Wednesday, April 29, 2009

Economic Dynamics of the Swine Flu


The world is watching the outbreak of a very serious swine flu. Although the disease is a medical condition, the spread of contagious diseases among humans is an eminently economic phenomenon.

Back in the 1980s, scientists were educating the population on the seriousness of the spread of the H.I.V. virus. H.I.V. is passed among humans, and scientists thought H.I.V./AIDS would spread to a large fraction of the populations in the United States and elsewhere as more people contacted greater numbers of persons carrying it. Indeed, at that early stage scientists had already observed exponential growth (that is, growth at ever-increasing rates) of H.I.V./AIDS prevalence.

However, the medical community’s 1980s consensus on the future of H.I.V./AIDS prevalence was at odds with economic theory. Professors Tomas Philipson and Richard A. Posner at the University of Chicago pointed out that people consider — and sometimes take — steps for protecting themselves against contagious disease.

In particular, prevalence — the portion of the population that is affected by a disease at a given time — is a key factor people consider: When a contagious disease is less prevalent, fewer people will take steps to protect themselves, and their lack of protection will help the disease spread. When the disease is more prevalent, more people will protect themselves, and their efforts will help thwart the disease’s spread.

In other words, while the medical community was using exponential growth to forecast the future of H.I.V. prevalence, Professors Philipson and Posner said that H.I.V./AIDS prevalence would follow a cycle: first rising, then falling. A lot was at stake: If the exponential growth forecasts were right, the public sector might reasonably consider spending trillions trying to fight the disease.

Although Professors Philipson and Posner were harshly criticized at the time, they turned out to be correct about the future of H.I.V./AIDS prevalence in the United States. According to AVERT.org, AIDS diagnoses and deaths peaked in the United States not long after Professors Philipson and Posner published their book “ Private Choices and Public Health: The AIDS Epidemic in an Economic Perspective.”



A similar prevalence pattern among humans is likely to be true for the swine flu.

The initial spread of the disease among humans occurred when precautions were low. Now that we know that the disease is spreading, private individuals and corporations around the world have already taken steps to protect themselves, and these steps will eventually help slow further spread of the disease.

Individuals and corporations try to protect themselves and their employees, but they do not have good incentives to protect others. For this reason, government assistance can be valuable, and help make the disease cycle occur with a lower and less costly peak than it would with private actions alone.

Nevertheless, government efforts have the effect of reducing private efforts. The private sector does less to prevent a disease’s spread when the disease is less prevalent, and government assistance can help reduce prevalence, so government assistance will likely cause the private sector to do less to prevent a disease’s spread. This is a special type of the “crowding out” that happens with many kinds of government spending.

The swine flu may soon present our government with some tough choices: how many tax dollars to spend and how much to interrupt civil liberties. The public and taxpayers will benefit if those choices are sensitive to the critical role played by the private sector.

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