Market challenges posed by Covid-19

Politicians and epidemiologists get most of the headlines in the battle against Covid-19 and deservedly so on the public health front.   Fear and shutdowns have plunged the economy into unimaginable depths.  Although some macroeconomists have received attention regarding advice on fiscal and monetary policy, two basic concepts from MBA-level microeconomics are probably even more critical as we plan our path toward recovery.

Concept #1: testing and contact tracing are public goods.  There will need to be testing at large scale and frequent intervals to be able to build confidence and contain future outbreaks.  Right now we have 50 states each developing their own protocols and numerous firms selling tests, many of which are of dubious effectiveness.  No private sector firm on its own would have the resources or the credibility to carry this out.  There are two ways out: (a) Congress and the President provide one of the large tech firms with a monopoly license to devise and implement a plan or (b) federal agencies such as FDA and CDC take on the task.  Yale economist Zack Cooper's WP op-ed provides further insights about what we need to do to correct this market and government failure.

Concept #2: economies of scale for vaccine manufacturing.  You may think this is putting the cart before the horse or that I am just taking vaccine discovery for granted.  Consider, however, what will happen once a viable vaccine has been discovered.  How much slack capacity does Big Pharma have?  Who is going to produce vaccines on a scale that will allow worldwide, equitable distribution?  Stanford b-school economist Susan Athey and three co-authors argue in an NYT op-ed that the federal government needs to invest $70b now to build the capacity we will eventually need.  You might say, why not let the firm that develops the vaccine create the capacity?  Problem is there are dozens of firms worldwide doing vaccine research and only a handful will achieve breakthroughs.  What CFO would ever approve a massive expansion of capacity without knowing whether it will be needed?

Most of the spending from the three pandemic spending bills passed and signed so far has focused on support payments to businesses and individuals.  There are genuine investments that need to be made as well.