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Adam Smith’s Wealth of Nations in 1776 argued that market forces lead to competitive outcomes and lower prices – if governments can resist the temptation to collude with corporations to protect monopolies from competition foreign.
The formula shortage debacle is a perfect illustration of what Smith meant.
In a desperate move to appease panicked parents struggling to find formula for their infants, the Biden administration this week invoked Korean War-era legislation, the Defense Production Act, to allow additional supplies of infant formula to be placed on the market.
What is the problem exactly? Two words sum it up: monopoly and protectionism.
Just four companies currently control 90% of the US infant formula market, reflecting the stranglehold of the pharmaceutical industry of which they are a part. Just as the national insulin market monopoly has allowed Big Pharma to play god with diabetic lives, starving babies are another market with “inelastic demand” – meaning parents will pay almost nothing. any cost to feed their young.
In a less than resounding call for greater scrutiny of this monopolistic price-raising power, Robert Califf, head of the Food and Drug Administration (FDA), said on May 16 that more “diversity in supply…will be much discussed and must be considered in light of the levers we have to get there.”
The government comes into play because the U.S. Department of Agriculture enjoys a unique supply of infant formula from the same monopolies, securing contracts for those vendors for the Women, Infants and Children (WIC) program.
WIC purchases more than half of all formula sold in the United States. This means that on the buy side of the market, the USDA operates as a “monopsonist”. Private purchasers of infant formula are caught between monopoly on the seller’s side and monopsony on the buyer’s side, a form of “bilateral monopoly”.
In technical terms, they are caught between a rock and a hard place.
The second element that Uncle Adam would recognize is the close relationship between monopoly infant formula industry lobbyists and government officials. Congress and the White House are jointly responsible for setting US tariffs and other forms of protection against foreign infant formula manufacturers, such as Canada and the European Union.
As a result, 98% of infant formula in the United States is sold by these national monopolies. U.S. trade restrictions dating back to the Trump administration, reinforced by “just-in-time” inventory management practices, have further reduced supply to keep monopoly profits as high as possible.
These tariffs were put in place by Trump at a level of 17.5% to protect US dairy interests from Canadian and other infant formula imports.
Just to make it clear that protectionism is bipartisan, Trump’s tariffs were put in place at the behest of Democrat Tom Vilsack, a former governor of Iowa who was then head of the US Export Dairy Council and is now secretary to Joe Biden’s agriculture, a position he also held in the Obama administration.
According to the trade publication American Shipper, additional non-tariff barriers, such as a 90-day waiting period for shippers to distribute infant formula in the United States, also act to limit foreign imports. FDA labeling requirements further restrict these imports, so formulas from the European Union can only enter US markets for personal use.
In short, a panoply of protective tariffs, quotas, non-tariff barriers and labeling requirements have blocked the US market for monopolists like a twitch. Adam Smith would agree that these monopolists, like ticks, are bloodsuckers, feeding on the body politic.
When supply bottlenecks are added to this formula, the situation worsens, as it has in recent months. Harvard Business School logistics expert Willy Shih observes in The Hill that just-in-time inventory management is about making money, but leaves the system extremely vulnerable to unplanned disruptions. Yet he notes that for products that have a big impact on human health, like baby food or insulin, there’s more than profit at stake. Recalling a visit to the Novo Nordisk factory in Denmark, where half of the world’s insulin is produced, Shih noted that the company sees it as its responsibility to “never run out since lives depend on insulin.” As a result, they keep a five-year supply at their own expense in inventory, just in case.
At home, the Biden administration has been forced to cover more of the cost of providing infant formula, at taxpayer expense, using Department of Defense contracts with commercial airlines to transport European formula to the United States. United after lifting most of the protectionist barriers already in place. Operation Fly Formula, as it is called, only highlights the absurdity resulting from these protectionist policies.
It is currently fashionable to deride economics and economists for not having sufficiently considered equity. In the case of infant formula, classic Smith economics clearly teaches that monopoly and protectionism, aided and abetted by government for remuneration, blatantly sacrifice consumers and taxpayers. What could be more inequitable than that?
Carlisle Ford Runge is the McKnight University Professor Emeritus of Applied Economics and Law at the University of Minnesota.