Economics, Politics, and Psychology: The Case of Avian Flu--Posner

There is concern about the possibility of a flu pandemic that would be as or more lethal than the 1918-1919 Spanish flu pandemic, which may have killed as many as 50 million people worldwide; 500,000 died in the United States. A strain of avian flu first detected in 1997 has infected some 150 million birds, including chickens, ducks, and geese, mainly but not only in eastern Asia. More than 100 human beings have been infected, of whom about half have died. The victims were infected by contact with diseased birds rather than by contact with infected humans. As long as the only transmission is from birds to humans rather than from humans to humans, there will be no human pandemic. But the flu virus is notoriously mutable; if the current strain of avian flu mutated into a form that made it transmissible from one infected person to another, it might spread rapidly through the human population. Stocks of vaccine for immunizing people from the avian-flu strain, and of drugs (mainly Tamiflu) for treating already infected people, appear are inadequate. The Swiss pharmaceutical manufacturer Roche, the only producer of Tamiflu, has been reluctant to license its production to other manufacturers. The probability of a pandemic is unknown, but probably significant because of the vast number of infected birds and the increasing number of infected human beings, in whom the virus might mutate into a form in which it was transmissible to other human beings. Flu pandemics have been frequent. There were two in the twentieth century besides the Spanish flu pandemic. They occurred in 1957-1958 and 1968-1969, and each killed more than a million people worldwide. All three twentieth-century pandemics involved strains of avian flu. There was also the swine-flu pandemic scare in 1976; the failure of a pandemic to materialize has engendered some skepticism concerning the likelihood of an avian flu pandemic. One of the most foolish forms of commentary on issues of public safety is to note the number of false alarms and infer from that number--entirely illegitimately--that there is nothing to fear. The world in general and the United States in particular are unprepared for a flu pandemic. Although the current strain of avian flu was discovered eight years ago, vaccine development and production are just beginning, along with stockpiling of Tamiflu. Apparently there is at present only enough vaccine for 1 percent of the U.S. population. Roche has only a limited capacity for producing Tamiflu and, as mentioned, is reluctant to license other pharmaceutical firms to produce the vaccine. The President recently announced a $7.1 billion program for improving the nation's defenses against flu pandemics, but it will take years for the program to yield substantial protection. So we are seeing basically a repetition of the planning failures that resulted in the Hurricane Katrina debacle. The history of flu pandemics should have indicated the necessity for measures to assure an adequate response to any new pandemic, but until an unprecedented number of birds had been infected and human beings were dying from the disease, very little was done. The causes are the familiar ones. People, including policymakers, have grave difficulty taking measures to respond to risks of small or unknown probability. This is partly because there are so many such risks that it is difficult to assess them all, and the lack of solid probability estimates makes prioritizing the risks inescapably arbitrary, and it is partly because politicians have truncated horizons that lead them to focus on immediate threats to the neglect of more remote ones that may be more serious. ("Remote" in the sense that, if the annual probability of some untoward event is low, the event, though it could occur at any time, would be unlikely to occur before most current senior officials leave office.) But by the time a threat becomes immediate, it may be too late to take effective response measures. There is also a psychological or cognitive impediment--an "imagination cost"--to thinking seriously about risks with which there is little recent experience. Wishful thinking plays a role too. There is the inverse Chicken Little problem: the illogical reaction that because the swine-flu pandemic never materialized, no flu pandemic will ever materialize. Another example of wishful thinking is the argument that most people afflicted by the Spanish flu in the 1918-1919 pandemic died not of flu, but of bacterial diseases such as pneumonia that the flu made them more vulnerable to. But, first, is is far from clear that "most" died of such diseases, and, second, the current strain of avian flu appears to be more lethal than the Spanish flu. Only about 1 percent of Spanish flu victims died, whereas 50 percent of known human victims of the current avian flu have died. That percentage is probably an overestimate because many of the milder cases may not have been reported or may have been misdiagnosed; but it is unlikely that the true fatality rate is only one-fiftieth of the current reported rate. It is estimated that even a "medium-level" flu pandemic could cause up to 200,000 U.S. deaths and a purely economic impact (that is, ignoring the nonpecuniary cost of death and illness) of more than $150 billion. A specific problem with respect to preventing flu pandemics is the difficult economics of flu vaccines. Because of the frequent mutations of the virus, a vaccine may be effective for only one season, in which event the manufacturer must recover his entire investment in the vaccine in just a few months. The expected cost of the vaccine to the manufacturer is increased by his legal liability (a form of products liability) for injuries due to the side effects of the vaccine. If a large population is vaccinated, a percentage of the population, amounting to a very large number of people, will in the normal course experience illness in the months following the vaccination. Many of them will be tempted to sue, and uncertainty about the causation of an illness may enable a number of persons to recover damages who would have become ill anyway. This problem can be solved in a variety of ways: by requiring proof of negligence rather than imposing strict liability for side effects of vaccination; by increasing the burden of proving causation in vaccination suits; or by the governmen's undertaking to indemnify the producers for damages attributed to the vaccine. Even if such steps were taken, there would be a strong case for the government’s financing vaccine development and procuring large quantities of vaccines for distribution as needed. Measures along these lines are now being taken; and the government’s agreeing to indemnify manufacturers for damages resulting from vaccine side effects would be a natural evolution from the National Vaccine Injury Compensation Program, created in 1986, which provides relatively modest "no fault" compensation for injuries caused by vaccination but does not preclude lawsuits against the manufacturers of the vaccine. However, measures not begun until the threat of a pandemic is imminent may be too little, too late. A difficult question is compulsory licensing of patented or other proprietary flu vaccines. On the one hand, compulsory licensing would speed the production of vaccine; on the other hand, it would reduce the incentive of firms to develop new vaccines in the first place. The answer may be to combine compulsory licensing with generous research subsidies. Hurricane Katrina and now the danger of an avian flu pandemic--one an actual, the other a potential, catastrophe for which the nation failed or is failing to prepare adequately--underscore the need for institutional reforms that will overcome policy myopia based on inability to plan seriously for responding to catastrophes of slight or unknown probability but huge potential harm.

