Economists’ standard optimization framework is to start with a fixed budget and allocate money across competing alternatives. At a high-level, this is also how the global development community (specifically OECD donors) tends to operate: foreign aid commitments are made as a proportion of national income, entirely divorced from specific policy goals. PEPFAR started with the goal instead: Set it, persuade key players it can be done, and ask for the money to do it.
Bush didn’t think like an economist. He was apparently allergic to measuring foreign aid in terms of dollars spent. Instead, the White House would start with health targets and solve for a budget, not vice versa. “In the government, it’s usually — here is how much money we think we can find, figure out what you can do with it,” recalled Mark Dybul, a physician who helped design PEPFAR, and later went on to lead it. “We tried that the first time and they came back and said, ‘That’s not what we want...Tell us how much it will cost and we’ll figure out if we can pay for it or not, but don’t start with a cost.’”
Economists are trained to look for trade-offs. This is good intellectual discipline. Pursuing “Investment A” means forgoing “Investment B.” But in many real-world cases, it’s not at all obvious that the realistic alternative to big new spending proposals is similar levels of big new spending on some better program. The realistic counterfactual might be nothing at all.
In retrospect, it seems clear that economists were far too quick to accept the total foreign aid budget envelope as a fixed constraint. The size of that budget, as PEPFAR would demonstrate, was very much up for debate.
When Bush pitched $15 billion over five years in his State of the Union, he noted that $10 billion would be funded by money that had not yet been promised. And indeed, 2003 marked a clear breaking point in the history of American foreign aid. In real-dollar terms, aid spending had been essentially flat for half a century at around $20 billion a year. By the end of Bush’s presidency, between PEPFAR and massive contracts for Iraq reconstruction, that number hovered around $35 billion. And it has stayed there since. (See Figure 2)
Compared to normal development spending, $15 billion may have sounded like a lot, but exactly one sentence after announcing that number in his State of the Union address, Bush pivoted to the case for invading Iraq, a war that would eventually cost America something in the region of $3 trillion — not to mention thousands of American and hundreds of thousands of Iraqi lives. Money was not a real constraint.
A broader lesson here, perhaps, is about getting counterfactuals right. In comparative cost-effectiveness analysis, the counterfactual to AIDS treatment is the best possible alternative use of that money to save lives. In practice, the actual alternative might simply be the status quo, no PEPFAR, and a 0.1% reduction in the fiscal year 2004 federal budget. Economists are often pessimistic about the prospects of big additional spending, not out of any deep knowledge of the budgeting process, but because holding that variable fixed makes analyzing the problem more tractable. In reality, there are lots of free variables.
The part about “what if money were no object?” reminds me of Justin Sandefur’s point in his essay PEPFAR and the Costs of Cost-Benefit Analysis that (emphasis mine)