Some Economics of Flu Pandemics

Every century or so, a major flu pandemic (an epidemic with a global impact) occurs. The last one, the Great Pandemic of 1918-19, infected many hundreds of millions of people, and killed about 50-100 million men and women worldwide. The Asian flu of 1957 is estimated to have killed 2 million people, and the pandemic of 1968 killed over 1 million persons. Various false alarms have also occurred, such as the swine flu outbreak in 1976 in the US, where over 40 million persons received flu vaccinations, and 30 persons died from the vaccinations, while few died from the flu itself. Is this swine flu scare the "big one" that has come almost 100 years after the Great Pandemic? If so, what would be its economic cost?

So far, less than 1,000 persons worldwide are confirmed to have swine flu -they are mainly persons under age 16- and the death rate is a few percent of those contracting the disease. However, it is still too early to be confident that the effects of this swine flu will be mild or moderate since flu pandemics, including the Great Pandemic, often go through phases, where the first phase is rather moderate, and the next phases are much more devastating. Whatever the course of this flu outbreak, health officials are confident that before long a major pandemic will strike that could wreak devastation throughout the world.

Note that flu pandemics involve a huge " externality" because infected individuals have limited incentives to consider the likelihood of infecting others when deciding how much contact to have with other individuals. This externality justifies a significant public health involvement in trying to control the spread of flu during a pandemic.

Consider the cost of a modern flu pandemic with the impact of the Great Pandemic. Fifty million deaths in 1918-19 constituted about 2.8% of the world population at that time. Since world population has grown twofold since then, a flu pandemic at this time that killed 2.8% of all people would take about 150 million lives. This is a staggering number. It can be converted into an equally staggering monetary value by using findings on what people are willing to pay to avoid fatal health and other risks- what economists call the statistical value of life. It is estimated that this statistical value of life for a typical young adult in the United States 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 $1000 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 percent 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 effects of such a pandemic on world GDP, the economic effects that are usually calculated.

A study published in the science magazine Lancet in December 2006 by Murray, et al estimates that a modern pandemic of equal virulence to the Spanish flu that caused the Great Pandemic would kill not 150 million persons, but about 60 million people. They also claim that these deaths would be very much concentrated in poorer countries. Using Murray, et al's calculations to adjust my estimate of what people of the world would be willing to pay to avoid such a pandemic would reduce 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 led to much greater movement of persons 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 flu pandemic. Public health officials can more quickly isolate and identify the genetic composition of different 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. 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 speedup recovery. The US and the European Union apparently have large enough stocks of antivirals to treat about 16% of their populations-the US supply covers about 50 million persons- while Japan has even large 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 hundred probability of occurring during the next twenty years would be approximately 1/100 x $20 trillion, or about $200 billion. This cost would justify sizable increases in world spending on antiviral drug and flu vaccines.