DRI-251 for week of 10-26-14: The Economics of Ebola

An Access Advertising EconBrief: 

The Economics of Ebola

Nearly twenty years ago, the Ebola virus was the subject of a popular nail-biting suspense movie in which a carrier brought the virus back from Africa, where it was running loose. At that time, commentators assured us that this scenario was pure Hollywood – the very lethality of the virus protected as against a pandemic by killing off victims before the disease could spread widely. Now we find ourselves playing out that movie scenario in real life, complete with virus-carriers traveling in airliners and subways and leaving panic in their wake.

Rather than the omnicompetent doctors and medical establishment of the movie, though, we are stuck with the real-life establishment, consisting of bureaucracy (the World Health Organization, the Center for Disease Control, politicians (President Obama, state governors like Andrew Cuomo of New York and Chris Christie of New Jersey) and political appointees (Dr. Thomas Frieden of CDC). Their actions have produced one fiasco after another in a sequence of events that film critics would have pooh-poohed as utterly unrealistic had it propelled the plot of another Ebola movie.

First, the establishment assured us that we would easily handle this outbreak of Ebola because we had been handling Ebola since its initial incidence in the 1970s. Oops – Ebola broke loose from its traditional confinement in central Africa and migrated to West Africa. No problem, the establishment intoned; there was no chance of the disease migrating to the United States since we knew perfectly well how to confine a virus to prevent its spread. We’ve been doing it for decades, haven’t we? Uh oh – an Ebola sufferer migrated to the U.S. by lying about his condition. Ah well, that’s still not a problem because we know how Ebola is transmitted and it cannot be caught by casual contact, only through contact with bodily fluids. Uhhh – it seems that a few health-care workers treating this migrant – who eventually died despite receiving treatment here – did indeed catch Ebola. Well, that’s still OK, because our precautions will suffice to prevent them from spreading the disease. After all, these people are health-care workers themselves, not civilians. They know all about disease and quarantines and precautions. Except that health-care workers themselves – even those returning from the epicenter of the epidemic in West Africa – are now refusing to undergo quarantine. They are hiring civil-rights lawyers. They are insisting that their superior knowledge of medicine entitles them to decide whether and how they should undergo quarantine. It seems that health-care workers have returned from West Africa, then rode airlines and subways and went bowling. Then they later showed symptoms characteristic of Ebola, such as high fever. But not to worry – we are sure that Ebola virus is only active in the body and transmissible when the victim is showing symptoms. Uhhhhhh… well, it seems that “West Africans are learning… how and when transmission [of the Ebola virus] is likely to occur; that a 10-day window exists before symptoms become observable” (“Why No Ebola Ban? Politics” The Wall Street Journal [10/29/2014] Holman Jenkins).

Oh.

Is it any surprise that the general public has become ever more cynical about the protestations of capability by government? The mounting fear now enveloping America is not so much of Ebola itself as of the government’s ineptitude.

Can economics save us? Can it even do anything to help us? The affirmative answer comes as a surprise to most people, but it shouldn’t.

Perverse Incentives Got Us In This Fix

Economist John Goodman analyzes why we have this problem in an article for Forbes Magazine (10/17/2014), carried also in the Independent Institute’s blog (“What Economics Can Teach Us About Ebola,” 10/17/14). He identifies two contrasting approaches to the ordering of “complex social systems,” engineering and economic. Engineers “see society as disorganized and inefficient. The solution? Let experts take over.” Naturally, the qualified experts are engineers. The renegade economist Thorstein Veblen called for rule by a “soviet of engineers,” which would impose optimum technical standards on an unruly populace.

“Almost everything interesting that economists study flows from the fact that people respond to incentives,” Goodman observes by way of contrast. What appears to the engineer to be chaotic and unplanned actually reflects the spontaneous, self-generating order of the marketplace. Planning by engineers inevitably has unintended consequences because it fails to incorporate the input and feedback of the price system, which generates and compiles vast amounts of information never dreamed of by the engineering plan. Thus, the marketplace “plan,” decentralized though it is, allows people to indirectly serve the needs and wants of countless others by directly serving their own needs and wants.

Goodman notes that health-care policy is run by the engineering mentality – which explains the string of policy failures that includes the recent cluster of Ebola-related mistakes. Ironically, the Ebola case is the mirror image of most cases of “government failure” because it seems to call for the classical government response of coercion that government is uncharacteristically reluctant to impose. The differential incentives facing those outside and inside of government explain this seeming contradiction.

