Northwood economic experts weigh in on government’s response to infant formula crisis

Background:
The baby formula market has four manufacturers with 90% of the market and the federal government is into 50% of the market with the WIC program (price-controlled formula with a food stamp type distribution program). The problem is a very non-resilient (and uniform demand) supply chain had a disruption when the FDA shut down the largest plant (Abbot) in Michigan and DHS purchased a large amount of formula for illegal immigrants crossing the border. Then panic buying took place and shortages (empty store shelves) occurred. Supply went down, demand went up, and the “chain” broke.
Government’s response
There were two votes recently on legislation designed to relieve the shortage of baby formula in the U.S. With bipartisan support, federal lawmakers approved one that dealt with one root cause of the problem. The other was simply a “throw money at it” pseudo-solution that was passed yesterday over strong partisan opposition.
Headlines across the country last week failed to make a distinction between the two bills. Vanity Fair claims “House Republicans Want Baby Formula-Seeking Parents to Keep Suffering.” There were less extreme, but still disingenuous headlines, including one from the Washington Post that claimed “Nearly 200 Republicans Vote Against bill to Ease Baby Formula Shortage.” House Republicans did no such thing: They voted in favor of the bill that will help ease the baby formula shortage, and against the one that simply throws money at it. The latter (HR bill 7790) offered only a $28 billion increase in the budget of our food safety police, the FDA. But the FDA is not capable of supplying a single ounce of formula. On the contrary, its specialty is in blocking supply. Indeed, the bureaucratic processes in place at the agency are one of the major causes of the crisis. Consider the case of Abbott Laboratories, makers of Similac, which consistently accounts for 20-30% of the U.S. market for baby formula.
After closing its plant in Sturgis last February due to suspected contamination, Abbott Laboratories has been slow to reopen. This is in spite of the fact that they submitted their detailed plan for corrective action to the FDA on April 8, a point when the baby formula shortage was already apparent. The FDA could and should have made reopening that plant a top priority. Instead, it took more than a month for FDA officials to review the plan before they finally reached a consent decree with the company, which was only filed this past Monday.
But that doesn’t mean the plant has permission to reopen. Now comes the process of numerous inspections and approvals. Even then it would take an additional two weeks for the plant to start production, and another six to eight weeks for that product to hit the shelves at retail stores. It is not clear how the additional $28 million provided by Congress to the FDA could speed up this process any further. The money is meant for the agency to hire and train more people to speed up regulatory review. But by the time these new inspectors are in place, the Abbott plant will already be operational.
One argument in favor of increasing the FDA budget is so they can inspect and approve more imported baby formula. Currently, imports make up less than 2% of the U.S. market. The market power of U.S. manufacturers is made possible by trade policies that limit access to safe, nourishing baby formula widely available from abroad. Our protectionist tariffs, quotas and regulatory policies are unconscionable considering the real harm they cause to American consumers. Baby formulas that are hugely popular in Europe have been seized at the U.S. border like contraband because they did not satisfy the FDA’s particular labeling requirements. Earlier this week, the FDA announced that it would be easing some of its regulations to allow more foreign baby formula into the U.S. market on a case-by-case basis, but only after they had undergone a thorough review to make sure they are safe and nutritious. As is their pattern, they prioritize caution over speed. Even with the additional $28 million spent on new inspectors and facilities, their proposed reforms are too slow and too narrow in scope. What we need is a reciprocity agreement with our trading partners whose regulatory standards are compatible with our own. These protectionist policies need to be dismantled, not merely tinkered with.
The people who voted against HR 7790 did not seek to extend parents’ suffering. They simply do not believe it will “ease the shortage.” And they have good reason to think so.
On the other hand, the Access to Baby Formula Act (HR 7791) that passed with bipartisan support this week will have a more immediate effect. The bill gives families eligible for supplemental nutrition programs (such as WIC) more choice in the market for baby food, and this should result in more competition and supply in markets where shortages are most acute. As it is currently designed, the WIC program contracts with a particular manufacturer to provide exclusive rights to sell their formula through the WIC program. In exchange, the manufacturer grants a significant rebate off the standard wholesale price. Since WIC purchases account for more than 50% of all baby formula sales in the U.S., this gives the lion’s share of the market to the favored company. National competition may be strong, but each regional market tends to be dominated by a single brand. The new law will enable WIC customers to substitute other brands when the favored brand is unavailable. This increase in competition should result in the supply of baby formula in these markets. The long-run impact of these changes will have on future WIC contracts has yet to be determined.