pandemic began, there were no known treatments for Covid-19. Thus, flexible trial designs that dropped inefficacious treatments and added potentially efficacious treatments in real-time were critical. These sorts of ‘adaptive’ trials—including the British RECOVERY trial—were instrumental in quickly discovering useful treatments, but they also raise very complex statistical issues which are best analysed in advance. For example: how much evidence should one require to ‘prove’ that a treatment is inefficacious? Setting a high standard could mean testing an inefficacious treatment for too long, with deleterious consequences for patients and for treatment discovery. Clinical trial resources are limited, so the opportunity cost of testing an inefficacious treatment is testing a potentially efficacious one. 

Shouldn’t we be preparing to be able to vaccinate for the next pandemic now?

[A]s the pandemic has dragged on, funding for ongoing vaccination and therapeutic efforts, as well as continued R&D, has been lacking (see, for example, US White House (2022)). Next-wave vaccines—most crucially, nasal vaccines (which may be more effective at reducing transmission) and pan-coronavirus vaccines (which would provide immunity against many variants at once)—are in development (Topol and Iwasaki, 2022) but, at least so far, we have seen nothing like an Operation Warp Speed-level push. With Covid-19 continuing to cause significant morbidity and mortality worldwide, not to mention ongoing economic disruption, estimates such as those of Castillo et al. (2021) suggest that an Operation Warp Speed 2.0 to combat the ongoing threat of Covid-19 would be highly cost-effective.

There are a variety of other questions. When distributing vaccines within a country, for example, does it make sense to prioritize those who are most likely to die of the illness, or those who are most likely to be infected, or those who are most likely to spread the infection? These groups overlap, but are not the same. Also, should the main focus of vaccine distribution be decentralized–say, through pharmacies–or centralized in government distribution centers? When distributing vaccines internationally, is it better to spread the limited supply of available vaccines across countries, with a low proportion of the population getting the vaccine, or to focus the first wave of vaccines on a subgroup of countries, where a higher proportion of the population within those countries can get the vaccine? And what kinds of contracts make sense for international distribution?

For me, one of the oddest things about the US pandemic experience was that, according to the Global Health Security (GHS) Index produced by the Johns Hopkins Center for Health Security, the US was in 2019 the country in the world most ready for a pandemic. But it turns out that this measure of pandemic preparedness was essentially useless.

Robert Tucker Omberg and Alex Tabarrok (2022, this issue) examine the Global Health Security (GHS) Index, a comprehensive measure of pandemic preparedness that was produced by the highly regarded Johns Hopkins Center for Health Security before the pandemic. The upshot of their paper is that countries that were ranked highly in pandemic preparedness did not perform better during the pandemic, whether looking at infections, confirmed deaths, excess deaths, the country-by-country time series of excess deaths, or other outputs. Indeed, almost no aspect of the GHS Index helps to predict pandemic outcomes, even after controlling for a variety of demographic factors.

Surely (he says in a pathetic and pleading tone), we can do better in being prepared when (not if) the next pandemic comes?

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

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