Superficially, the incentives created by an ongoing or incipient disease epidemic run counter to those in an ordinary marketplace setting. Market transactions are ordinarily governed by the principle of mutually beneficial voluntary exchange, which benefits both parties and gives both an incentive to trade. Thus, the incentives are efficient, working in the direction of improving the welfare of all. In an epidemic, though, the incentives tend to be perverse, working toward making everybody worse off. Virus carriers have an incentive to hide their condition, because quarantine isolates them and costs them real income. Government has a duty to quarantine potential virus sufferers – that is, actual virus-sufferers and non-sufferers alike – to prevent disease spread. But where do its incentives lie? Does it earn a reward if it keeps the disease from entering the U.S.? Of course, it is true that government bureaucrats and rank-and-file employees are potential Ebola sufferers like everybody else, but it is also true that bureaucrats benefit from the sort of increase in government budgets and employment that accompany an Ebola scare and epidemic. The potential benefit is large and immediate, while the potential cost is heavily discounted because it is unlikely and in the murky future.

Virus sufferer Thomas Eric Duncan had an incentive to travel to the U.S. because he got better treatment here than in his homeland. He had an incentive to lie about his condition because it upgraded his travel status. Of course, he had a responsibility to be truthful about his health status in order to be fair to his fellow citizens but, as Goodman noted, “self-interest trumped responsibility.” Notice that, ordinarily, self-interest is an efficient incentive – only here does it benefit the self-interested at the general expense.

Duncan’s U.S. hospital had little or no incentive to invest in expensive quarantine-control measures. Consequently it didn’t. It also had little incentive to prevent the sort of mistake made in the Duncan case, since hospitals usually profit from such mistakes rather than suffering because of them.

Health-care workers returning from West Africa have an incentive to evade quarantine because – as the system is now structured – they stand to lose but not gain personally from acceding to a 21-day period of isolation. Why make themselves a public target by revealing their status? Better to collect a paycheck for their time and make everybody else bear the risk.

Of all the incentive anomalies associated with disease epidemics, politics provides the strangest. Government traditionally promotes coercion and conformity, as the late Milton Friedman noted in his great work Capitalism and Freedom. It is government that tells us what to eat or not to eat, what we can put in our own bodies, what we are allowed to do for a living; government that forces us to buckle a seat belt when we occupy the driver’s seat of our own automobile. Yet in this case, one in which government has a seemingly clear-cut case for coercing potential carriers of an epidemic disease into a temporary quarantine, the Obama administration opposes a mandatory quarantine for returning West African health-care workers who have treated Ebola patients. Why?

The stated rationale is that it would deter volunteers from traveling to Africa to treat Ebola sufferers in the first place. If that is true, this would be the first recorded instance of concern shown by this administration for supply-side effects of any coercive measure. The real reason is undoubtedly that the quarantine would reveal the depths of our ignorance about Ebola and expose the government’s uncertainty about a disease and policy upon which it has heretofore expressed complete certainty and confidence. Better to risk the spread of Ebola in the U.S. than to take the political risk of revealing the government’s true lack of confidence in its position!

A Travel Ban – Burning Down the Library of Congress Once Again

An old political joke illustrating the rough equivalence of the two major parties runs as follows: If the Democrats advocated burning down the Library of Congress, the Republicans would counter with a proposal to phase in the fire over a three-year period.

The latest version of Tweedledum and Tweedledee is the Republican response to the Obama administration’s Ebola policy. Republicans have countered with a bold proposal for a travel ban – that is, a prohibition on travel from West Africa to the United States for the duration of the Ebola epidemic. Republicans have justified their alternative by pointing to all the flaws in the administration’s proposals and to the fact that it has been wrong about everything so far.

All true enough, but that doesn’t make the Republicans right. President Obama reacted by forbidding traffic from West Africa to five major U.S. airports. Opponents responded by making the obvious point that anybody determined to get into the country would simply avoid those airports. And exactly the same response applies to their own travel ban – anybody determined to get into the country will simply ignore it. We are back to the same old mantra repeated during discussions of the immigration issue: “Seal off the border.” Except that now the would-be immigrant’s very life is at stake, not merely his or her economic well-being. Where previously the chances of enforcing the Republican demand to “close the borders” were nil, they would now be negative nil. In this particular case, the criticism that Republicans are a trivial “party of no” is well-founded.

Are Epidemics a True Case of Externalities? Or Do Free Markets Offer a Coasean Solution?