Comments

[W]

David Welker: You should avoid reckless inferences. But, overall, I am not suprised that you, once again, display recklessness. It is like earlier when you assserted that "Would also note that you don't have an inalienable right to a patent; just read the Constitution!" How much work would it have really been for you to have actually looked at the Constitution before saying something that is so clearly wrong?? Not much.

Like all your hasty comments, this one is based on a misinterpretation. Congress can choose to create patents or not create patents. You don't have an inalienable right to a patent, because the Congress need not create a patenting system. It simply has the power to do so, if it wishes.

[W]

Dan C: I agree, to a degree, about normative values sometimes trumping economic models. For example, an economist can tell society how much it cost to run a drug war. And I can understand that society, or a majority, will still vote to continue the drug war because they can not morally accept the social consequences of legalization.

I agree that economics is a social science. Optimality would take into account what actual societal preferences are and use that as its background. Optimality is not determined by the normative preferences of the economist himself!

I agree Dan C, that the economist, much like the judges that Justice Scalia abhors, who reads his own preferences into the data, is an activist one. That is why it is useful to distinguish between "the utiliarian" and "economic perspectives," as Posner stated.

[Sally J]

Finally, normative analysis does not trump economic models.

Apparently, it does if you are as blind to your bias as David Welker!

[W]

If you did, you would not suggest that there was any conflict between economic perspectives and utilitarianism when you write "You ... are the utilitarian. Economic perspectives are not you."

Exactly, Sally J. In stark contrast to the italicized quote here, one of my charges is that Mr. Welker is one of those people who views economic theory as a means to reach outcomes that square with his utiliarianism -- he does not consider economic questions as a social scientist would. Were he a judge, he would not be a Scalia.

[W]

Thus, you must concede that economic perspective do not clash with utilitarianism

I never mentioned any "clashing". I noted that what the data shows (as a byproduct of economic analysis) conflicts with what you want the data to show (as a utilitarian). That is why you say: "Frankly, no normative theory that I would subscribe to would accept the deaths of millions of people from flu epidemic as making the world better off. Economic theory just does not go there." It's your quote. You're the one who uses "normative theory" and "economic theory" interchangeably. I do agree with your statement that "my meaning as being contradictory and implying that I really am either so simple-minded as two [sic] thoughtlessly switch between normative and descriptive." Notice the [sic].

