John Nacion/NurPhoto via AP
Baby formula is a concentrated industry led primarily by two conglomerates that aren’t reliant on formula for their success.
Inflation will continue as the number one issue facing the country until it subsides, because it offends American myth. We’ve been told since time immemorial that capitalism has perfectly calibrated the economy so that anyone can get anything, anytime, however they want it. And that the wonders of globalization and other efficiencies will grind down the cost of this massive undertaking to a nib, continuously improving U.S. living standards. As long as you ignore the deprivation and poverty that makes this narrative presumably possible (and actually implausible), you can celebrate the greatest of all possible worlds.
John Kenneth Galbraith had a name for this: the affluent society, where we only need concern ourselves with equitably splitting the proceeds of our productive spirit.
Whenever this equilibrium is threatened, politics spin out of control. After the stock market crashed in 1929, leading to mass production shortages, we eventually reconceived how the state interacts with the economy. When the 1973 Arab oil embargo led to gas lines and eventually to runaway prices, it made space for the Reagan Revolution and spooked liberal economists to fear the inflation bogeyman to this day.
What led to our current predicament of rising prices, missing goods, and rationing was obvious if you knew where to look. Weeks before COVID lockdowns in the U.S., the American Economic Liberties Project’s Matt Stoller wrote the most perceptive and also the simplest prediction we’ve seen over the past several years. It boils down to this: Our system of production, logistics, and regulatory oversight was not engineered to handle any stress.
Unfortunately, policymakers continue to try to solve new problems with the old methods, and the reconfiguration of commerce needed to ensure stability and resiliency gathers moss.
Last week, we talked about baby formula shortages. This is a concentrated industry led primarily by two conglomerates that aren’t reliant on formula for their success. Abbott Labs, creator of Similac, produces medical devices and other health products, and Reckitt Benckiser, creator of Enfamil, is mostly known for making Lysol.
Outside of the new-normal supply chain issues, the main problem here involves a voluntary recall in February at Abbott’s facility in Sturgis, Michigan, after two babies died and two others were sickened by bacteria. Abbott then took a large amount of product off the market, and shut the plant. But the market structure itself created the conditions for crisis.
Stoller has posted some great details on the formula market, which I’ll summarize: First, the FDA makes it very hard for companies to break in (and appropriately so, this is more a medical product than food), but easy for them to stay in. Factory inspections are clearly lax, given the state of the Sturgis plant. An Abbott whistleblower warning of problems was ignored by regulators for months. In short, Abbott duped the FDA, who weren’t hard to dupe.
Second, as I explained last week, the Women, Infants and Children (WIC) program is responsible for about half of all formula purchases, through a complex competitive bidding process where states negotiate bulk discounts in exchange for market exclusivity.
Policymakers continue to try to solve new problems with the old methods, and the reconfiguration of commerce needed to ensure stability and resiliency gathers moss.
WIC-eligible formula appears on store shelves alongside competitors, but those rivals know that most people coming into the store won’t be able to buy their product. So a formula oligopoly often whittles down to a practical monopoly. This leads to higher prices for non-WIC families, as the monopoly provider seeks to recoup the funds reduced by the bulk discounts. Formula is incredibly high-priced in the U.S., and there’s been a crime ring around it for approximately two decades.
When the Abbott recall happened, the 34 states where Abbott had a near-monopoly were sure to suffer most. Sure enough, the six states with the most acute shortages (Iowa, Missouri, North Dakota, South Dakota, Tennessee, and Texas) are Abbott WIC states.
But here’s where things get strange. Federal officials can be clueless, but they are not complete idiots. They knew that a large recall of a critical, close to sole-source product could be catastrophic. In March, the U.S. Department of Agriculture tore down the monopoly, allowing WIC parents to be rebated for non-contract products. WIC beneficiaries could access different sizes of product too, a new wrinkle. Purchasing limits were put in place to prevent hoarding. Yet nearly three months later, the USDA is pleading with Abbott to allow non-contract purchases through the end of August, suggesting that the company at the heart of this crisis remains in control of whether the government can surge supply to get out of it.
The White House has proclaimed that “more infant formula has been produced in the last four weeks than in the four weeks preceding the recall.” The FDA says there were more sales in April than pre-recall, too. But that leaves aside the critical question of logistics. Just because there’s more formula produced and sold doesn’t mean that it’s in the right place; companies have to affirmatively boost production and shipments, despite knowing that they’ll get locked out again once Abbott’s factory gets back online. Imports are being increased, but that doesn’t seem like the primary issue. When you neglect production and think things appear like magic, the block and tackle of getting things where they need to go gets lost.
More to the point, policymakers should look at the market structure that created this trap. The WIC program does seem to save poor people a lot of money, but at the expense of the middle class ineligible for WIC, and of resiliency. If you want to help child nutrition in infants of poor families, nationalize the WIC formula sector and let the other brands battle it out for the rest of the market, with antitrust policy employed to prevent anti-competitive behavior. Or you can just give poor people money, rather than hiving off every purchase in their lives into one or another program.
The failure to plan or understand markets is even more acute with coronavirus vaccines, an incredible innovation from mostly U.S.-based firms that Americans are nonetheless on the brink of not being able to access. There was an opportunity to get long-delayed COVID aid passed through Congress with the $40 billion intended for Ukraine, but President Biden ducked that fight, separating the two priorities.
As Republicans continue to block swift funding and seek a vote on immigration policy in conjunction with it, there’s a real possibility that we’re going to ration next-generation COVID vaccines. America may be the arsenal of democracy, but it’s sure not the arsenal of public health.
I am in the uncomfortable position of agreeing completely with Larry Summers that the shortsightedness of this is shocking. But again, in the context of the past couple of years, it’s not so surprising. Our actions suggest that we assume everything just grows on trees until it’s unavailable, and then politicians thunder and pout. Pandemic preparedness during a pandemic should be about the easiest possible thing to accomplish, yet here we are.
In fact, the rationing doesn’t stop with formula and vaccines; it’s our formal economic policy. Federal Reserve interest rate hikes to stop inflation are designed to “tamp down demand,” a euphemism for throwing people out of work in the hopes that millions will lack enough money to buy things. The current strategy is to ration our way through inflation, despite the fact that interest rates can’t end lockdowns in China or halt the war in Ukraine, the primary current drivers of the price squeeze.
What this comes back to is that public policy has relied—absurdly—on belief in an automatic process of capitalism, where shortages not only shouldn’t but cannot happen. When that internalized promise is not kept, people get really damn angry about it, and they should. They should know that it’s the result of decades of bad policy: monopolization, centralization of production, lax regulatory response. Until we recognize this deficiency and start re-engineering policy to ensure the general welfare, that anger will reap a whirlwind in November and beyond.
