Self-recommending, here is the transcript, audio, and video. Here is part of the summary:
Michael joined Tyler to discuss the intellectual challenge of founding organizations, applying methods from behavioral economics to design better programs, how advanced market commitments could lower pharmaceutical costs for consumers while still incentivizing R&D, the ongoing cycle of experimentation every innovator understands, the political economy of public health initiatives, the importance of designing institutions to increase technological change, the production function of new technologies, incentivizing educational achievement, The Odyssey as a tale of comparative development, why he recently transitioned to University of Chicago, what researchers can learn from venture capitalists, his current work addressing COVID-19, and more.
Here is one excerpt:
COWEN: I’ve seen estimates — they’re actually from one of the groups you founded — that a deworming pill could cost as little as 50 cents a year per person in many parts of Africa. So why isn’t deworming done much more?
KREMER: You could say the glass is half empty, you can say it’s half full, or you can say it’s almost three-quarters full. I think it’s about three-quarters full. When I first got involved in deworming, it was testing a small NGO program. We found phenomenal effects of that. The original work found health gains and education gains. Now we’ve tracked people over 20 years, and we’re seeing people have a better standard of living or earning more.
Following the early results, we presented the results of the government of Kenya to the World Bank. Kenya scaled this up nationally, in part with assistance from the World Bank, primarily just in conveying some of that information.
Indian states started doing that, and then the national government of India took this on. They’re reaching — a little bit harder to know the exact numbers — but probably 150 million people a year. Many other countries are doing this as well, so it’s actually quite widely adopted.
COWEN: But there’s still a massive residual, right?
KREMER: That is for sure.
COWEN: What’s your best explanatory theory of why the residual isn’t smaller? It would seem to be a vote winner. African countries, fiscally, are in much better shape than they used to be. They’re more democratic. Public health looks much better. The response to COVID-19 has probably been better than many people expected, say, in Senegal, possibly in Kenya. So why not do deworming more?
KREMER: The people who have worms are pretty poor people. The richer people are less likely to have worms within a given society. Richer people are probably more politically influential.
There’s also something about worms — they gradually build up in your body, and one worm is not going to do that much damage. The problem is when you’ve got lots of worms in your body, and even there, it’s going to take time.
I’ve had malaria. I don’t think I’ve had worms. I hope I haven’t. When you have malaria, you feel terrible. You go from feeling fine to feeling terrible, and then you take the medicine. You feel great afterwards. With worms, it’s much more like a chronic thing, and when you expel the worms from your body, that’s sort of gross. I don’t think, even at the individual level, do you have quite the demand that would be commensurate with the scale of the problem. That’s a behavioral economics explanation.
I think there are political issues and then there are behavioral issues. I would actually say that a huge, huge issue . . . This sounds very boring, but this falls between the Ministry of Health and the Ministry of Education, and each one of them has different priorities. The Ministry of Health is going to be worried about delivering things through clinics. They’re worried about HIV and malaria, tuberculosis, as it should be.
The Ministry of Education — they’re worried about teacher strikes. It’s very easy for something to either fall between the cracks or be the victim of turf wars. It sounds too small to be, “How can that really get in the way?” But anybody who’s spent time working in governments understands those things can very easily get in the way. In some ways, it’s surprising how much progress has been made.
Here’s one way the political economy works in favor. You mentioned democracy — I think that’s a factor. I actually find — and I don’t want to be necessarily a big fan of politicians — but in some ways, politicians hear how much this costs, and they think they can affect that many people for that small amount of money, and they’re like, “Hey, I want to get on that. Maybe this is something I can claim as an achievement.” We saw that in Kenya. We saw that in India.
COWEN: Let’s say the current Michael Kremer sets up another high school in Kenya. What is it that you would do that the current high schools in Kenya are not doing? What would you change? You’re in charge.
KREMER: Right. We’ve learned a lot in education research in recent years. One thing that we saw in Kenya, but was also seen in India and many other places, is that it’s very easy for kids to fall behind the curriculum. Curricula, in particular in developing countries, tend to be set at a fairly high level, similar to what you would see in developed countries.
However, kids are facing all sorts of disadvantages, and there are all sorts of problems in the way the system works. There’s often high teacher absence. Kids are sick. Kids don’t have the preparation at home, often. So kids can fall behind the curriculum.
Whereas we’ve had the slogan in the US, “No Child Left Behind,” in developing countries, education system is focused on kids at the top of the distribution. What’s been found is, if you can set up — and there are a whole variety of different ways to do this — either remedial education systems or some technology-aided systems that are adaptive, that go to where the kid is . . . I’ve seen huge gains from this in India, and we’re starting to see adoption of this in Africa as well, and that can have a very big impact at quite low cost.
I will be having a Conversation with him soon. So what should I ask him?
Here are previous MR posts on Michael Kremer.
