A Vaccine Would Be the Most Effective Economic Stimulus

This article appeared on UK Telegraph on May 14, 2020.
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Chancellor Rishi Sunak’s extension of the furlough scheme through October is confirmation, if any were needed, that the pandemic will not produce a mere three‐​month economic hiatus.

Lost GDP from our societal decision to suppress the virus runs at around £60bn per month right now, with government borrowing potentially up to £300bn for 2020. Neither accounts for the broader social costs of this crisis, from lost interaction with loved ones or potential partners, through to impaired learning for children.

I say a “societal decision,” rather than the Government’s lockdown, because good evidence worldwide shows that voluntary social distancing shuttered activity long before government mandates. Sweden, which hasn’t locked down, is likewise not being spared devastation as its people adapt.

Their central bank forecasts a 7–10pc GDP decline this year — a worse hit than other Scandinavian countries and up to three‐​quarters of the forecasted UK impact. The virus is our primary economic problem.

Economic disruption will, therefore, remain even as the Conservatives relax some lockdown restrictions. Continued uncertainty about the risks of a second wave will plague business investment. Boris wants us in for the “long haul.”

He’s announced a policy of suppressing the spread of the virus with a threat‐​level type system triggering new restrictions on activity whenever transmissions jumps, right until a vaccine or effective treatment is found.

Matt Hancock, the Health Secretary, highlighted an important implication for single people — nobody should “hug” a stranger until that point.

Given these intolerable costs and this strategy’s dependence on a vaccine or effective treatment saving lives before herd immunity is reached, it is baffling how little taxpayers are spending to find one. Cobbling together public announcements implies UK public spending of just £300m for Covid‐​19 vaccine development, a mere 0.1pc of this year’s likely borrowing.​

This seems ludicrous. Vaccines usually take up to a decade to bring to market and most attempts fail. Even if an effective one is found, scaling up production for global immunisation is a daunting logistical challenge. Time is money and of the essence. A private company would usually only begin to commit to such an endeavour once it was near‐​certain its product was viable. Hence Bill Gates wanting to build seven potential factories, knowing full well most of them will be a waste of his philanthropic funds.

Meanwhile, after global immunisation, those same factories would likely have to be scaled down to just produce boosters or new‐​born vaccines. The risks to the companies are huge.

Given how costly each month lost without a vaccine is proving, we need funds to accelerate these processes and overcome these difficulties.

This is a rare example of the case for more government spending. Around the world “trillions have been spent on relief, but very little comparatively has been spent on fighting the virus with testing and vaccines,” Alex Tabarrok, an economist at George Mason University, told me.

The potential to free us of this economic and social burden means most vaccine spending would be a no‐​brainer from a cost‐​benefit perspective. It’s a case of spending “billions to save trillions,” he said.

Alongside Michael Kremer, an economic Nobel Prize winner, Tabarrok’s team of economists propose significant additional public funding for developers to alleviate risks and overcome logistical hold‐​ups.

The key idea is a huge government fund to deliver an “advanced market commitment.” This would be a promise by governments to purchase millions of doses of the most effective vaccines at a fixed high price.

Companies and philanthropists are already working on a vaccine and want to do good by humanity, but a strong incentive to compete to produce the best possible vaccine quickly matters, too.

Public funds should also offer large, but “partial” reimbursement for credible companies’ repurposing or building factories well before vaccines are ready. The word “partial” is crucial, as the companies must have “skin in the game” to avoid overspending.

This combination of “push” and “pull” incentives helps socialise the big risks for the companies developing vaccines. Without this support most will be building factories that prove useless. They also face the risk that governments will expropriate their product or intellectual property after their vaccine is produced. That deters investment today.

Instead, this scheme’s rewards would incentivise players to find the most effective vaccine quickly. Taxpayers would bear higher risks to encourage the private sector to accelerate activity. Crucially, this taxpayer commitment would be a fraction of the money spent so far on Covid‐​19‐​related relief.

Admittedly, the development and manufacturing problems are not the only time‐​sensitive vaccine challenge. Trials where people get inoculated and then go off and live their lives take a long time to generate reliable results.

That’s why there’s growing push for human challenge trials — paying volunteers to be given the potential vaccine and deliberately exposing them to Covid‐​19 in controlled conditions to test the vaccine’s effectiveness. This must also be explored quickly.

As the economic and social costs of sustained social distancing escalate, we will hear a laundry list of demands for new government support or “stimulus.” Given the virus is the drag on our economy, the most effective stimulus remains that which will save lives and reduce disruption: a working vaccine.