Friday, May 1, 2020

Romer: if virus tests were like sodas; a modest extension

Paul Romer has a lovely post, If virus tests were like sodas. (HT Marginal Revolution.) Go enjoy the whole thing. It's short. A few excerpts and a suggested addition:

Imagine a world in which the only way to get a soda is to get your doctor to write a prescription. It costs $20 per can. Your insurance company pays. ...
Because they have to keep total costs from running out of control, insurance companies, health care providers, and government regulators have cobbled together a system that limits access to soda. One part of this system is an expensive regulatory process...
The only people who can get sodas are those already under the care of the health care system. They are not thirsty, but the insurance company covers the cost, so whatever.
People who are thirsty start going to the hospital just to get soda. Doctors comply with their requests for a prescription. Soda producers try to increase output, but soon run into “bottlenecks.” One vendor with an approved soda delivery system that packages a straw with a can finds that its supplier of straws can not keep up with the increased demand. This soda company explains to its unhappy customers that it has FDA approval only for a product that includes a straw from its traditional supplier. The soda company says that it is applying to the FDA for an Emergency Use Authorization (EUA) that gives it permission to bundle a can with a straw from a different vendor. As it waits, it keeps repeating its excuse: “There is a straw bottleneck!”...
In their experiments with drinking from the can, these same university researchers realize soda is just flavored sugar water and that they could produce millions of sodas per day at a price well under $1 per can. The researchers publicize their findings. Policy wonks urge them to get going: “Produce the sodas that a thirsty nation needs.” But these do not say anything about who will pay for all these additional sodas. The researchers are good sports, but they are not idiots. They produce some token batches of soda and go back to writing papers.
... wonks conclude that even an economic system as big, as powerful, and as innovative as the one we have established in the United States cannot rise to the challenge of producing millions of sodas per day. They settle for a stretch goal of offering one soda per month to each family. 
Comment: The policy wonks as usual left out the problem: big, powerful, innovated, and regulated to death.
The facts: 
Researchers affiliated with Rutgers University did discover that you do not need a swab to do an RT-PCR test for the SARS-CoV-2 virus. They even went to the trouble to get an EUA to conduct tests on saliva samples.
No one has proposed a way to pay the researchers at Rutgers, or their peers in comparable laboratories located throughout the United States, for the tests they could supply. For now, they do them because they are good sports.
The US economy produces 350 million 12 oz cans worth of soda each day.
Soda producers do not need to get regulatory approval each time they innovate around some hurdle or bottleneck.
I'm not sure soda is so lightly regulated, but we'll leave that.
If we want to use this nation’s massive capacity – much of which, by the way, is now sitting idle – to produce tens of millions of virus tests per day, there is a way to do it:
Decide what a test should do.
As long as labs provide tests that do what a test is supposed to do, let them worry about the details.
Do not appeal to charity; be prepared to pay these labs twice as much as we spend on soda.
On the last point, the usually clear Paul ran out of steam. Who should be prepared to pay the labs? The same insurance companies and government purchasers where the whole problem started?

Let me offer a suggestion. Allow people and businesses to pay the labs whatever the labs want to charge and buy the tests themselves. Require only that they report the test result to the CDC's national database.

Lots of people and businesses will happily pay cash for a test. Spitting in a cup and sending it in -- or putting it in an Abbot Labs machine for instant results -- cannot possibly hurt anyone. There is no reason such tests should not be sold, unregulated, on the free market, like pregnancy tests.

Sure, label the test with the best estimate of its false positive and negative rate, and the same long legal boilerplate disclaimers that go on a lawnmower you buy from Home Depot.

Who gets it first? Well, those willing to pay the most. This is not a capitalist inequality outrage, this is a good idea. GDP and employment are cratering. The  people and businesses who get most economic value out of testing should get them first. And, by doing so, they fund the immense expense of test development and rapid ramp up for the rest of us.  And, of course, the higher the price, the more quickly competitors will ramp up and drop prices. We'll all get tests faster if those who "can afford it"  pay through the nose to get it first.