Intestinal helminths—including hookworm, roundworm, whipworm, and schistosomiasis—infect more than one-quarter of the world’s population. Studies in which medical treatment is randomized at the individual level potentially doubly underestimate the benefits of treatment, missing externality benefits to the comparison group from reduced disease transmission, and therefore also underestimating benefits for the treatment group. We evaluate a Kenyan project in which school-based mass treatment with deworming drugs was randomly phased into schools, rather than to individuals, allowing estimation of overall program effects. The program reduced school absenteeism in treatment schools by one-quarter, and was far cheaper than alternative ways of boosting school participation. Deworming substantially improved health and school participation among untreated children in both treatment schools and neighboring schools, and these externalities are large enough to justify fully subsidizing treatment. Yet we do not find evidence that deworming improved academic test scores.
If you do not today have a worm, there is some chance you have Michael Kremer to thank!
With Blanchard, Kremer also has an excellent and these days somewhat neglected piece on central planning and complexity:
Under central planning, many firms relied on a single supplier for critical inputs. Transition has led to decentralized bargaining between suppliers and buyers. Under incomplete contracts or asymmetric information, bargaining may inefficiently break down, and if chains of production link many specialized producers, output will decline sharply. Mechanisms that mitigate these problems in the West, such as reputation, can only play a limited role in transition. The empirical evidence suggests that output has fallen farthest for the goods with the most complex production process, and that disorganization has been more important in the former Soviet Union than in Central Europe.
Kremer with co-authors also did excellent work on the benefits of school vouchers in Colombia. And here is Kremer’s work on teacher incentives — incentives matter! His early piece on wage inequality with Maskin, from 1996, was way ahead of its time. And don’t forget his piece on peer effects and alcohol use: many college students think the others are drinking more than in fact they are, and publicizing the lower actual level of drinking can diminish alcohol abuse problems. The Hajj has an impact on the views of its participants, and “… these results suggest that students become more empathetic with the social groups to which their roommates belong,.” link here.
And don’t forget his famous paper titled “Elephants.” Under some assumptions, the government should buy up a large stock of ivory tusks, and dump them on the market strategically, to ruin the returns of elephant speculators at just the right time. No one has ever worked through the issue before of how to stop speculation in such forbidden and undesirable commodities.
Michael Kremer has produced a truly amazing set of papers.
…finance ministers from at least three Western countries are scheduled to meet in Rome next week to announce a pilot program for delivering next-generation vaccines more rapidly to poor nations. An official for the GAVI Alliance, an international vaccines group, confirmed that the project would be the first step of a controversial plan to pay qualifying vaccine makers a higher price than they would ordinarily receive for their products in impoverished areas hard hit by infectious diseases.
The Nobel Prize goes to Abhijit Banerjee, Esther Duflo and Michael Kremer (links to home pages) for field experiments in development economics. Esther Duflo was a John Bates Clark Medal winner, a MacArthur “genius” award winner, and is now the second woman to win the economics Nobel and by far the youngest person to ever win the economics Nobel (Arrow was the previous youngest winner!). Duflo and Banerjee are married so these are also the first spouses to win the economics Nobel although not the first spouses to win Nobel prizes–there was even one member of a Nobel prize winning spouse-couple who won the Nobel prize in economics. Can you name the spouses?
Michael Kremer wrote two of my favorite papers ever. The first is Patent Buyouts which you can find in my book Entrepreneurial Economics: Bright Ideas from the Dismal Science. The idea of a patent buyout is for the government to buy a patent and rip it up, opening the idea to the public domain. How much should the government pay? To decide this they can hold an auction. Anyone can bid in the auction but the winner receives the patent only say 10% of the time–the other 90% of the time the patent is bought by the government at the market price. The value of this procedure is that 90% of the time we get all the incentive properties of the patent without any of the monopoly costs. Thus, we eliminate the innovation tradeoff. Indeed, the government can even top the market price up by say 15% in order to increase the incentive to innovate. You might think the patent buyout idea is unrealistic. But in fact, Kremer went on to pioneer an important version of the idea, the Advance Market Commitment for Vaccines which was used to guarantee a market for the pneumococcal vaccine which has now been given to some 143 million children. Bill Gates was involved with governments in supporting the project.
My second Kremer paper is Population Growth and Technological Change: One Million B.C. to 1990. An economist examining one million years of the economy! I like to say that there are two views of humanity, people are stomachs or people are brains. In the people are stomachs view, more people means more eaters, more takers, less for everyone else. In the people are brains view, more people means more brains, more ideas, more for everyone else. The people are brains view is my view and Paul Romer’s view (ideas are nonrivalrous). Kremer tests the two views. He shows that over the long run economic growth increased with population growth. People are brains.
The work for which the Nobel was given is for field experiments in development economics. Kremer began this area of research with randomized trials of educational policies in Kenya. Duflo and Banerjee then deepened and broadened the use of field experiments and in 2003 established the Poverty Action Lab which has been the nexus for field experiments in development economics carried on by hundreds of researchers around the world.
