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 [2021]).
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?
READER COMMENTS
Craig
May 23 2022 at 8:36am
The toilet paper became a craze, the testing kits made sense. What I am now seeing is seemingly random. I walked into a Walmart in Cookeville, TN last year and its stocked to the brim with all sorts of stuff, except Saltines. Rotz crackers, Cheez It, they have thowe. Just no saltines. Juat poof out of the blue. Before that it was Gatorade, plenty of OJ, soda…..there was nobody to pay a premium just one day it wasn’t there and 3 weeks later, ot was.
Of course now its baby formula, but its also razors. You can get disposables but you cant get the replacement blades for Gillette, Schick, Harrys Razors….poof out of the blue. Why? Nobody knows. Just suffer through a disposable for a week, right? Or Ritzers or whatever.
No problem getting razors from 2/2020 — 4/2022.
Its bizarre, its the random roulette wheel of shortages. I know you don’t care for the word shortages, but its not like 80% of the store isn’t there. 99.9% of the store IS there.
robc
May 23 2022 at 11:13am
For me it was Distilled Water, from about Dec 2021-Apr 2022.
Not everywhere, Walmart and King Soopers were out, but Safeway had it. But even there brand changed. Now it is back.
Also Rice Krispies. Not any other cereal, but there was a period over the winter where no one had them in stock.
Pierre Lemieux
May 23 2022 at 12:15pm
robc: I have seen what you mentioned too. To add to what I said to Craig, many reasons are possible. The manufacturer might have increased its price, which some retailers did not to want to try to pass on their customers. Especially in a context when prices are not flexible, shocks might lead some retailers to try and re-negociate their supply contracts. When prices don’t adjust, quantities do.
Gavin Roberts
May 27 2022 at 4:50pm
One thing we thought about a lot when looking at price gouging during COVID is how grocery stores think about their customers reactions to shortages versus higher prices. A grocery store manager likely focuses a lot on regular\long-term customers. “We want to be your regular grocery store. The one you think of every time you stop on the way home.” Given that many customers at any given store at a particular time fall into the “regular customer” category, the manager might be wary of increasing prices a great deal to alleviate a shortage as that might make a return customer more angry if they view it as “profiteering” on the part of the store. A missing product or rationing aren’t likely to be viewed as profiteering by customers. It’s like a cultural or social norm constraint on the price system. I haven’t looked into this in detail but think it could be an interesting avenue for future research, i.e., survey customers along these lines.
Jon Murphy
May 23 2022 at 12:49pm
On top of Pierre’s point, I believe there was also a general strike at the plant that makes Ritz and other crackers, which would contribute to a supply disruption.
Pierre Lemieux
May 23 2022 at 12:02pm
Craig: Stores often temporarily run out of stuff. Before the pandemic, grocery stores were on average out of 5%-7% of their usual products (this estimates looks high to me, but perhaps it includes different sizes of the same product). At the end of March 2020, this figure had doubled. In the summer of 2020, the figure was still 10%. (See my EconLog post “Why Shortages Are Not More Widespread,” August 17, 2020.) Some of this might remain now. If you do not want to let your customers bid up the prices of your grocery goods, for the reasons mentioned in my current post, one way to reduce your costs would seem to be less tight restocking for (or straight discontinuation of) the goods that are less profitable.
Craig
May 23 2022 at 12:42pm
Looking more closely at the picture I took of the razors I realize now I made an error. Seeing the aisle without razors I thought they were out of stock but actually the place where they are stocked have cards saying to present the card to customer service where they will be dispensed to the customer, so it turns out these items must be subject to enough shoplifting that they do that. Unfortunately my weary eyes missed that detail.
Jon Murphy
May 23 2022 at 12:50pm
Here’s a weird one: my local Wegman’s Grocery Store has been out of all of the pasta under the store brand. Other brands are fully stocked, but the Wegman’s brand is not.
Craig
May 23 2022 at 1:18pm
The store brands are awesome inflation beaters. I saw that with sodas. I just bought 2Ls of Diet Coke at Publix, buy 2 get 2 for $1.40 for a 2L bottle, the store brand in Publix is $.99, in Walmart (TN and FL) is $.88 and Food Lion (TN), also $.88. Now I don’t buy Sam’s Cola because I personally don’t like it, but I do buy the Dr. Thunder (Dr Pepper knock off), the 7up/Sprite knockoff, Orange soda and Ginger Ale because I can’t tell the difference and for a while those WERE hard to find in stores. Same with the soup, ie chicken noodle/chicken and rice/chicken and stars, Great Value v Campbells. I’ve also noticed the grocery circular ‘topline’ specials, ie the item at the very top of the circular is typically gone by Sunday, particularly if its a chicken/beef special. (In TN frustrating because the nearest grocery store is 20 miles away), in South FL, there are dozens of grocery stores within 5 miles of me.
Jon Murphy
May 23 2022 at 1:31pm
I love Wegman’s Brand items. Amazing inflation beaters. Even as expensive as things have gotten, my grocery bill hasn’t changed that much (although I have had to substitute away from beef).
I am moving to NC to start a new job and I am sad there are no Wegman’s there.
Thomas Lee Hutcheson
May 23 2022 at 2:28pm
Hold on Wegmans will come as NC gradually become “bluer.”
Craig
May 23 2022 at 7:36pm
I did Wegmans in NJ mostly on my lunch break when I’d get a sub there occasionally and I’d pick some stuff up for home later of we missed getting it. Beautiful store.
NC probably Walmart/Publix. The Publix app will have the weekly BOGO items. In general if its at Publix on BOGO ots better than Walmart, if not, Walmart and Great Value/Equate always seems to be extremely competitive. Publix also has prepared foods, subs, and for the South, the best grocery store baled breads.
JFA
May 23 2022 at 4:50pm
The product that I’ve been missing: the store brand unsweetened apple sauce in the large container. The store only has the small containers. The grocery store down the street has their store brand apple sauce in large containers. I’m not complaining, though… just noting the oddity. I like hearing everyone else’s experience.
Thomas Strenge
May 24 2022 at 3:56pm
Here in the Kansas City Metro we have repeated stock outs of Yoplait Strawberry Yogurt in the large container. That’s what my toddler loves for breakfast, not the small ones because those have actual chunks of fruit. Every other month, all stores in the metro appear to run out. Weird.
Tom West
May 31 2022 at 3:06am
I blame efficiency.
In any industry that I have some exposure to, I see incredible efficiency, with any competitor that isn’t utterly devoted to efficiency (say by diverting serious resources to robustness) either going bankrupt or being bought out by those who are.
I suspect it simply wasn’t possible to be this efficient in previous eras, which made the opportunity cost of purchasing some robustness much lower.
[Typo fixed per commenter request.–Econlib Ed.]
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