[Dan C]

I would like to see more comments on topic.

One, is society wrong to show less alarm then Judge Posner. (I assume by the digressions here, most people are not afraid of massive death tolls.)

Two, if we should take steps to prepare for a pandemic, how do we do it in the short run and the long run.

Lastly, how does a society make the " institutional reforms that will overcome policy myopia based on inability to plan seriously for responding to catastrophes of slight or unknown probability but huge potential harm."

[David Welker]

W,

First, you are absolutely right. I read your writing too fast; it was bit careless on my part. You did accurately assert that there is no inalienable to a patent; I thought you said the opposite. That was my mistake.

Second, either you are totally misinterpreting me
or your still fundamentally confused. Frankly, I think if you are misinterpreting me, it is because you are willfully choosing bad interpretations. I don't use economic theory and normative theory interchangeably. I hope you don't either. I have spent countless posts distinguishing them. So, get it straight. Any interpretation you have where I state they are equivalent is clearly wrong. To be more precise; I don't care what you, or an economic model, say the benefits of allowing millions of people to die from avian flu and I don't care what you say the costs are for saving them. (Unless you can concoct a highly unlikely story where millions of deaths from flu save even more lives. That is so far-fetched in this context. I did not feel this qualification was necessary to the point.) That is because I put such a high value on human life. Whatever value I put on human life, that is not something economics can say is right or wrong.

Third, you have correctly noted a spelling error. But if you had a reasonable degree of perceptiveness and intelligence you would realize that spelling errors can occur when someone writes something on an uneditable blog in a hurry, and it does not necessarily go to the merits of the points they are making. That you apparently think that this is conclusive evidence on the merits of a substantive position reflects poorly on YOU. You just demonstrate your own pettiness and lack of concern with substance.

Fourth, that said, I do think that it is inefficient to make such errors. The marginal benefit of preventing such errors may exceed the marginal cost of taking more time; I have ended up wasting time clarifying what I "really."

Fifth, all things considered, I get the sense that you agree that economic models are descriptive and seperate from normative judgments concerning the predictions of those models. Please clarify if this is not your understanding.

Sixth, W, you have both proposed a (1) governemnt solution to the problem and (2) insisted that government should not act. If I understand your position, it is, that governemnt should not act, but if it does, the best way to act is how you propose. Fine. That is a consistent view, if I am stating it correctly. But you really haven't defended your assertion that government should not act. I think that would be interesting.

[David Welker]

Sally J,

It would be interesting if you elaborated on exactly how you think I am biased. I am sure that I am biased, in the sense that I have my own normative views. But then, everyone is biased in that particular manner. So, when you suggest I am biased, what do you mean?

[David Welker]

Dan C,

Back to substance, but a slight digression first. You write: "Economist are not ignorant of normative issues when then study social issues. Policy makers are frequently ignorant of economics, but that does not mean that economic realities will not impact their choices."

I agree with you that economists are not ignorant of normative issues. However, like W, I think that they have no special insight into what is normatively best. They are entitled to their views, but those views should be weighted just as much as any other person with an understanding of the relevant data. Ideally, the role of an economist would be to simply report predicted consequences and let others decide. As you note, other policy makers are sometimes ignorant of economic consequences; but I don't think that excuses economists when they insert their own normative values and represent it as being more objective. In other words, they should not use their economics training to seize an unfair advantage for their normative views, whether those views are utilitarian or something else. Ideally, when economists make policy proposals, they would not advance a particular view without explicitly identifying their normative philosophy and perhaps suggesting how different normative philosophies might be advanced by other policies.

Now, back to substance. You write: "One, is society wrong to show less alarm then Judge Posner. (I assume by the digressions here, most people are not afraid of massive death tolls.)"

I think this might be a shaky assumption. Certainly, the lack of an adequate market response ex ante does not show the concern or fear that people would have ex post. I think, that contrary to your suggestion, that most people would be fearful of massive death tolls, especially to the extent that they or people they know face serious risks.

