April 11, 2007 — Pandemic Preparations

The economic damage from a flu outbreak could vary depending on the choice of responses
By Doug Campbell

A recent study finds that a severe pandemic flu outbreak could trigger one of the worst recessions in U.S. history. Estimates of state-by-state losses vary, with Maryland emerging the least scathed and Nevada the most. But the report's authors conclude that a number of factors could make the economic impact better or worse than anticipated.

Overall, the report from Trust for America's Health predicts a 5.5 percent drop in U.S. Gross Domestic Product in the event of a flu outbreak. The $683 billion, one-year hit would be the second worst since World War II, the Washington, D.C., nonprofit group said. The study was funded by the Pew Charitable Trusts as part of the U.S. Pandemic Preparedness Initiative.

Thanks to an economy built significantly on government and real estate, Maryland's losses wouldn't be quite as large, though they would be significant. The report assumed that government and real estate services would experience only small drops in demand compared with industries that require more social interaction or which are usually paid for with discretionary income. The estimated fall is $12.5 billion in annual output, or a 5.09 percent drop. Virginia was ranked No. 49 with a 5.13 percent decrease in GDP. (Government-dominant Washington, D.C., ranks lowest of all, with an estimated 4.62 percent decline in economic activity.)

Other states in the Fifth District didn't fare as well. West Virginia ranked No. 18, with a 5.69 percent loss in output, followed by South Carolina at No. 20 (5.62 percent), and North Carolina at No. 30 (5.48 percent.) Elsewhere, Nevada, heavily reliant on discretionary tourism and entertainment spending, would experience an 8.08 percent fall in GDP, according to the study's calculations.

Depending on the effectiveness of preparations, an outbreak's actual economic fallout could be much different, says Jeff Levi, executive director of Trust for America's Health. If supply chains break down, businesses could close en masse, for example. But if a pandemic hits with the virus that we're prepared for — the H5N1 avian flu — then there's a good chance that there will be adequate stockpiles of vaccines to prevent a sustained outbreak, Levi says. The federal government has already pledged $7 billion for pandemic preparedness, with most of that going to development of an effective vaccine.

"If clinical trials we have going on now continue to show promise, we might have a very large stockpile. If that's the case, we could dramatically reduce the number of people who get sick and die," Levi says. "We're talking a huge investment to make that happen."

George Mason University economist Tyler Cowen has proposed some other ways to ease the economic impact of a pandemic. In general, he agrees that vaccine stockpiling is important but questions whether that should be the centerpiece of a plan. He thinks that the vaccines in stock may not be effective and that the government couldn't distribute them quickly enough in the event of an outbreak. "If we had a magic bullet [vaccine] now, should we stockpile it? Yes. But that's not the world we live in," Cowen says. "The lesson is to invest in a lot of micro-planning for a lot of local health care institutions to deal with a crisis."

Centralized planning for a flu outbreak remains important. The federal government should serve as the ultimate authority in an avian flu crisis, Cowen says. It would take nationwide changes to institute efforts like awarding prizes for innovations in vaccines. The same goes for relaxed liability laws for vaccine makers, which would encourage more risk-taking. "A key thing to keep in mind is that the whole U.S. vaccine industry has been devastated," Cowen says. "We should think about [creating and stockpiling] vaccines but I would start with a more fundamental reform, looking at why the vaccine industry has shrunk."

Additionally, he believes in protecting existing intellectual property laws to provide continued incentive for firms to innovate. Cowen thinks that a good approach would be for the government to immediately buy the relevant license at a high value, with part of the deal obligating the drug maker to continue producing the licensed drug at high volume. Finally, prediction markets may give the best idea of probability of widespread human-to-human transmission.

Beyond health care-related efforts, Cowen has some notions about how business should be conducted during an outbreak. These ideas include preparing emergency legislation to treat mortgage defaults more leniently; drafting plans to keep ports open to receive oil shipments; and repealing price-gouging laws. As Cowen notes, price-gouging laws, especially during emergencies, can lead to shortages. Finally, the Federal Reserve would play a key part in providing "appropriate liquidity to the nation's financial markets."

"Pandemic Flu and the Potential for U.S. Economic Recession." Trust for America's Health, March 2007.

Cowen, Tyler. "Avian Flu: What Should Be Done." Mercatus Center at George Mason University Working Paper Series, November 11, 2005.