America’s infant formula shortage is very strange and very embarrassing. Nationwide, more than 40 percent of formula is out of stock, and in many states, like Texas and Tennessee, more than half of it is gone. What’s going on? The immediate cause is the shutdown of a Michigan plant. But shutdowns and recalls happen all the time, and they rarely cause a national crisis like this. Economist Scott Lincicome says the real culprit lies in America’s trade and regulatory policy. He explains how we got here and how we can get back to a rational baby formula policy in America. Part of their conversation is excerpted below.
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Derek Thompson: Let’s start with the pandemic. Scott, how did the pandemic itself prove to be the perfect storm when it comes to gunking up the supply of baby formula?
Scott Lincicome: A lot of this stuff is just the pandemic doing its thing, like it’s done with all sorts of supply chains all over the world. When you have demand collapsing and then supply trying to follow suit and then demand coming back in unexpected ways and countries shutting down and reopening and states doing different things, and then labor shortages and trucking shortages and all sorts of crazy stuff in the market, it’s inevitably going to run down to manufacturing, whether it’s abroad or here. Little-known fact is that the global supply chains and the domestic supply chains are actually suffering from a lot of the same things. We always think about the ports, but there’s a lot of domestic stuff that’s suffering as well. Baby formula in a lot of ways was just like all other parts of manufacturing—
Thompson: Ships, cars, and all these other things that we famously have shortages of last year …
Lincicome: And workers aren’t showing up. And then the next thing you know, your packaging suppliers shut down and it’s a giant mess. Right? So there’s that. And then, adding insult to injury is this recall of a major FDA-approved supplier, Abbott, in Michigan, that had a plant shut down because some infant formula was found to have harmed several babies. The connection is unclear, but that’s OK. That’s for the lawyers to figure out, but that caused the facility to shut down. And that really kind of, I think, added a lot of fuel to the fire. So you had the normal supply-chain stuff and then this recall, and that has really fueled a serious shortage in the market and leaving us now to try to scramble, to pick up the pieces, and fill these gaps as best we can.
Thompson: Right. And with the pandemic, it’s really tough because at the beginning of COVID, you had all of these parents hoarding baby formula because they were afraid the baby formula was going to run out like toilet paper, like paper towels, like everything else was running out. You went into the grocery stores and the aisles were cleared. They said, “Oh my God, this is gonna happen for our baby’s food?” They hoarded baby formula in 2020, then what happened? They had a lot of excess baby formula, so they didn’t need to buy as much in late 2020, early 2021, and suppliers, people manufacturing all baby formulas, say, you know, well, obviously there’s a pullback in demand. We don’t need to make as much. And then what happens early this year for a variety of reasons, the demand for baby formula comes back and suppliers aren’t ready for it on top of this really catastrophic shutdown of Abbott Laboratories.
Lincicome: The other thing that I think is critical is that we stopped having babies at the beginning of the pandemic, and then we suddenly started having babies again. Which adds even more uncertainty into these market gyrations. And then, like you said, having been a parent of an infant who needed baby formula, let me tell you, you do kind of freak out when you can’t find the right product. And so there also has been just some natural, psychological element hoarding of stuff. And it’s really adding insult to injury in a lot of this stuff. But it’s not merely the pandemic doing its thing in this case.
Thompson: That’s right. And we’re going to get to the policy, which is really the meat of this episode. We’re going to get to the policy in like 15 seconds, but just to point something out, I know lots of people that I’ve been talking to, texting to within my family, friends telling me that they are strategizing with their family to buy up as much baby formula as possible and ship baby formula to the parents in their family to make sure they don’t run out of formula. What does this do? It exacerbates the shortage because when parents, or when anyone in any inflationary environment, in any shortage environment, sees that there’s a possibility of the thing that you need running out, then you buy as much as possible in the short run. And when it’s something like baby formula, you buy even more of it because this isn’t just like toilet paper.
It’s not just something that’s important to have around. This is the life and death of an infant. So the psychology of shortages is definitely a major factor here, but it is not the only factor. It is not the only factor. Another factor is policy—trade policy and regulatory policy. That, to me, is the deep story of the infant formula shortage. And that’s a story that I want you to help me tell today. So why don’t we start at 30,000 feet? Give me the Scott Lincicome thesis statement on trade and regulatory policy for infant formula in the United States of America.
Lincicome: So in a normal market, when you have these types of demand and supply gyrations, the market will adjust. Prices are going to rise and supply is going to fill the gaps really, really quickly. The problem we have is that we’ve essentially created a tariff and regulatory wall around the United States that has dramatically restricted the amount of additional supply that can enter from large global producers of infant formula in Europe or New Zealand or Canada or elsewhere. You couple those regulatory barriers with stuff going on in the U.S. market related to domestic production, government policies that have actually contributed to concentration in the market and controlling prices that have further restricted the ability of the market to adjust in times of crazy shocks like this. And so thanks to good old government policy, things are a lot worse than they really needed to be.
This excerpt was lightly edited for clarity.
Host: Derek Thompson
Guest: Scott Lincicome
Producer: Devon Manze