Next you write: "Two, if we should take steps to prepare for a pandemic, how do we do it in the short run and the long run."

I think that Posner, and believe it or not, W put forth reasonably good proposals. Subsidies combined with compulsory licensing for research in the area of vaccines to compensate for expected low prices that would be received in case of a disaster would be a good policy response. Alternatively, you might possibly choose to have a reward system, where the government pays a reward for a vaccine or, what is practically equivalent, eminent domain with truly fair compensation. Predictability of truly fair compensation is key if eminent domain is used, since you would not want excessive uncertainty regarding compensation to dampen incentives for vaccine development in the first place.

I think the idea of using a reward system or eminent domain is basically equivalent to compulsory licensing. Except that a reward system or eminent domain has the advantage of not entangling per unit production with licensing fees, which means that the cost of vaccines will closer approximate the marginal cost of production. On the other hand, Posner's proposal has the advantage of being less innovative legally. Compulsory licensing is a known path.

Comparing subsidies versus a blanket reward in terms of compensating drug makers, there is a risk that subsidies will be directed to the wrong researchers, but then there is a risk that rewards will be directed to the wrong risks. Eminent domain with predictable and fair compensation might solve both problems. The private market would select the researchers, but compensation would not flow from the public unless the drug turned out to be useful. However, this is not a satisfactory solution to the extent that you think that the uncertainty of whether a vaccine will be useful will lead to systematic underinvestment in an area where we don't want to take many risks. Subsidies might be better, since then compensation could be spread around more, lowering the risk to researchers that the vaccine they are developing will, thankfully, never need to be used. Also, subsidies could be structured in a manner that encourages researchers to share information, rather than horde information on failed experiments. A reward system seems less satisfactory, since it will surely lead to less cooperation among researcher rushing to win the race. Whether such fierce competition to gain a reward that encourages information exclusion or more cooperation with information sharing will be more efficient is a difficult question. One advantage of the reward system is that it might result in extremely motivated researchers. Does the extra motivation outweigh the costs of those researchers not collaborating and sharing information? Overall, I suspect that if subsidies were structured correctly, they could lead to extremely motivated researchers as well, but with the advantage of more information sharing.

W made the point in an earlier post that sometimes vaccines can be changed to be effective against another strain of a disease. This might ameliorate some of the risks associated with not being first under a reward system. This is true, but I don't think you can systematically rely on this. Even if you could realy on it, being first for a given disease or any particular strain of a disease would always be better. Thus, I think that under the reward system there would definitely be a lot of inefficient hoarding of information. I don't see how you can structure it otherwise and not have the reward turn into something more akin to a subsidy. I would be interested in anything W has to say though.

Overall, I think that the best approach to compensation would be to use carefully structured subsidies, but then have the magnitude of those subsidies be sufficient so that the vaccine can justly be entered immediately into the public domain. This is exactly the same as Posner's proposal, but it keeps prices lower, thus reducing deadweight loss, since no compulsory license fee would be due on marginal units of production.

[Dan C]

David

Prof Stigler would talk about how as a young man he favored big government but that with experience and training his views evolved.

All of our normative values are shaped by our experiences and training. What you view as interjecting bias into a study could be viewed by others as wisdom or even common sense. For example, I have a bias toward market solutions to policy issues. That is what my training taught me but it is also consistent with my worldview. I think you ask too much when you expect people to reveal all their biases. I prefer to assume that all social science research comes with some baggage from the researcher. I ask them to be honest, but I donÔøΩt assume that they are unbiased uber-men.

I once had the opportunity to meet with Stephen Jay Gould. I think it is safe to say that his scientific views ran on parallel tracks with his political views. Did his political views force his scientific views? I donÔøΩt think so. Did his political views and his scientific views interact at times? I think so. I think that is human nature.

On the topic.

I fear overcomplicated solutions. I think you run the risk of people gaming the system. I mentioned before about defense spending. The goal is pretty clear: defend the United States from enemies. But we all see that defense spending becomes, for lack of a better term, creative.

You mention the need to create the right incentives to achieve societies desired outcomes. And I agree with much of the reasoning.