Much has been learned in field experiments about what does and also doesn’t work. In Incentives Work, Dufflo, Hanna and Ryan created a successful program to monitor and reduce teacher absenteeism in India, a problem that Michael Kremer had shown in Missing in Action was very serious with some 30% of teachers not showing up on a typical day. But when they tried to institute a similar program for nurses in Putting a Band-Aid on A Corpse the program was soon undermined by local politicians and “Eighteen months after its inception, the program had become completely ineffective.” Similarly, Banerjee, Duflo, Glennerster and Kinnan find that Microfinance is ok but no miracle (sorry fellow laureate Muhammad Yunus). A frustrating lesson has been the context dependent nature of results and the difficult of finding external validity. (Lant Pritchett in a critique of the “randomistas” argues that real development is based on macro-policy rather than micro-experiment. See also Bill Easterly on the success of the Washington Consensus.)
Duflo, Kremer and Robinson study How High Are Rates of Return to Fertilizer? Evidence from Field Experiments in Kenya. This is an especially interest piece of research because they find that rates of return are very high but that farmers don’t use much fertilizer. Why not? The reasons seem to have much more to do with behavioral biases than rationality. Some interventions help:
Our findings suggest that simple interventions that affect neither the cost of, nor the payoff to, fertilizer can substantially increase fertilizer use. In particular, offering farmers the option to buy fertilizer (at the full market price, but with free delivery) immediately after the harvest leads to an increase of at least 33 percent in the proportion of farmers using fertilizer, an effect comparable to that of a 50 percent reduction in the price of fertilizer (in contrast, there is no impact on fertilizer adoption of offering free delivery at the time fertilizer is actually needed for top dressing). This finding seems inconsistent with the idea that low adoption is due to low returns or credit constraints, and suggests there may be a role for non–fully rational behavior in explaining production decisions.
This is reminiscent of people in developed countries who don’t adjust their retirement savings rates to take advantage of employer matches. (A connection to Thaler’s work).
Duflo and Banerjee have conducted many of their field experiments in India and have looked at not just conventional questions of development economics but also at politics. In 1993, India introduced a constitutional rule that said that each state had to reserve a third of all positions as chair of village councils for women. In a series of papers, Duflo studies this natural experiment which involved randomization of villages with women chairs. In Women as Policy Makers (with Chattopadhyay) she finds that female politicians change the allocation of resources towards infrastructure of relevance to women. In Powerful Women (Beaman et al.) she finds that having once had a female village leader increases the prospects of future female leaders, i.e. exposure reduces bias.
Before Banerjee became a randomistas he was a theorist. His A Simple Model of Herd Behavior is also a favorite. The essence of the model can be explained in a simple example (from the paper). Suppose there are two restaurants A and B. The prior probability is that A is slightly more likely to be a better restaurant than B but in fact B is the better restaurant. People arrive at the restaurants in sequence and as they do they get a signal of which restaurant is better and they also see what choice the person in front of them made. Suppose the first person in line gets a signal that the better restaurant is A (contrary to fact). They choose A. The second person then gets a signal that the better restaurant is B. The second person in line also sees that the first person chose A, so they now know one signal is for A and one is for B and the prior is A so the weight of the evidence is for A—the second person also chooses restaurant A. The next person in line also gets the B signal but for the same reasons they also choose A. In fact, everyone chooses A even if 99 out of 100 signals are B. We get a herd. The sequential information structure means that the information is wasted. Thus, how information is distributed can make a huge difference to what happens. A lot of lessons here for tweeting and Facebook!
Banerjee is also the author of some original and key pieces on Indian economic history, most notably History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India (with Iyer).
Before last year’s Nobel announcement Tyler wrote:
I’ve never once gotten it right, at least not for exact timing, so my apologies to anyone I pick (sorry Bill Baumol!). Nonetheless this year I am in for Esther Duflo and Abihijit Banerjee, possibly with Michael Kremer, for randomized control trials in development economics.
As Tyler predicted he was wrong and also right. Thus, this years win is well-timed and well-deserved. Congratulations to all.
It's hard to summarize, so read the whole thing. But he is calling for a closer look at the evidence and the application of RCT [randomized control trial] standards. Here is an excerpt:
First, the fact that a technology has been scientifically proven in isolation–such as a certain fertilizer proven to raise crop yields–does not mean that it will improve people’s well-being amidst the complexities of real villages. Recent research by Esther Duflo, CGD non-resident fellow Michael Kremer, and Jonathan Robinson shows that fertilizer use is scientifically proven highly effective at raising farm yields and farmers’ profits in Kenya. But for complex reasons very few farmers wish to adopt fertilizer, even those well trained in its use and usefulness. This means that this proven technology has enormous difficulty raising farmers’ incomes in practice. The gap between agronomy and development is very hard to cross.
Second, it is not sufficient to compare treated villages to untreated villages that were chosen ex-post as comparison villages because they appear similar. Many recent research papers have shown this conclusively. A long list of studies conducted over decades showed that African and other children learned much more in schools that had textbooks than in schools that appeared otherwise similar but did not have textbooks. Paul Glewwe, Michael Kremer, and Sylvie Moulin evaluated a large intervention in some of the neediest schools in Kenya (ungated version here, published here). Schools that received textbooks were randomly chosen from an initial pool of candidates. The problem: Children did not learn more in the treated schools than in the untreated schools.
Chris Blattman comments.
