The Volokh Conspiracy

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Harvard Economist N. Gregory Mankiw Endorses Idea of Paying People to Take a Covid Vaccine

The plan was first proposed by Robert Litan of the Brookings Institution.



In a recent New York Times column, prominent Harvard economist (and former Bush Administration Council of Economic Advisers Chair) N. Gregory Mankiw endorses the idea of paying people to take a Coronavirus vaccine, when it becomes available. The proposal was first presented by Robert Litan of the Brookings Institution. I commented on Litan's idea  in this post (where I also suggested some modifications). Here is an excerpt from Mankiw's piece:

What's the best way to get the economy back on track after the Covid-19 recession? Simple: Achieve herd immunity. And what's the best way to achieve herd immunity? Again, simple: Once a vaccine is approved, pay people to take it.

That bold proposal comes from Robert Litan, an economist at the Brookings Institution. Congress should enact it as quickly as possible….

Recent research by the University of Chicago economists Austan Goolsbee and Chad Syverson has found that the government-mandated shutdowns account for just a small part of the decline in economic activity. The main reason people aren't spending is that they are afraid to leave their homes and contract the virus….

Even if stock prices remain near record highs, spending, employment and production won't fully recover until the fear of catching the virus dissipates.

That's why the solution to America's macroeconomic woes will have to come from microbiology. Nine vaccines are already in Phase 3 trials. It is most likely only a matter of time before at least one of them is approved….

Once a vaccine becomes available, however, another challenge arises: getting people to take it. In a recent NBC News/SurveyMonkey Weekly Tracking Poll, only 44 percent of Americans said they would get the vaccine. The rest said they wouldn't or weren't sure….

Those numbers are troublingly low. No vaccine will be 100 percent effective, which means that getting vaccinated won't be sufficient to protect yourself from the virus. But if enough people get vaccinated, society will develop herd immunity. With widespread, even if imperfect, vaccination, the virus won't be able to spread. No one knows for sure, but experts believe that 70 to 90 percent of the population will need to be vaccinated.

Immunology, meet economics. One of the first principles of economics — perhaps the most important — is that people respond to incentives. Applying this principle to the case at hand, Mr. Litan recommends that the government pay $1,000 to whoever gets the vaccine. With a large enough incentive, most Americans are likely to get vaccinated.

This proposal is textbook economics. (I've written some of the textbooks.). As all economics students learn, when an activity has a side effect on bystanders, that effect is called an externality. In the presence of externalities, the famous theorems of economics that justify laissez-faire do not apply. Adam Smith's vaunted invisible hand can no longer work its magic….

Vaccination confers a positive externality. When you get vaccinated, you benefit not only yourself but also your fellow citizens by helping society take a step toward herd immunity. In this case, internalizing the externality requires not a tax but a subsidy, as Mr. Litan suggests.

Perhaps because he's writing an op ed with tight word limits for a popular audience, Mankiw oversimplifies the economics of externalities here. The "invisible hand" of the private sector has in fact come up with many ways to address various types of externalities. For example, private planned communities have a range of tools for reducing externalities like crime and local pollution. Elinor Ostrom won a Nobel Prize in economics large part for demonstrating that private arrangements can overcome many more externalities than economists previously believed. That said, it is unlikely that the private sector alone can overcome an externality as large-scale as this one may turn out to be.

And Mankiw is right to point out that a subsidy is the obvious textbook economic solution to this kind of problem. He is in fact the author of one of the nation's leading economics textbooks.

Mankiw also argues that the extra debt incurred to fund this proposal would be worth it because "[d]eficit finance is appropriate in times of crisis." I would emphasize that if the idea enables us to reach herd immunity even a few month faster than would otherwise be the case, it would actually save money on net, by bolstering the economy and reducing payments for various gargantuan bailouts (to say nothing of saving lives, which will in itself increase economic activity and tax revenue).

In my earlier post on this subject, I explained why paying people to get vaccinated is preferable to the obvious alternative of a vaccination mandate, even though I do not oppose the latter as a matter of principle. Hopefully, Mankiw's endorsement will create more momentum for this valuable idea than Litan and I were able to generate earlier.