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Bird Flu Insurance

The U.S. Department of Agriculture has been stockpiling millions of doses of a chicken vaccine, aimed at preventing an American bird flu (H5N1) pandemic.

From The Wall Street Journal:

With human vaccines for bird flu still in the development and testing phase, scientists say the best way to prevent a human pandemic is to stop H5N1 while it is still mostly a problem in birds.

"It would be irresponsible of us not to have vaccines ready," says Ron DeHaven, administrator of the Agriculture Department's Animal and Plant Health Inspection Service.

Big Bird, however, is not so keen on the idea.  Poultry industry representatives from the National Chicken Council, which represents firms including Tyson Foods, Pilgrim's Pride, and Perdue Farms, balk (bok?) at the idea of a mass vaccination plan that could cost them billions of dollars in lost export sales.

The U.S. exports about 15% of its chicken meat annually, with $2.2 billion in shipments last year alone. The industry says importing countries would be likely to close their borders to chickens from states where poultry had been vaccinated. That's because the basic screening tests many importing countries use for bird flu can't tell for sure whether chickens have been treated with a vaccine or infected with the disease itself.

So let's think about this from a relative cost perspective.  Using figures quoted in the aforelinked article, as well as a Congressional Budget Office report cited in Friday's Journal, the major costs associated with a mass pro-active vaccination of domestic chickens breaks down as follows:

• Cost of vaccine: $500 million
• Cost of labor: $500 million
• Lost exports: Up to $2.2 billion/year

To handle the ongoing cost of reduced exports, let's plug in a year-one equivalent cost to represent all future lost sales (as a multiple of total current annual exports).  They would surely not drop all the way to zero, but assuming they drop by 90%, then slowly normalize over the following few years, let's attribute 250% of current annual exports as the equivalent year-one hit (e.g. that might manifest as Yr 1: 90%, Yr 2: 70%, Yr 3: 60%, Yr 4: 30%, not accounting for time value or industry growth, both of which would render the estimate overly harsh). 

In other words, 2.5x current annual exports seems like a adequate assumption to fully realize the cost.

Under these assumptions, the total equivalent year-one cost of the program (including public sector/taxpayer costs and the effect on industry) is $6.5 billion.  This doesn't take into account certain partial offsets, including the effect of the incremental vaccine sales and wages earned, as well as the sudden surplus of chickens available for domestic sale (I don't know what the price elasticity of chicken demand is, but it's probably fairly high, given the many substitute products, so some of the lost export sales should be able to be recouped via discounted domestic sales).

All the more reason why $6.5 billion seems like a high-side estimate for the total public/private cost.  Still a whopper of a number, to be sure.  But now let's consider the cost of the alternative.

The same report gauges the cost of a "mild pandemic" to be $675 billion.  The report qualifies the estimate:

"There is a substantial amount of uncertainty associated with these scenarios because there is scant empirical evidence available to inform many of the assumptions that are needed for the calculations underlying the economic effects."

If accurate, the price of the "premium" offered by the insurance policy of the poultry vaccination program is less than 1% ($6.5 billion / $675 billion).

Is there a 1% or greater chance of the program preventing the pandemic?  Beats me.  But that seems like an important question.

Further, that's the relevant threshold assuming we take a risk-neutral stance toward the prospect of this catastrophic outcome.  Clearly, this is a matter on which to be risk-averse, lowering the necessary odds that the program would prevent the pandemic, in order for it to make economic sense.

Worse still is the possibility of a "severe pandemic", the economic toll of which would be far higher and which would cause an estimated 2 million American deaths.  Under this scenario, not only is the cost much higher, but the risk aversion should be steeper still, as this is clearly an unacceptable outcome to which to maintain exposure, unless the odds of it occurring are vanishingly small.

In short, we seem to have pretty good data on the expected costs of the vaccination program: $6.5 billion, give or take.  Courtesy of the CBO, we have (admittedly rough) estimates on what the economic and human costs of a pandemic might be: $675 billion (or much more, if the pandemic is severe) and as many as 2 million lives.

The missing piece is a reliable forecast of the likelihood of a mild or severe pandemic taking place, and of the ability of this vaccination program to make the difference between its occurring or not.  Based on the above assumptions, the probability of even a mild pandemic being averted (via a means that scientists claim is the best way to prevent one) can be well under 1% and the program still makes sense.

An expected pushback to this argument is that "there are other, more productive ways to spend the money."  And there are undoubtedly other research programs, preventative steps, and response preparedness initiatives that can be invested in.  But that doesn't negate the attractiveness of this insurance policy, as money remains fungible.  If you're going to take up riding motorcycles, it doesn't mean that life and health insurance are sucker bets, just because a good helmet provides more preventative bang for the buck.

Bear in mind none of this addresses how the poultry industry ought to be made whole, assuming the program is implemented.  Surely that can be worked out, assuming the expected net impact of the initiative is as overwhelmingly positive as it appears to be.

I'm no fan of obstructing free enterprise or of placing undue constraints on international trade.  But given what's at stake, the good people at the National Chicken Council, in determining the aggressiveness of their resistance to this program, would do well to recall the perilous lessons of cost-benefit analysis once learned by Ford Motor Company.

