The Grand Deal

Josh Gans explains how getting vaccines developed and delivered is supposed to work, and how Australia (and NZ, though he doesn't mention us) have failed. 

I worry that NZ is set to repeat this particular kind of failure. We need to be getting orders in right now for the delta-variant shot that Pfizer's developing. Pay a pile for it up front. Order twice as much as we need, for rush delivery at the actual front of the queue. Give the doses we don't need to whichever other country looks like they most need it. It's still a bargain, and it's the right thing to do. 

Here's Josh:

Let me explain the grand deal because I don’t think it is commonly thought about and it is certainly not explicitly written down. But it goes like this. If we were to think purely ethically, we would want every person in the world to have an equal chance of being the first to be vaccinated. That is we would take scarce supply and randomly allocate doses.

That doesn’t happen for lots of reasons. First of all, it is cheaper to surge vaccine doses in particular regions — aka countries — rather than send them out willy nilly. Second, some countries can actually get doses to people quicker than others which tips the balance. But the final consideration is: someone needs to pay for all of this. We don’t have a world government etc and so we have individual governments. Every single one of those has opted for some version of the ethical distribution (with adjustments) locally so it isn’t like this isn’t understand. But it is also understood that there were some billions of dollars to be paid for all of this and not just the vaccines we ended up using but the ones that didn’t work out.

When you have this type of problem — how to allocate fixed costs — you then move from ethics to economics. The social planner facing a budget constraint is going to allocate the funding of most of those costs to the groups most willing and able to pay for them. That means that everyone is happy to participate but also that if you happen to be poorer you are not obliged to pay more than you can afford. Now we could do this the fully ethical way world-wide if we just had a global tax system to sort out the allocation of costs but, as I mentioned, we don’t. So we just make do with what we have.

The thing you do then is the same thing many businesses do. You price discriminate. In this case, if you are a drug company, you set the prices of earlier deliveries many times higher than of later ones. Then you approach the groups you think might (a) afford to pay for those early deliveries and (b) might want to. This is what Pfizer and every other vaccine developer did. (Yes, even the ones from China and Russia).

The idea was that those countries would lock in deals and then the companies would go down the list with lower prices until the market cleared. From a global perspective, the rich countries get the doses sooner which means that it doesn’t look like the ethical outcome but hidden away there is the fact that the rich countries are, in effect, paying for the main costs of this. None of the companies is doing this as a charity. Ultimately bills need to be paid. So that must be happening.

Canada was a great example of a country that went with this deal. It bought country sufficient doses from many comers and then, when so many vaccines worked out, looked like it had embarrassingly ordered 10 times more than it needed. But the folks in Ottawa could actually add and they knew what they were doing. The doses they didn’t need would be gifted to other countries. This is the most transparent kind of way of dealing with the grand deal.

Australia’s cut and run

Australia didn’t do that. They won’t even reveal what they did do citing “national security” which is odd. Did they low-ball? It looks that way. Did they fail to diversify? Absolutely. Was that a crazy thing to do? To anyone who has thought for two seconds about the costs and benefits of any pandemic expenditures, it would seem so.