In the immediate case, if Tamiflu is the solution to a pandemic, the threat of compulsory licensing is the best short run solution. I donÔøΩt see a practical way around this. Might such action make firms less likely to produce future vaccines? I donÔøΩt think so. Even under compulsory licensing, I think the firms have a potential for profit. A fuller answer would require that I understand why Roche is reluctant to license.

In the long run, the United States could put up for bid an annual contract (or a Z number of years contract) to buy X million doses per year with an option to buy Y million doses in the event of a pandemic. Drug companies would, I assume, partner to share the risk of developing an effective vaccine and share (or convert if needed) capacity.

The only difficulty would be getting Congress to buy the insurance policy. I wonder how much such a contract would cost?

[Dan C]

I hit post too soon

The advantage of putting the contract out for bid is that the government does not need to buy shots for everyone, they just need a criticial mass number. The drug firms could still sell their drug in other markets, but they are certain that they will recieve a steady income stream from their basic research. They would also be compensated for maintaing excess capacity. The drug companies would still have incentives to innovate and compete.

[anon]

I'd like to get back to the psychology of institutional design. Surely some psych people read this blog. Is there much of a literature on institutional design and group decision-making? It's a topic that's been of great interest in the legal academy in the last few years. It's fascinating (and frightening) to think about how Homeland Security, DHHS or whoever is taking charge of these policies go about determining what constitutes a risk worth protecting against. This is in some sense the problem Breyer tackled in Breaking the Vicious Circle, I think, only from the opposite perspective.

[anon]

Another psych-related question: Why are bloggers generally so snarky? Name calling and ad hominem attacks are rampant across most blogs. Is that because of the anonymity of commenting? Anyway, all of the above posters - chill out. Have fun. It's a weblog.

[W]

Mr. Welker,
1. I don't think this discussion has been unproductive in any aspect.
2. I don't think we have an eminent domain problem, because eminent domain, loosely speaking, is when the government takes privately-owned property. But it isn't your property if it is federal property governed by the Federal Property Clause. If Congress chooses not to award federal patents to private parties for a given vaccine, and instead the federal government owns the patent, then the property can't be taken away from its owner, because the "taker" is the federal government and the owner is the federal government too. To the extent that states would award patents under state patenting systems, they would be preempted by the federal scheme, and those state patents would have no legal effect.
3. This bleeds into the "hoarding information" critique, which I think is valid, because to the extent that researchers are motivated by the prospect of individual fame, they may seek not to coordinate with others to acheive it. I suppose I have a few responses:
a. Researchers often work in teams; I doubt this would have negative intra-team effects.
b. Teams of researchers often form between universities; I doubt this would prevent a Princeton microbiologist from working with a Harvard microbiologist.
c. There is great waste generated by having two companies race to be first to patent a vaccine; one consideration is that great competition between researchers may not just offset the waste that would have been generated by a winner-takes-all private-system, but it may actually generate greater benefits. The more independent creation of information we have, the better. Researchers may come to the same solution by slightly different methods, which gives policy makers options -- solution1 or solution2? So, it is not just that the same methods resulting in the same solution will be generated by two people, and that the second-runner up can convert his innovation to a cure for a slightly similar strain. (Though, obviously, I still think that is a great benefit of my proposal.)
d. As I stated before, the legal costs drop. I cannot stress how much pressure that reduces on the system. It actually increases the quality of the research generated by scientists, because they aren't mistating what exactly they are producing. Let's say that Company X in 1970 drafts a broad patent that is approved. In 2000, it can go around suing every company whose newfangled inventions plausibly fall within the patent's broad confines, without having actually produced anything of value to the consumer. We really don't need that in the vaccines context.
e. On researchers again: while the race to the first place benefits big companies -- e.g., vertically integrated ones -- smaller companies that cannot acheive those economies of scale can bind together to compete against the big guys. So you may actually produce greater coordination overall between small competitors by creating the conditions for individual researchers to hoard information, i.e., less competition on one level -- between big firms -- may produce greater competition on another -- between big firms and small firms, which reduces the price to the consumer by cutting into the big firms' market power. (I'm sure I explained this poorly. Sorry, you caught me drunk.)

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