The great Nobel laureate Ronald Coase looked at the economic concept of externality under a microscope and saw things that other economists missed completely. He realized that the classic case of externalities didn’t make sense because both parties to the externality had an incentive to remedy it. That is, both parties stood to gain by a bargain in which they exchanged money or goods to offset the effects of the externality.

For example, suppose that my cattle are trampling your grass. Either you can pay me to keep my cattle away from your grass – in which case I benefit from having more money and you benefit from having more grass – or I can pay you to allow my cattle to graze. In the latter case, you benefit from having more money to compensate for the loss of grass and I benefit from having satisfied cattle; in effect, I have bought grass for my cattle from you. In either case, no action by government was necessary since we each had an incentive to act ourselves.

The typical reason why incentives a la Coase do not solve all cases of economic externality is the existence of large numbers. In the case of air pollution, for example, there are so many air breathers affected by factory pollution that their interests cannot be sufficiently condensed to allow face-to-face bargaining between pollutant and victims. In the instant case of health-care workers returning from West Africa, there are a handful of workers but millions of potential epidemic victims within easy reach of an epidemic’s spread.

Presumably, that is why we sit cooling our heels why government flounders ineffectually with the health-care quarantine of workers returning from Africa. But must sit helplessly by while government fails? Or is there a free-market solution to the quarantine problem?

A Modest Proposal

Why not allow a returning African health-care worker to establish what an economist would call a reservation input-supply price for quarantine – that is, the minimum amount of money they would accept to undergo 21-day quarantine isolation. Publish this monetary amount and allow the public to voluntarily contribute to a fund to compensate the worker for undergoing quarantine.

This would solve the quarantine problem at a stroke. It would persuade the worker to undergo quarantine by making it worth their while by their own valuation. It would be an efficient solution because the cost would be covered by those receiving the benefit, guaranteeing that payees into the fund would be getting a “piece-of-mind” benefit worth as much or more than their individual contribution. Anybody who thinks the worker’s reservation price is too high doesn’t have to contribute. And the worker’s incentive to go to Africa and treat Ebola sufferers now remains intact.

This method would allow very small contributions by relatively large numbers of contributors; say, $1 by 21, 000 people to cover a fee of $1,000 per day for the worker. Additional contributions could cover the costs of set-up and maintenance for the site. Would you pay $1 to foreclose the possibility of an Ebola epidemic in your city?

The quarantine would be monitored by the public via a web-cam website, of the type used by 24-hour sites. (For example, young girls make large sums of money by allowing the curious and lascivious to observe their private, daily lives on such sites.) The camera would follow the worker continuously and the tape would constitute a record of any violation. Violation would forfeit the fund proceeds and make the worker contractually subject to further penalties or, perhaps, legal sanctions.

What separates this proposal for voluntary quarantine from the “voluntary quarantine” proposals now imposed by the federal government and some state governments (such as Maine)? This proposal embodies the economic principles of mutually beneficial voluntary exchange; it creates a voluntary contract between the quarantined and those who benefit from quarantine in which all benefit. In contract, the so-called voluntary quarantine now operative is really a veiled threat leveled at potential Ebola carriers who have been exposed to the disease: either quarantine yourself or we will force you to submit to our quarantine. There is no pretense that the quarantined will benefit and no real pretense of an enforceable contract, since the voluntary home quarantine apparently operates on the honor system. That is, it is a sham quarantine imposed for political purposes rather than a true medical measure. The public is expected to take its operation on faith, just as it does most operations of government. It operates as part of the same wasteful, inefficient, bureaucratic health-care apparatus that has failed so miserably in its mission thus far. To sum it up, then, the benefits to the quarantined are non-existent and the benefits to the public are speculative at best and non-existent at worst, while the costs are sizable.

Taking Control

Various commentators have remarked the success of government failures that has characterized the Obama administration. Of course, the administration’s defenders have disputed this narrative, but they have done so exclusively by defining success down. For example, the Washington Post vigorously rejected the claim that the Obama Ebola policies have failed, on the ground that there has been no Ebola epidemic in the U.S. When an administration’s own stated goals and premises are repeatedly undershot and overturned, the excuse of “it could be worse” cannot be accepted as a close substitute. If there is no such thing as failure, then the concept of success is also without meaning.

For many decades, the American public has taken big government as the sine qua non of problem solving. It is long past time to take control of our own lives. Markets offer the means for this self-help. Rather than impotently watch big government flail ineffectually, we should simply ignore it and take matters into our own hands. Even if we make errors, a trial-and-error process will eventually produce success, for trial and error within a model of voluntary exchange is a recipe for success, even as it produces failure and frustration in the realm of politics.