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Bird Flu Insurance

The U.S. Department of Agriculture has been stockpiling millions of doses of a chicken vaccine, aimed at preventing an American bird flu (H5N1) pandemic.

From The Wall Street Journal:

With human vaccines for bird flu still in the development and testing phase, scientists say the best way to prevent a human pandemic is to stop H5N1 while it is still mostly a problem in birds.

"It would be irresponsible of us not to have vaccines ready," says Ron DeHaven, administrator of the Agriculture Department's Animal and Plant Health Inspection Service.

Big Bird, however, is not so keen on the idea.  Poultry industry representatives from the National Chicken Council, which represents firms including Tyson Foods, Pilgrim's Pride, and Perdue Farms, balk (bok?) at the idea of a mass vaccination plan that could cost them billions of dollars in lost export sales.

The U.S. exports about 15% of its chicken meat annually, with $2.2 billion in shipments last year alone. The industry says importing countries would be likely to close their borders to chickens from states where poultry had been vaccinated. That's because the basic screening tests many importing countries use for bird flu can't tell for sure whether chickens have been treated with a vaccine or infected with the disease itself.

So let's think about this from a relative cost perspective.  Using figures quoted in the aforelinked article, as well as a Congressional Budget Office report cited in Friday's Journal, the major costs associated with a mass pro-active vaccination of domestic chickens breaks down as follows:

• Cost of vaccine: $500 million
• Cost of labor: $500 million
• Lost exports: Up to $2.2 billion/year

To handle the ongoing cost of reduced exports, let's plug in a year-one equivalent cost to represent all future lost sales (as a multiple of total current annual exports).  They would surely not drop all the way to zero, but assuming they drop by 90%, then slowly normalize over the following few years, let's attribute 250% of current annual exports as the equivalent year-one hit (e.g. that might manifest as Yr 1: 90%, Yr 2: 70%, Yr 3: 60%, Yr 4: 30%, not accounting for time value or industry growth, both of which would render the estimate overly harsh). 

In other words, 2.5x current annual exports seems like a adequate assumption to fully realize the cost.

Under these assumptions, the total equivalent year-one cost of the program (including public sector/taxpayer costs and the effect on industry) is $6.5 billion.  This doesn't take into account certain partial offsets, including the effect of the incremental vaccine sales and wages earned, as well as the sudden surplus of chickens available for domestic sale (I don't know what the price elasticity of chicken demand is, but it's probably fairly high, given the many substitute products, so some of the lost export sales should be able to be recouped via discounted domestic sales).

All the more reason why $6.5 billion seems like a high-side estimate for the total public/private cost.  Still a whopper of a number, to be sure.  But now let's consider the cost of the alternative.

The same report gauges the cost of a "mild pandemic" to be $675 billion.  The report qualifies the estimate:

"There is a substantial amount of uncertainty associated with these scenarios because there is scant empirical evidence available to inform many of the assumptions that are needed for the calculations underlying the economic effects."

If accurate, the price of the "premium" offered by the insurance policy of the poultry vaccination program is less than 1% ($6.5 billion / $675 billion).

Is there a 1% or greater chance of the program preventing the pandemic?  Beats me.  But that seems like an important question.

Further, that's the relevant threshold assuming we take a risk-neutral stance toward the prospect of this catastrophic outcome.  Clearly, this is a matter on which to be risk-averse, lowering the necessary odds that the program would prevent the pandemic, in order for it to make economic sense.

Worse still is the possibility of a "severe pandemic", the economic toll of which would be far higher and which would cause an estimated 2 million American deaths.  Under this scenario, not only is the cost much higher, but the risk aversion should be steeper still, as this is clearly an unacceptable outcome to which to maintain exposure, unless the odds of it occurring are vanishingly small.

In short, we seem to have pretty good data on the expected costs of the vaccination program: $6.5 billion, give or take.  Courtesy of the CBO, we have (admittedly rough) estimates on what the economic and human costs of a pandemic might be: $675 billion (or much more, if the pandemic is severe) and as many as 2 million lives.

The missing piece is a reliable forecast of the likelihood of a mild or severe pandemic taking place, and of the ability of this vaccination program to make the difference between its occurring or not.  Based on the above assumptions, the probability of even a mild pandemic being averted (via a means that scientists claim is the best way to prevent one) can be well under 1% and the program still makes sense.

An expected pushback to this argument is that "there are other, more productive ways to spend the money."  And there are undoubtedly other research programs, preventative steps, and response preparedness initiatives that can be invested in.  But that doesn't negate the attractiveness of this insurance policy, as money remains fungible.  If you're going to take up riding motorcycles, it doesn't mean that life and health insurance are sucker bets, just because a good helmet provides more preventative bang for the buck.

Bear in mind none of this addresses how the poultry industry ought to be made whole, assuming the program is implemented.  Surely that can be worked out, assuming the expected net impact of the initiative is as overwhelmingly positive as it appears to be.

I'm no fan of obstructing free enterprise or of placing undue constraints on international trade.  But given what's at stake, the good people at the National Chicken Council, in determining the aggressiveness of their resistance to this program, would do well to recall the perilous lessons of cost-benefit analysis once learned by Ford Motor Company.