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Free Markets Beat Central Planning
By: John R, Cochrane – January 14, 2021
The Grumpy Economist
I repackaged and rethought some of my earlier thoughts on vaccine allocation and markets vs. government for National Review. Text here, without the lovely pop-up ads:
Surely, we can’t let there be a free market for COVID-19 tests and vaccines. Indeed, tests and vaccines encapsulate many of the “market failure” parables from introductory economics courses.
But the argument for free markets is not that they are perfect. The argument is that the known alternatives are much worse. And we have seen a catastrophic failure of government at all levels around the world to handle this pandemic, especially in delivering tests and vaccines.
The CDC delayed testing for about two months. While it dithered, it blocked private parties from testing. University labs, for example, were blocked from making and conducting their own tests. During those two months, someone could sell you a thermometer to detect a COVID-19 fever, but if someone tried to sell you anything more effective, the FDA would stop them. Once it finally approved paper-strip tests in November, the FDA insisted that $5 paper-strip tests require a prescription and be bundled with an app, driving the cost to $50. Rapid testing that lets people who are sick isolate, and lets businesses ensure that employees are healthy, is only just becoming widely available, held back for six months by the FDA.
Let’s imagine that the government had not prohibited free-market activities. This is not anarchy, just a lightly regulated sensible market on top of whatever the government wants to do.
Private companies would have developed tests quickly and would have worked to make them faster, better, and cheaper. Why? To make money! Lots of people, businesses, schools, and universities are willing to pay for good, fast testing. Medical companies, knowing they could make a lot of money so long as they beat the competition, would have raced to develop and sell tests. We would have had $5 or less at-home paper-strip tests by late spring. And that would have enabled much of the economy to reopen.
Why does the FDA forbid businesses from telling you what’s inside your own body? Unlike a drug, a test result cannot harm you. Sure, the test might not be perfect, but it would be a lot better than relying on thermometers. Even if you catch only half of the sick people, you can cut the virus’s reproduction rate in half and end its spread. Sure, companies and the FDA should evaluate tests and disclose their false-positive and negative rates. But why forbid companies to make and sell us tests?
Would it be perfect? No. People might ignore positive results and go out anyway. People might not take tests. But did the government do better than the market would have done? Not by a long shot. “The market is not perfect” does not mean “the government is better”!
The first two vaccines were invented in a weekend in January.
Then we waited an agonizing 11 months for the drug companies to conduct clinical trials on a small number of volunteers, and for the FDA to grant emergency-use authorizations. Yes, this is the emergency fast track. Approval normally takes years.
In a free market, as soon as the drug is safe, everybody becomes part of the clinical trial. If you want an untested drug, and understand the risks, we won’t put you and the drug company in jail for trying it. We gain experience much more quickly with what works and what doesn’t. In a free market, this pandemic would have been over by midsummer. Yes, some people might have been hurt by bad vaccines.
Others might have caught COVID-19 thanks to ineffective vaccines.
But the hundreds of thousands who died from COVID-19 would be alive, and so would the economy. Should 200,000 die and many millions lose jobs and businesses to save 100?
Operation Warp Speed, in which the government paid to produce vaccines ahead of FDA approval, was the one huge success of government policy. But why was it needed? Investors seem to have billions of dollars to finance Elon Musk’s electric cars and rockets to Mars. Why would they not spend a few billions ramping up production on a risky but diversified portfolio of vaccines? Because they and the drug companies know that they will not be able to charge a market price when the vaccine is finalized. Inevitable price controls, facing a government monopoly buyer, means no money for risky production, and makes Warp Speed necessary.
People are complaining that drug companies might make a few billion dollars. The pandemic is costing us trillions! The companies should be making billions more — and more still the sooner, faster, and better their vaccines go out.
And then, the catastrophic rollout. Senseless priority lists. Massive paperwork and restrictions on administering vaccines. Penalties for skipping the line so it’s better to throw out vaccines than use them.
In a free market, vaccines would be sold to the highest bidder. The government could buy them too, but you wouldn’t be forbidden from buying them yourself, and companies and schools would not be forbidden from buying them for their employees. Businesses would likely pay top dollar to vaccinate crucial employees who are off the job due to the pandemic. And only businesses know just which employees are crucial to the economy, and which can wait.
We must protect health-care workers, you say. Indeed we must. And hospitals would pay a lot to be first in line. The government, with a strong interest in keeping hospitals going, would pay a lot to give it to health-care workers.
We must protect the elderly, you say. Indeed we should. But this is a purely private benefit. Why should the elderly, who are not all poor, and many quite wealthy, not pay anything to get a shot that only benefits them?
To an individual, the vaccine is a way to avoid getting the disease. Staying home is another way to avoid getting the disease. The vaccine just allows you to go out. So shouldn’t it go to people who have the most urgent reasons to go out — and therefore are willing to pay more to get it?
What about people who can’t afford it? Wouldn’t that be a financial burden? Now we get down to it. This isn’t about efficiently stopping the disease. It’s about money. The first rule of economics is don’t muck with prices in order to transfer small amounts of money. But that’s what we’re doing. The government gives it to old people first, without charging them, to save the old people some money. Why not just give them money, and let them decide if they want the vaccine now or later?
Why won’t the government allow you and me to buy on top of its rationing scheme? Because we might drive the price up. It’s all about saving the government money. But it’s a trivial amount of money. The government is spending trillions of dollars — a trillion in the most recent “stimulus” bill alone. Every trillion dollars is $10,000 for every family in the U.S. The cost of vaccines is chump change on this scale.
What about the “externality?” Indeed, the government should be giving the vaccine to people most likely to spread it, in a way designed to stop the disease. Markets might not do this. Though they might.
Businesses and institutions have every interest to make sure they are a place that does not spread the disease and to buy and require vaccination. But markets do not perfectly account for such externalities — the fact that by giving you a vaccine I help all the people you might spread it to.
Yet the government isn’t even trying. The U..K gave its first dose to a lovely 91-year-old woman. Germany to a 101-year-old. However well-intentioned, this has nothing to do with stopping the disease. The government’s rationing plans, to date, do not begin to define a plan for stopping the disease. It’s just about protecting individuals — i.e., saving them the cost of buying a vaccine.
Allowing the vaccine to go to the highest bidders — and allowing people to get it at CVS or administer it themselves — would have rolled vaccines out much faster, and to people more likely to spread the disease without the vaccine, and encouraged those who can shelter and wait to do so.
We are in a race between evolution and bureaucracy. Evolution just pulled ahead. The new strain is here, growing exponentially. It’s time for a new entrant to the race: freedom.