  1. "The people and businesses who get [the] most economic value out of testing should get them first."

    Consider what has happened in the market for hand sanitizer, particularly before online retailers cracked down on what they deemed 'price gouging.' Do you conclude by revealed preference that those who spent $100 on a couple bottles of Purell derive that much more value out of sanitizer than I apparently do? How do you think a benevolent social planner would feel?

    Dworczak, Kominers, and Akbarpour explore this problem through the lens of mechanism design. There is good economics here! When agents have private information on both their valuation of an indivisible good and their marginal utility of money, the allocation delivered by competitive equilibrium is not generally optimal from a utilitarian perspective.

    The same general point holds in this context. The people who are willing to pay the most for a vaccine do not necessarily deliver the highest social benefit from vaccination - they're just rich! It would take a heroic amount of faith to believe that the competitive allocation is optimal under these conditions. And Scott's paper doesn't even touch on the massive public health externalities involved in vaccination. I don't believe any social optimum would involve 100% of Atherton being vaccinated immediately, with two-month delays for East Palo Alto. What do you think? But I am perfectly happy to be wrong! :)

    1. The Dworczak, Kominers, and Akbarpour paper is way off as an analogy. There is an equality goal in there.

      The rich buying vaccination delivers a benefit to themselves and bestows one on us, for which the rest of us pay nothing! If the rich don't get it first that enhances equality, but not stopping the spread. If the rich don't pay the higher price, an institution is necessary to ration the stuff, without providing incentives to produce more vaccine.

    2. Continued: If the rationing institution were to pay higher prices to the producers, so as to increase supply, the money would have to come from somewhere. We could tax the rich more! So, one can have the equality and the efficiency if one were to raise taxes on the rich. :-)

  2. But when many firms can't even pay their existing debt obligations, have no sense of how quickly they can bounce back, can we expect them to pay? Sure, if only the government gives them loans for it!

  3. Precisely, precisely, Professor Cochrane!

    I can buy cheerios, but I can't buy tests. Of course, warning labels have the function of terrorizing the consumer, but I have strongish nerves. :-)

  4. I published a paper with precisely this advocacy back in 1970, in some obscure Libertarian magazine when I was a student at Booth (before it sold it naming rights). Unfortunately, for me it was just an "editorial" proposal, but the "poisonous street drugs" problem in those days suggested to me we put thousands of the testing machines, like Abbot Labs seems to have, in ordinary drug and grocery stores for people to use like vending machines. Then they could test their street-heroin for concentration and poisons.

    I truly now regret failing to save a copy for myself, or at least I cannot find it in 50-yr.old paper file-piles. Of course searching an old computer, from the days before them, might be easier if ... But of course, I never was a "paper-chaser" and I didn't need it for employment advancement.

  5. What is the purpose of regulation? Answer: control. The purpose of the control is to (a) limit the excursions of a process from a specifically desired output, and (b) prevent harm to property and persons.

    If less control is exerted (regulations are relaxed or lifted) then the excursions of a process can be expected to increase, and the harm to property and persons may become more frequent and costly. The question to be asked and answered is straight-forward: "Is social welfare enhanced or diminished by relaxation or elimination of the regulation?"

    P. Romer wants, on one hand, to rein-in the likes of Google and Facebook, etc., to prevent the perceived harm that those firms are imposing on 'society', and, on the other hand, he wants to rein-in the oversight that the FDA, etc., have through regulation of foods and pharmceuticals and medical test equipment, etc. In the first instance he seeks regulation ("control") over competitive behavior through taxation of that behavior which he perceives is socially undesirable. In the second instance he seeks relaxation or elimination of regulation ("control") that others see as socially desirable to prevent harm to persons, to permit behavior that he sees as socially desirable. He disregards socially desirable behavior of Google and Facebook in the first instance, and ignores potentially socially undesirable behavior of innovators in testing equipment and methods in the second. The FDA, etc., are not able, as economists seem to be, to see only the bright side of things and ignore those things that might detract from the view of a brave new world as seen from the heights of academia.