The Advance Market Commitment for vaccines launched on friday. Under the commitment a group of developed nations (Canada, Italy, Norway, Russia, the United Kingdom) and Bill Gates! (The Bill & Melinda Gates Foundation) promises to pay for a pneumococcal vaccine suitable in price and effectiveness for the developing world. The idea, the brain child of economist Michael Kremer, could save millions of lives over the next several decades. Kremer deserves a Prize for his Prize – in Peace or Economics.
Owen, who played a part in the project, has more background and musings.
3. Laura Deming: “What is the most important US law that seemed really insignificant when originally passed?”
4. Clinical trials are coming along slowly (NYT).
One of the most confounding aspects of the pandemic has been Congress’s unwillingness or inability to spend to fight the virus. As I said in the LA Times:
If an invader rained missiles down on cities across the United States killing thousands of people, we would fight back. Yet despite spending trillions on unemployment insurance and relief to deal with the economic consequences of COVID-19, we have spent comparatively little fighting the virus directly.
Economists Steven Berry and Zack Cooper have run the numbers:
By our calculations, less than 8 percent of the trillions in funding that Congress has allocated so far in response to the virus has been for solutions that would shorten or mitigate the virus itself: measures like increasing the supply of PPE, expanding testing, developing treatments, standing up contact tracing, or developing a vaccine. A case in point is the most recent House Covid-19 package. It calls for $3 trillion in spending; less than 3 percent of that total is allocated toward Covid testing. As Congress considers next steps, it’s imperative to shift priorities and direct more funding and effort toward actually ending the pandemic.
Berry and Copper point to the vaccine plan that I am working on as an example of smart spending:
…a group of prominent economists, including Nobel Laureate Michael Kremer, has proposed spending a $70 billion dollar vaccine effort. The proposed expenditure is both much larger than anything proposed by the White House or Congress and also quite cheap compared to the potential benefits.
…[Similarly] Nobel Laureate Paul Romer and the Rockefeller Foundation have each sketched out $100 billion plans to increase testing. We say: Let’s fund both, allocating half the funds directly to states, who can spend to activate the vast capacity of university labs, and also fund Romer’s plan to scale up $10 instant tests for true mass testing. We could create a $50 billion dollar challenge prize that rewards the first 10 firms that develop effective treatments for Covid-19 — $5 billion each. We could fund Scott Gottlieb and Andy Slavitt’s bipartisan $50 billion contact tracing proposal. We could allocate $100 billion to fund the libertarian leaning Mercatus Center’s proposal for advanced purchase contracts to procure massive quantities of PPE.
What makes this all the more confounding is that spending to defeat the virus will more than pay for itself! As I said in my piece in the Washington Post (with ):
Economists talk about “multipliers” — an injection of spending that causes even larger increases in gross domestic product. Spending on testing, tracing and paid isolation would produce an indisputable and massive multiplier effect.
Who gains by killing the economy and letting people die? Yes, it’s possible to spin some elaborate conspiracy about someone, somewhere benefiting. But in talking with people in Congress the message I hear is not that there’s a secret cabal with a special interest in economic collapse and dying constituents. In a way, the message is worse. Multiple people have told me that things move slowly, no one is stepping up to the plate, leadership is absent. “Who is John Galt?,” they sigh. Ok, they don’t literally say that, but that sigh of resignation is what it feels like in the United States today at the highest levels of government.
I was asked by the LATimes to contribute to a panel on economic and pandemic policy. The other contributors are Joseph E. Stiglitz, Christina Romer, Alicia H. Munnell, Jason Furman, Anat R. Admati, James Doti, Simon Johnson, Ayse Imrohoroglu and Shanthi Nataraj. Here’s my contribution:
If an invader rained missiles down on cities across the United States killing thousands of people, we would fight back. Yet despite spending trillions on unemployment insurance and relief to deal with the economic consequences of COVID-19, we have spent comparatively little fighting the virus directly.
Testing capacity has slowly increased, but where is the national program to create a dozen labs each running 200,000 tests a day? It’s technologically feasible but months into the crisis, we have only just begun to spend serious money on testing.
We haven’t even fixed billing procedures so we can use the testing capacity that already exists. That’s right, labs that could be running tests are idle because of billing procedures. And while some parts of our government are slow, the Food and Drug Administration seems intent on reducing America’s ability to fight the virus by demanding business-as-usual paperwork.
Operation Warp Speed is one of the few bright spots. Potential vaccines often fail and so firms will typically not build manufacturing capacity, let alone produce doses until after a vaccine has been approved. But if we follow the usual procedure, getting shots in arms could be delayed by months or even years.
Under Operation Warp Speed, the government is paying for capacity to be built now so that the instant one of 14 vaccine candidates is proven safe and effective, production will be ready to go. That’s exactly what Nobel-prize winning economist Michael Kremer, Susan Athey, Chris Snyder and I have recommended. It might seem expensive to invest in capacity for a vaccine that is never approved, but it’s even more expensive to delay a vaccine that could end the pandemic.
Relief payments can go on forever, but money spent on testing and vaccines has the potential to more than pay for itself. It’s time to fight back.
