Some Economics of Flu Pandemics

Chicago Booth Review’s “From the Archives” series features notable work by University of Chicago faculty and other business leaders. This essay has been edited; the original was published in May 2009 on the Becker-Posner Blog.

It is estimated that this statistical value of life for a typical young adult in the US is about $5 million. This means that a young person would be willing to pay about $500 for a decrease of 1/10,000 in the probability of dying at each age, and $1,000 for a decrease in the probability of dying of 1/1,000. To get a monetary value of the aggregate cost of another such great pandemic, we assume that the comparable statistical values of life in other countries equal $5 million times the ratio of the per capita incomes to the US per capita income. For example, the statistical value of life for a typical young person in a country with half the per capita income of the US would be $2.5 million. Then if we assume that the same percentage of the population would die from such a pandemic in all countries, the total cost of a pandemic equal in severity to the Great Pandemic would be over $100 trillion.

This is such a huge amount that it is hard to visualize. It dwarfs in magnitude the effect of such a pandemic on world GDP, the economic effect that is usually calculated.

A study published in the science magazine the Lancet in December 2006 by University of Washington’s Christopher J. L. Murray and his coauthors estimates that a modern pandemic of equal virulence to the Spanish flu that caused the Great Pandemic would kill not 150 million people, but about 60 million people. They also claim that these deaths would be concentrated in poorer countries. Using the study’s calculations to adjust my estimate of what people of the world would be willing to pay to avoid such a pandemic reduces the estimate, from $110 trillion to about $20 trillion.

The number of deaths from such a virulent flu might well be proportionately less than that caused by the Spanish flu because of important developments in the world health-care system. On the one hand, the explosion in world population since 1919, the growth of cities at the expense of the countryside, and the development of air travel that has led to much greater movement of people across national boundaries imply that the spread of flu among people has become a lot easier.

Offsetting these changes are others that make it a lot easier to contain the spread and severity of a flu pandemic. Public-health officials can more quickly isolate and identify the genetic composition of flu strains than they could during the Great Pandemic. Officials of different countries are also in much greater contact with each other, and can collaborate to partly quarantine the epicenters of future pandemics.

Perhaps the most important development in recent decades that would save lives during a future pandemic are vaccines and antiviral drugs, such as Tamiflu [oseltamivir]. Vaccines might be produced quickly enough to inoculate huge numbers against new flu strains, even highly virulent strains. When taken early enough, the antivirals can greatly moderate the course of an illness and speed up recovery.

The US and the European Union apparently have large enough stocks of antivirals to treat about 16 percent of their populations—the US supply covers about 50 million people—while Japan has even larger drug supplies relative to its population. The poorer countries of Africa and elsewhere are the least prepared to fight a major pandemic.

Of course, new flu strains may emerge that cannot be treated by the known antivirals. And bioterrorists may be able to produce and spread highly deadly viruses of all kinds. At the same time, however, drug companies are better prepared than even a few years ago to ramp up production of old drugs, and to develop additional drugs to fight new flu strains and other viruses that are not treatable by present drugs.

I have indicated that the vast majority of people are willing to pay a lot to gain protection against deadly flu viruses. This is why it would be desirable to greatly increase the stockpile of drugs and vaccines even if the probability of another pandemic were low, and its nature not known. For example, the expected worldwide cost in terms of willingness to pay to avoid the risk of another great pandemic that had a one-in-100 probability of occurring during the next 20 years would be approximately 1/100 x $20 trillion, or about $200 billion. This cost would justify sizable increases in world spending on antiviral drugs and flu vaccines.

Gary S. Becker was University Professor of Economics and of Sociology at the University of Chicago and at Chicago Booth until his death in 2014. He received the Nobel Prize in Economic Sciences in 1992.