    To be sure, the FDA has created a system of regulation that promotes economic rent seeking behavior and a rigid system of supply that is not responsive to emerging pandemic threats to society as a whole. On the other hand, purveyors of 'patent medicine' that trade on quackery are, by and large, suppressed by FDA regulations today and that "control" (suppression) is more likely social welfare increasing than the alternative approach would be if the FDA, etc., were to be done away with.

    The proper question to ask is not whether the current system is dysfunctional on one level, but rather whether the regulation as it currently stands is appropriate to the current situation. More formally, one would want to ask whether relaxation of the regulation over testing protocols and methods is optimal and, if not, whether a change in regulation, permanent or temporary, would be social welfare improving, and, if so, how might the regulation be changed to achieve an optimal solution that fits the current situation.

  6. Unfortunately soda is a terrible metaphor for guiding thought about coronavirus tests.
    The soda making business is a matter of mixing a few industrial chemicals (just check out the ingredients list), feeding them into a bottling or canning line, and being very clever about marketing, advertising, and distribution. The negative consequences of people consuming said sodas are multiple and the positive consequences are nil to negligible. The supposed benefit of soda consumption is a degree of pleasure in the individual consumer.
    Coronavirus testing is not for individual benefit to the testee except in the case where said testee is already sick and the test may provide data useful in planning therapy for said testee.
    The most important use of coronavirus testing is for identifying individuals who are infected so that it becomes possible to seek out those who may have acquired infection from those individuals and to reduce their chances of extending the infection chain. Thus coronavirus testing is a public good rather than an individual pleasure. Unfortunately, again, USA is terrible at pursuing public good (smacks of that evil socialism). As JHC suggests in his comments.
    A coronavirus test is substantially more complicated than a mixture of industrial chemicals and the results come in 2 good varieties (correct ones) and 2 bad varieties (false positives and false negatives). While much of the regulation we have has been contorted into a means of inhibiting competition it is still important to have the regulation that supports our trust in the correct, rather than false, outcomes of such tests.
    The story I heard of Germany is that when a valid test method was determined the necessary details of how to do it was forwarded to all the institutions capable of implementing those details. So the capability to do hundreds of thousands of tests could spring up much faster than your average soda company could produce a new ingredients list.
    So how to pay for a service that is of no direct benefit to the person paying? The benefit being to those do not get sick because somebody else was put in quarantine.
    Expecting individuals, or individual businesses, to pay for stuff before anything can happen in the way of a public good is a recipe for ensuring that public good is not delivered.
    Slightly socialist countries (e.g. New Zealand, South Korea, Taiwan, Germany) seem to have found a way.

    1. You are right that tests have positive externalities. That just strengthens Romer's argument, though, because it becomes even more important not to hinder people from buying them. That argument implies there should be even *less* regulation than of pop.
      The feature of wrong test results is really just saying that tests are a product of varying quality. Pop is like that too. I can buy cheap Kroger pop, or expensive exotic gourmet root beers. You are correct that regulation of quality is more important for tests than for pop, since the consumer can detect false claims of pop deliciousness easily and cheaply. The regulation coudl be limited to requiring honest disclosure of test false positive and false negative rates, though, just as breakfast cereal has to disclose vitamin levels.

  7. Good comparison. And I bet if we waited five years, we'd get all the covid-19 tests we wanted approved and cheap. The problem is that the regulators think 6 months is lightning speed; they can't wrap their minds around the word "emergency".

    In theory, the FDA is a good idea, and most years it probably does more good than harm. I wouldn't be surprised if the harm it's done in the year 2020 outweighs all the good it did in the previous 100 years. Somebody should calcuate that. One question to answer in doing that, though, is what kind of discounting to use. Should the benefit done in 1920 just be updated to 2020 dollars, or should it be increased at a rate of 3% for 100 years to account for the 1920 benefit coming long before the 2020 harm?


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