When You Subsidize Something You Get More Of It

The editors of the Washington Post have some proposals for dealing with the baby formula shortage in a more organic fashion:

First, we need to keep the imports coming. The FDA claims its heavy-handed import controls are about safety, but formula could come from Europe, Australia and Singapore, which are places that have equally good — if not better — health outcomes for kids.

Second, Congress should seriously consider whether it’s time to ditch WIC state monopolies, which would also require additional funding to WIC, at least for a few years, to ease the transition. At a minimum, Congress could make it easier for companies to compete for WIC contracts by passing the bipartisan WIC Healthy Beginnings Act.

Third, the FDA needs to improve its food safety oversight, especially for domestic baby formula.

It’s a bit difficult to ferret out the reasons that the primary contractor monopoly system that is used by the Special Supplemental Nutritional Program for Women, Infants, and Children (WIC) was adopted in the first place. Originally, it was a cost-containment system put in place through act of Congress from 1987 and fully implemented by 1994. It has been known for twenty years that the program had the perverse impact of increasing the price of baby formula, cf. here. See also here. The TL;DR version is that

• The program has always been opposed by small retailers and producers.
• It has always been supported by large producers.
• The increase in the price of baby formula is not related to the cost of its components.
• It is in fact a consequence of the WIC program itself.

or, shorter, we’re subsidizing the price of baby formula so we get higher prices.

It’s not the only well-intentioned but perverse program that has contributed to the price increases. We are subsidizing the immigration of poor people to the United States so we get more of them (yes, illegal immigrants are eligible for WIC). We are subsidizing the children of the poor so we get more of them than might otherwise be the case.

Additionally, the plan is easier to administer than a more competitive system would be so, naturally, it is favored by bureaucrats. Lawmakers tend to prefer grand, sweeping solutions to complex problems rather than constantly revisiting them and adjusting them. That explains why nothing has been done to fix the program even though its problems have been recognized for a generation. You don’t want to have starving babies, do you?

There is no perfect solution and, indeed, there is no single solution. At the very least we need to be phasing out the perverse drivers of increasing cost and reduced availability of baby formula. We should also stop thinking about solving problems once and for all and more about risk mitigation.