How Londoners Survive Without a Food Czar
The so-called shortage of baby formulas, which appeared earlier this year in the United States, is a strange phenomenon. It is actually, or at least it started with, localized “shortages” in free baby formulas for poor mothers under the Special Supplemental Nutrition Program for Women, Infants, Children (WIC). For the purpose of this program, about half the baby formulas produced in the United States are purchased by state governments with federal money.
The production of baby formulas is a very regulated industry. In early 2022, the Food and Drug Administration forced the closure of a factory of Abbot Laboratories (producer of Similac) in Michigan. Abbot is the dominant American producer of baby formulas, partly because it is the monopolistic distributor chosen by most state governments. A germ had been discovered in the factory, but not in the products. Some 98% of all the baby formulas consumed in the United States are produced domestically, thanks to a customs tariff of 17.5%, not to mention the regulatory requirements. Industry concentration is a typical result of regulation and protectionism. (See “Why the Baby-Formula Market Is a Mess: Low Competition, High Regulation,” Wall Street Journal, May 20, 2022; and “The Baby Formula Shortage Was Made in Washington,” Wall Street Journal, May 19, 2022)).
At least until very recently, anybody could buy baby formula, including families who are eligible to get it free from WIC. Those who can’t get their WIC allocation can purchase formulas on the open market at the market price. The Wall Street Journal illustrates with a few cases (“Baby-Formula Shortage Leaves Families Desperate, Prompting WIC Program Revamp,” May 20)—for example:
Some low-income parents who rely on the federal Women, Infants and Children program said that shortages of approved baby formula have left them paying hundreds of dollars to purchase formula outside the program …
Michelle Richter, 35, receives WIC baby-formula vouchers for her 9-month-old son. … She said she hasn’t been able to find formula at WIC-approved retailers. …
As a result, Ms. Richter said, she has had to shop online for formula with her own money. Over the past month, Ms. Richter said, she ordered three cans of Enfamil formula for about $150 total from Amazon.com Inc.
One can empathize with this mother, even without knowing her specific circumstances. But we have seen worse tragedies in human history than buying baby formula online for one’s own baby with one’s own money. Poor mothers can find baby formulas or smartphones or TV sets on the open market if they are among the highest bidders, that is, if they are willing to pay the market price (by foregoing other things, of course). A free market is a continuous and invisible auction. Impersonal markets are more efficient than politicians and bureaucrats in allocating resources. Ms. Richter could buy on the market what the government was providing at a zero price but was unavailable.
There is no mystery in these phenomena although understanding them does require some elementary economic knowledge, even if mainly practical, knowledge of how things work in a world where nearly unlimited human wants exceed what scarce resources can produce.
In his book More, Philip Coggan (a former columnist at The Economist) reminds us of the Russian official who, after the breakup of the Soviet Union, asked British economist Paul Seabright:
Who is in charge of the supply of bread to the population of London?
Isn’t it striking that no “food czar” (as Peter Navarro was Donald Trump’s “equipment czar” at the height of the pandemic), no government apparatchik, is required to provide the 22,000 tons of food that residents of London consume every day in a great variety of diets? This must be as complicated as finding PPE (personal protective equipment) or baby formulas, and a food shortage in London (or Los Angeles or name your city) would be as much of a catastrophe.
Like other dictators, the one in Venezuela, Nicolas Maduro, often calls in the army to solve shortages, which unsurprisingly never works. What is needed is economic freedom and valid price signals.
Joe Biden is not Nicolas Maduro, nor was Donald Trump. But facing the baby formula “shortage,” Biden did what Trump did when confronted to the “shortage” of PPE: he invoked the Korean-war Defense Production Act (DPA) and its allocation powers, including ordering the air force’s civilian aircraft to fly in baby formulas from Europe. Were Biden to control prices as Trump did under the DPA, baby formulas would disappear from everywhere as PPE did.
At the time of writing, baby formula is available online at Amazon and Walmart.
The problem seems to have become more acute in the past few days, but there might be some propaganda involved: politicians have an incentive to make people believe that, without them, babes would have no milk. One reason for mounting formula problems could be the very invocation of the DPA and the possibility of price controls, forewarning that shortages are coming—real shortages: nothing on even the virtual shelves. With this prospect, consumers are more motivated to engage in panic buying and hoarding. Econometric research by Rik Chakraborti and Gavin Roberts found that this is exactly what happened during Covid: the residents of the 34 states with “price gouging” laws on the books, having had the experience of shortages in past emergencies, engaged in hoarding, worsening the shortages (“Effects of Preexisting and Surprise Price-Gouging Regulation During the COVID-19 Pandemic,” Journal of Consumer Policy 44 ).
Another, related reason for the possible worsening of the availability of baby formulas is that their prices did not apparently increase to their new market-clearing levels, even in the free half of the market. At least, this is what a look at Amazon’s price histories suggests. Price increases would reduce quantity demanded including consumer hoarding and provide a real incentive for manufacturers to increase production, thereby eliminating any temporary shortage. The observation of unchanging prices is partly deceptive, however, as producers can, up to a point, in order to serve an unsatisfied demand, raise prices stealthily by reducing the diversity of their products or the cost of their packaging. Reckitt Benckiser Group (producer of Enfamil) seems to have done that by “focusing on sizes it says allows it to provide the most formula.” (“Gerber Owner Nestlé to Fly Extra Baby Formula to the U.S.,” Wall Street Journal, May 17, 2022.)
In our collectivist times, producers may be fearful of transparently letting consumers bid up prices. This fear is not without foundation: the Department of Health and Human Services warned that Biden would be “calling on the Federal Trade Commission and state attorneys general to crack down on price gouging.” Will this encourage producers to increase their output?