Alex Tabarrok is a professor of economics at George Mason University and a member of the Accelerating Health Technologies With Incentive Design team.
My point about not fighting the virus directly was illustrated by many of the other panelists. Joseph Stiglitz, Christina Romer, Alicia Munnell, Jason Furman, James Doti, and Shanthi Nataraj say nothing or next to nothing about viruses. Only Anat Admati, Simon Johnson, Ayse Imrohoroglu get it.
Admati supports a Paul Romer-style testing program:
Until effective vaccines and therapies are available, which may be many months away, our best approach is to invest heavily in increasing the capacity for testing many more people and isolating those infected.
Simon Johnson argues, in addition, for antibody tests (not the usual PCR tests):
Policymakers should go all-in on ramping up antibody testing, to determine who has been exposed to COVID-19. Such tests are not yet accurate enough to determine precise immunity levels, but the work of Michael Mina, an immunologist and epidemiologist at Harvard, and others demonstrates that using such tests in the right way generates not just information about what has happened but, because of what can be inferred about underlying disease dynamics, also the information we need to understand where the disease will likely next impact various local communities.
Imrohoroglu advocates for targeted lockdown:
In addition to CDC recommendations about social distancing and public health strategies for all, I believe that as we reopen, we should keep a targeted lockdown policy in place for at-risk groups.
I’ve been working with Michael Kremer, Susan Athey, Chris Snyder and others to design incentives to speed vaccines and other health technologies. AcceleratingHT is our website and now features a detailed set of slides which explain the calculations behind our global plan. The global plan is similar in style to the US plan although on a larger scale. The key idea is that the global economy is losing $350 billion a month so speed pays. One way to speed a vaccine is to invest in capacity for 15-20 vaccine candidates before any candidates are approved, so that the moment a candidate is approved we can begin production (one can store doses in advance of approval). Most of the capacity will be wasted but that is a price worth paying. As Larry Summer says if you will die of starvation if you don’t get a pizza in two hours, order 5 pizzas. Human challenge trials are another way to speed the process.
A global plan is ideal since there are significant benefits to coordination. If each country invests in vaccines independently they will each choose the vaccine candidates most likely to succeed but that means all our eggs are a few baskets. There are over 100 vaccine candidates and they have different scientific and production risks so you want to choose the 15-20 which maximize the probability of success for the portfolio as a whole. To do that efficiently you need countries to agree that ‘I will invest in lots of capacity (more than I need) in candidate X if you invest in lots of capacity (more than you need) for candidate Y’, even knowing that the probability that X succeeds may be less than that of Y.
Vaccine nationalism is making a global plan look unlikely but if each country invests in multiple candidates around the world, as Operation Warp Speed is doing, and if each country guarantees to uphold contracts, we can reach a similar solution.
At AcceleratingHT you can also find our Incentive Design App which computes the optimal vaccine program given user chosen parameters. A big shout out to Juan Camilo Castillo, a newly graduated PhD student from Stanford, who put in a lot of heavy lifting on the app. We have been working on these models under time pressure and I will never forget the late night/early morning zoom calls where Michael Kremer would call out, “I think we need to take into account factor X. What effect would that have?” and Camilo would respond “Give me 5 minutes!” and, as we debated other factors Y and Z, Camilo would hack-away changing parameters and rewriting code till he had an answer. Hire a rising star while you can!
Bloomberg: As sections of the global economy tip-toe toward reopening, it’s becoming clearer that a full recovery from the worst slump since the 1930s will be impossible until a vaccine or treatment is found for the deadly coronavirus.
Consumers will stay on edge and companies will be held back as temperature checks and distancing rules are set to remain in workplaces, restaurants, schools, airports, sports stadiums and more.
China — the first major economy consumed by the virus and the first to emerge on the other side — has been able to revive production but not demand. The lesson for other economies: it’ll be a stop-start path back toward normal.
There’s also the risk of new flare-ups. Some 108 million people in China’s northeast region have been put back under varying degrees of lockdown amid a new cluster of infections. Doctors there are also seeing the coronavirus manifest differently, suggesting that it may be changing in unknown ways.
In South Korea – where the virus was controlled without a hard lockdown – consumer spending remains weak as infections continue to pop up.
…Harvard University professor Carmen Reinhart, who is the incoming chief economist of the World Bank, had a similar message. “We’re not going to have something akin to full normalization unless we (a) have a vaccine and (b) — and this is a big if — that vaccine is accessible to the global population at large,” she told the Harvard Gazette.
The virus is being beaten back and there are reasons for optimism but I agree with Reinhart that we won’t get full normalization without a vaccine. The world economy is on the order of $90 trillion and the IMF is projecting a 3% decline instead of an expected 3.3% increase so a loss to the world economy of around $6 trillion in 2020. Growth will probably return in 2021 and there will be some catchup but the IMF projects a cumulative loss of 9 trillion. Ending the pandemic early could generate hundreds of billions, even trillions, in output–that’s why Susan Athey, Nobel laureate Michael Kremer, Chris Snyder and myself advocate for going big on vaccines. It’s billions in costs and trillions in benefits. Warp speed ahead!
