Pay Attention to Nobel Laureate Michael Kremer on the Pandemic
(Bloomberg Businessweek) -- In the early years of the 21st century, an intrepid band of economists devised a clever, market-based idea for combating pneumococcal disease, a sometimes-symptomless killer that’s spread by airborne droplets when infected people cough or sneeze. They said funders should stimulate development and production of vaccines using an “advance market commitment”—essentially a promise to buy doses in large quantities at a set price. Governments, foundations, and companies quickly adopted the idea. Vaccines were developed, and they were used to immunize 150 million people and save 700,000 lives, mostly those of the elderly and children younger than 5. One of the inventors, Michael Kremer, shared the Nobel Memorial Prize in Economic Sciences in 2019.
Now that another sometimes-symptomless killer is spreading, the gang is getting back together for a new push to save lives. Since their original idea—advance market commitment—probably won’t induce sufficient private-sector investment, they also say countries should directly finance vaccine development.
There’s already a lot of research being done on vaccines for Covid-19 by dozens of companies worldwide. Pfizer Inc. announced on Tuesday that it’s administered an experimental vaccine to U.S. patients. A handful are in human trials already, including Moderna’s and ones from CanSino Biologics, the Beijing Institute of Biotechnology, and Inovio Pharmaceuticals.
But the big idea of Kremer and his colleagues is that the urgency of a vaccine is so great that it’s almost impossible to overspend on research, development, and manufacturing for it. What would look like wasteful redundancy in any other context is highly economical in this one. The International Monetary Fund estimates that Covid-19 will decrease world economic output by a total $9 trillion in 2020 and 2021. That comes to $375 billion a month. So it would be worth spending as much as $375 billion to accelerate the development of a vaccine by a single month. (These are rough numbers, of course, and possibly even an underestimate.)
They calculate that the world should fund the rapid development of 15 to 20 potential vaccines and begin building the factories to produce all of them even before it’s clear which, if any, will work. Vaccine manufacturing is extremely high-tech, so the factory construction will cost more than the research and development. A plant built for one vaccine can’t easily be repurposed to make another. “There’s a saying in the industry that the process is the product,” Kremer said on May 1 in an online seminar hosted by Princeton.
As if that's not enough, the economists calculate that each factory that’s built should be big enough to produce 1.5 billion doses of vaccine in just three months so the people all over the world who need the vaccine the most—health-care workers, the elderly, and so on—will be able to get it almost immediately.
A factory with an annual run rate of 6 billion doses is far bigger than any profit-minded company would build on its own dime. Once we vaccinate the entire population, then aside from booster shots, the only people needing vaccines will be newborn babies, of which there are about 130 million a year—just 2% of that 6 billion capacity. What’s more, the company that builds the plant may not have the world market to itself; it may not have any of the market if its research fails. And there’s the ever-present risk that governments will pay so little for vaccines that the companies won’t be able to recoup their investment.
Still, massive overconstruction is the right thing to do if it saves lives and get the economy going again sooner. That’s why relying purely on market forces won’t work. “I don’t think we can count on companies’ investing at the scale of manufacturing capacity that is socially appropriate without some social intervention,” Kremer said in the seminar, moderated by Princeton economist Markus Brunnermeier.
Kremer, a professor at Harvard, got into the vaccine game in 2004 with an article he wrote with Rachel Glennerster that proposed “advance market commitments” as a way to develop vaccines for diseases such as malaria that primarily afflict poor countries. A year later the Center for Global Development put out an influential report on the subject by Kremer, Ruth Levine, and Owen Barder called Making Markets for Vaccines: Ideas to Action. In 2007, Canada, Italy, Norway, Russia, and the U.K., along with the Gates Foundation, committed $1.5 billion to developing a pneumococcal vaccine using advance market commitments. In 2010 pharma giants GlaxoSmithKline PLC and Pfizer Inc. began manufacturing doses, joined a year later by Serum Institute of India. By last year approximately 700,000 lives had been saved by the vaccine, according to a February working paper by Kremer, Christopher Snyder of Dartmouth College, and Jonathan Levin, dean of Stanford’s Graduate School of Business.
The new group, with a fluid membership currently totaling 11, recently named itself Accelerating Health Technologies with Incentive Design, or AcceleratingHT. It includes most of the original crew along with some new people including contracts expert Susan Athey of Stanford’s business school, who was the first female winner of the Clark Medal, which is given to outstanding U.S. economists young than 40; Alex Tabarrok of George Mason University, who blogs at Marginal Revolution; and a London-based Bayesian statistician, Witold Wiecek.
“There are some big brains in the group but no egos—everyone is pitching in and doing whatever it takes,” Glennerster writes in an email. She’s married to Kremer and is chief economist at the Department for International Development, the U.K.’s ministry for international development cooperation.
The trick that Kremer and his colleagues used against pneumococcal disease was for funders to “pull” vaccines into the market by promising to buy them once they were developed, in addition to “pushing” vaccines into the market by financing their development. The problem with the push approach is that some companies will happily take the funders’ money even if they don’t have a prayer of developing a vaccine. The pull approach—which is another term for an advance market commitment—saves money because developers are paid only if they produce a useful product.
But AcceleratingHT’s plan for Covid-19 doesn’t rely entirely on the pull approach because pull has its own drawbacks. Vaccine developers may invest less than would be socially optimal out of fear that their research won’t succeed. Motivating the developers purely through pull might require an extremely high compensation per dose. So the economists recommend that funders pay a big portion of vaccine makers’ expenses up front—perhaps 85% on average—while requiring the companies to cover the rest so they have some skin in the game. So some push and some pull.
Kremer is concerned that international cooperation on vaccine development could be derailed by “vaccine nationalism,” with big countries funding research by domestic companies to serve the domestic market. China and the U.S. skipped the April 24 kickoff event for a World Health Organization initiative to raise $8 billion for coronavirus vaccines and therapeutics.
On the other hand, he says, big countries have an incentive to cooperate because they’ll want access to the first vaccine that’s developed, even if it’s from another country. A partial form of cooperation would be for countries to hedge their bets by chipping in for one another’s vaccine factory construction in return for a share of its eventual output, if any.
In an interview, Kremer says he supports the Trump administration’s Operation Warp Speed and other nations’ investments because, even if they aren’t ideal from the point of view of cooperation, they will likely get vaccines to market sooner, and that’s ultimately good for everyone. “If we all install a lot of capacity,” he says, “we all have more shots on goal.”
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