Today in the New York Times I have an op-ed with Susan Athey, Michael Kremer and Christopher Snyder. We argue for a big program to invest in vaccine capacity before any vaccine is tested and approved. We agree with Bill Gates that we want the vaccine factories to be warmed up by the time a vaccine is approved. We can’t leave it all to Gates, however. The US economy is hemorrhaging $150-$350 billion a month so the benefits of a vaccine to society are huge and we should go big.
Today, the U.S. government could go big and create a Covid-19 vaccine A.M.C., guaranteeing to spend about $70 billion on new vaccines — enough to make direct investments to support capacity installation or to repurpose capacity and to pay, say, $100 per person for the first 300 million people vaccinated.
An investment of that size can anticipate and overcome several challenges typical of vaccine development. If we want to achieve a 90 percent probability of success, we must take into account historical rates of success from publicly available data; doing that suggests that we need to actively pursue not two or three vaccine candidates, but 15 to 20.
…Usually, to avoid the risk of investing in capacity that eventually proves worthless, firms invest in large-scale capacity only after the vaccine has proved effective. But in the middle of a pandemic, there are huge social and economic advantages to having vaccines ready to use as soon as they have been approved. If we leave it entirely to the market, we will get too little vaccine too late.
An advance market commitment for Covid-19 should combine “push” and “pull” incentives. The “pull” incentive is the commitment to buy 300 million courses of vaccine at a per-person price of $100, for vaccines produced within a specified time frame. If multiple vaccines are developed, the A.M.C. fund will have authority to choose products to purchase based on efficacy, the availability of sufficient vaccine for timely vaccination or suitability for different population groups. So firms compete to serve the first 300 million people with the most attractive vaccines, and the “pull” component provides strong incentives for both speed and quality.
The “push” incentive guarantees firms partial reimbursement for production capacity built or repurposed at risk and partial reimbursement as they achieve milestones. The partial reimbursement ensures that manufacturers have “skin in the game,” while inducing them to build large-scale capacity before approval is certain.
More than usual, read the whole thing and please do help to circulate the ideas by posting and tweeting.
The op-ed draws on the work of a large team of economists and statisticians who have been working days and nights for weeks. You can find out more at AcceleratingHT where we will soon be posting additional analysis and tools.
It’s a great privilege for me to be working with this group. One day I will write the story but for now let me just say that I have never seen such a brilliant and dedicated group come together to apply their skills to a problem of such importance and urgency.
It is long, do note that many topics are covered in the other half of the class, I tried to put this beneath the fold, but today WordPress software is not cooperating…
American Economic Review Symposium, May 2010, starts with “Why do Firms in Developing Countries Have Low Productivity?” runs pp.620-633.
Nicholas Bloom, Raffaella Sadun, and John Van Reenen, “Recent Advances in the Empirics of Organizational Economics,” http://cep.lse.ac.uk/pubs/download/dp0970.pdf.
Serguey Braguinsky, Lee G. Branstetter, and Andre Regateiro, “The Incredible Shrinking Portuguese Firm,” http://papers.nber.org/papers/w17265#fromrss.
Bloom, Nicholas, Raffaella Sadun, and John Van Reenen. “Management as a Technology?” National Bureau of Economic Research working paper 22327, June 2016.
David Lagakos, “Explaining Cross-Country Productivity Differences in Retail Trade,” Journal of Political Economy, April 2016, 124, 2, 1-49.
Dani Rodrik, “A Surprising Convergence Result,” http://rodrik.typepad.com/dani_rodriks_weblog/2011/06/a-surprising-convergence-result.html, and his paper here http://www.hks.harvard.edu/fs/drodrik/Research%20papers/The%20Future%20of%20Economic%20Convergence%20rev2.pdf
Tyler Cowen, The Complacent Class, chapter four, “Why Americans Stopped Creating,” 2017.
Ufuk Akcigit and Sina T. Ates, “Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory,” NBER working paper 25755, April 2019.
Syerson, Chad “What Determines Productivity?” Journal of Economic Literature, June 2011, XLIX, 2, 326-365.
Michael Kremer, “The O-Ring Theory of Economic Development,” Quarterly Journal of Economics, August 1993, 108, 3, 551-575.
Song, Jae, David J. Price, Fatih Guvenen, and Nicholas Bloom. “Firming Up Inequality,” Federal Reserve Bank of Minneapolis working paper 750, April 2018. Do not bother with the very long appendix.
Nicholas Bloom, Raffaella Sadun, and John Van Reenen, the slides for “Americans do I.T. Better: US Multinationals and the Productivity Miracle,” http://www.people.hbs.edu/rsadun/ADITB/ADIBslides.pdf, the paper is here http://www.stanford.edu/~nbloom/ADIB.pdf but I recommend focusing on the slides.
Tyler Cowen and Ben Southwood, “Is the rate of scientific progress slowing down?”, https://docs.google.com/document/d/1cEBsj18Y4NnVx5Qdu43cKEHMaVBODTTyfHBa8GIRSec/edit
Patrick Collison and Michael Nielsen, “Science is Getting Less Bang for its Buck,” Atlantic, November 16, 2018, https://www.theatlantic.com/science/archive/2018/11/diminishing-returns-science/575665/
Decker, Ryan and John Haltiwanger, Ron S. Jarmin, and Javier Miranda. “Where Has all the Skewness Gone? The Decline in High-Growth (Young) Firms in the U.S. National Bureau of Economic Research working paper 21776, December 2015.
Furman, Jason and Peter Orszag. “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality.” October 16, 2015.
2. Competition and monopoly
Bresnahan, Timothy F. “Competition and Collusion in the American Automobile Industry: the 1955 Price War,” Journal of Industrial Economics, 1987, 35(4), 457-82.
Asker, John, “A Study of the Internal Organization of a Bidding Cartel,” American Economic Review, (June 2010), 724-762.
Tim Sablik and Nicholas Trachter, “Are Markets Becoming Less Competitive?” Economic Brief, Federal Reserve Bank of Richmond, June 2019.
Susanto Basu, “Are Price-Cost Markups Rising in the United States? A Discussion of the Evidence,” Journal of Economic Perspectives, Summer 2019, 33, 3, 3-22.
Esteban Rossi-Hansberg, Pierre-Daniel Sarte, and Nicholas Trachter, “Diverging Trends in National and Local Concentration,” NBER Working Paper 25066, Septemmber 2018.
David Autor, David Dorn, Lawrence Katz, Christina Patterson, John Van Reenen, “The Fall of the Labor Share and the Rise of Superstar Firms,” https://economics.mit.edu/files/12979, make sure you get the Oct. 2019 version, not the earlier NBER paper.
Whinston, Michael D., “Antitrust Policy Toward Horizontal Mergers,” Handbook of Industrial Organization, vol.III, chapter 36, see also chapter 35 by John Sutton.
Jan De Loecker and Jan Eeckhout, “The Rise of Market Power and its Macroeconomic Implications,” http://www.janeeckhout.com/wp-content/uploads/RMP.pdf. My comment on it is here: https://marginalrevolution.com/marginalrevolution/2017/08/rise-market-power.html and see also me on intangible capital, https://marginalrevolution.com/marginalrevolution/2017/09/intangible-investment-monopoly-profits.html.
Chang-Tai Hsieh and Esteban Rossi-Hansberg, “The Industrial Revolution in Services, September 20, 2019, on-line.
Klein, Benjamin and Leffler, Keith. “The Role of Market Forces in Assuring Contractual Performance.” Journal of Political Economy 89 (1981): 615-641.
Breit, William. “Resale Price Maintenance: What do Economists Know and When Did They Know It?” Journal of Institutional and Theoretical Economics (1991).
Bogdan Genchev, and Julie Holland Mortimer. “Empirical Evidence on Conditional Pricing Practices.” NBER working paper 22313, June 2016.
Sproul, Michael. “Antitrust and Prices.” Journal of Political Economy (August 1993): 741-754.
McCutcheon, Barbara. “Do Meetings in Smoke-Filled Rooms Facilitate Collusion?” Journal of Political Economy (April 1997): 336-350.
Crandall, Robert and Winston, Clifford, “Does Antitrust Improve Consumer Welfare?: Assessing the Evidence,” Journal of Economic Perspectives (Fall 2003), 3-26, available at http://www.brookings.org/views/articles/2003crandallwinston.htm.
FTC, Bureau of Competition, website, http://www.ftc.gov/bc/index.shtml, an optional browse, perhaps read about some current cases and also read the merger guidelines.
Parente, Stephen L. and Prescott, Edward. “Monopoly Rights: A Barrier to Riches.” American Economic Review 89, 5 (December 1999): 1216-1233.
Demsetz, Harold. “Why Regulate Utilities?” Journal of Law and Economics (April 1968): 347-359.
Armstrong, Mark and Sappington, David, “Recent Developments in the Theory of Regulation,” Handbook of Industrial Organization, chapter 27, also on-line.
Shleifer, Andrei. “State vs. Private Ownership.” Journal of Economic Perspectives (Fall 1998): 133-151.
Xavier Gabaix and David Laibson, “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets,”http://papers.ssrn.com/sol3/papers.cfm?abstract_id=728545.
Strictly optional, most of you shouldn’t read this: Ariel Pakes and dynamic computational approaches to modeling oligopoly:
III. Economics of Tech
Farrell, Joseph and Klemperer, Paul, “Coordination and Lock-In: Competition with Switching Costs and Network Effects,” Handbook of Industrial Organization, vol.III, chapter 31, also on-line.
Weyl, E. Glenn. “A Price Theory of Multi-Sided Platforms.” American Economic Review, September 2010, 100, 4, 1642-1672.
Gompers, Paul and Lerner, Josh. “The Venture Capital Revolution.” Journal of Economic Perspectives (Spring 2001): 145-168.
Paul Graham, essays, http://www.paulgraham.com/articles.html, to browse as you find useful or not.
Acemoglu, Daron and Autor, David, “Skills, Tasks, and Technologies: Implications for Employment and Earnings,” http://econ-www.mit.edu/files/5607
Robert J. Gordon and Ian Dew-Becker, “Unresolved Issues in the Rise of American Inequality,” http://www.people.fas.harvard.edu/~idew/papers/BPEA_final_ineq.pdf
Browse through the first issue of Nakamoto.com on blockchain governance, read (or not) as you find useful.
IV. Organization and capital structure
Ronald Coase and Oliver Williamson on the firm, if you haven’t already read them, but limited doses should suffice.
Gibbons, Robert, “Four Formal(izable) Theories of the Firm,” on-line at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=596864.
Van den Steen, Eric, “Interpersonal Authority in a Theory of the Firm,” American Economic Review, 2010, 100:1, 466-490.
Lazear, Edward P. “Leadership: A Personnel Economics Approach,” NBER Working Paper 15918, 2010.
Oyer, Paul and Schaefer, Scott, “Personnel Economics: Hiring and Incentives,” NBER Working Paper 15977, 2010.
Tyler Cowen chapter on CEO pay in big Business, to be distributed.
Ben-David, Itzhak, and John R. Graham and Campbell R. Harvey, “Managerial Miscalibration,” NBER working paper 16215, July 2010.
Glenn Ellison, “Bounded rationality in Industrial Organization,” http://cemmap.ifs.org.uk/papers/vol2_chap5.pdf
Miller, Merton, and commentators. “The Modigliani-Miller Propositions After Thirty Years,” and comments, Journal of Economic Perspectives (Fall 1988): 99-158.
Myers, Stewart. “Capital Structure.” Journal of Economic Perspectives (Spring 2001): 81-102.
Hansemann, Henry. “The Role of Non-Profit Enterprise.” Yale Law Journal (1980): 835-901.
Kotchen, Matthew J. and Moon, Jon Jungbien, “Corporate Social Responsibility for Irresponsibility,” NBER working paper 17254, July 2011.
Strictly optional but recommended for the serious: Ponder reading some books on competitive strategy, for MBA students. Here is one list of recommendations: http://www.linkedin.com/answers/product-management/positioning/PRM_PST/20259-135826
Furman, Jason. ”Business Investment in the United States: Facts, Explanations, Puzzles, and Policy.” Remarks delivered at the Progressive Policy Institute, September 30, 2015, on-line at https://m.whitehouse.gov/sites/default/files/page/files/20150930_business_investment_in_the_united_states.pdf.
Scharfstein, David S. and Stein, Jeremy C. “Herd Behavior and Investment.” American Economic Review 80 (June 1990): 465-479.
Stein, Jeremy C. “Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior.” Quarterly Journal of Economics 104 (November 1989): 655-670.
V. Sectors: finance, health care, education, international trade, others
Gorton, Gary B. “Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007,” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882, published on-line in 2009.
Erel, Isil, Nadault, Taylor D., and Stulz, Rene M., “Why Did U.S. Banks Invest in Highly-Rated Securitization Tranches?” NBER Working Paper 17269, August 2011.
Healy, Kieran. “The Persistence of the Old Regime.” Crooked Timber blog, August 6, 2014.
More to be added here, depending on your interests.
In the bad old days, health care in poor countries was just terrible. It wasn’t only the poverty, lack of hospitals and pharmaceuticals, and unsanitary conditions. In addition, doctors gave very bad advice and they also didn’t work very hard, as outlined in this paper. Citizens suffered accordingly.
Those conditions have improved somewhat, but actual health outcomes have improved a lot. You still can’t trust the local medical advice in Tanzania, but guess what? You have much better vaccines, greater access to antibiotics, more NGOs running health clinics, and better health care information, sometimes through the internet. If your kid has diarrhea, let the kid drink water, even unclean water! As for antibiotics (NYT):
Two doses a year of an antibiotic can sharply cut death rates among infants in poor countries, perhaps by as much as 25 percent among the very young, researchers reported on Wednesday.
In other words, the quality of the most important part of health care treatments bypassed the rest of the problems in poor economies and grew rapidly, even in countries with only so-so economic growth. The rate of reduction in child mortality has tripled in many countries since the 1990s, and by no means are those locales major economic winners as say Singapore and South Korea were.
Therein lies one of the most important (and under-reported) global changes in the last twenty years. It is now possible to have a decent public health system in a country with poor or mediocre political and economic institutions.
In other words, public health is no longer such an O-Ring service, an O-Ring service being one where everything has to go right for the service to be of decent quality. And advances are much, much easier when the O-Ring structure no longer rules.
The O-Ring citation is to a famous Michael Kremer paper — a trip to the moon is definitely an O-Ring process, because if one step is off the whole mission probably is a failure. But tasty fish curry is not — you can get a splendid version in some pretty dumpy countries, maybe even a better version in poorer places.
Electricity, however, it seems is still an O-Ring service, as evidenced by the recent power blackouts in South Africa.
What else is likely to become less of an O-Ring good or service in the next few decades to come? And what can we do to hasten such progress? Is there any chance of quality software production making that same kind of transition? Or might some goods and services return to a greater connection with the O-Ring model?
For this post I am very much indebted to a conversation with Garett Jones.