How the Baby Formula Crisis Helps Show the Difference Between Cash and Benefits-in-Kind
Summary: I think some kind of compromise between Democrats and Republicans along such lines is something that deserves serious consideration as a response to the baby formula shortage. If we can reduce child poverty while also helping to prevent another baby formula shortage, plus give moms more individual freedom to choose the baby formula best for their kids while making it more affordable for all parents, I think all of that is something worth working together across the aisle to achieve for American families.
Depending on where you live, and when you read this, you may have noticed that baby formula is the latest thing for your local grocery store to be entirely out of. You may have also noticed a lot of blame being thrown around in the usual partisan ways from immigrants to capitalism, and although it’s important to recognize exactly why parents are having a hard time finding food for their babies, and how to immediately solve that problem in the short-term, it’s also an opportunity to look under the proverbial hood of a system that failed, in order to best prevent this problem from happening again in the long-term. And to do this, we’re going to need to look at the ways we treat baby formula and the parents who need to buy it. To do that, we’re going to need to talk about monopolies and a government assistance program called WIC.
WIC (short for Special Supplemental Nutrition Program for Women, Infants, and Children) was established back in 1972. It’s kind of like SNAP (aka food stamps) for new moms and moms-to-be. The aim of WIC is to improve the diets of low-income pregnant women so that babies are born healthier, and also to improve the diets of infants up to age five. To achieve this goal, it provides moms with the ability to obtain very specific foods for free, along with classes that teach nutrition and encourage breastfeeding, and referrals for preventive health care and other various services like family planning. States are allowed a lot of leeway in how they go about WIC, but the incomes of recipients must be at least under the poverty line and at most under 185% of the poverty line. It is a welfare program.
The way WIC works at the state level is that each state gets companies to bid for contracts to supply certain foods. This is also part of the reason why one state will allow moms to buy soy milk or sliced cheese, while another state won’t allow those options. The companies that bid the lowest and win get a four-year exclusive contract with the government to buy their products. WIC recipients are then only allowed to obtain specific foods from that specific company. This arrangement can make a lot of sense for budgetary reasons. The ability to negotiate prices down means the government can spend less than they otherwise would, which is seen as saving taxpayer money. However, in reality, it’s more complex than that.
Companies don’t just sell their product to the government at a reduced rate and call it a day. They raise the price of the product others pay so customers who aren’t the government pay more. On average, prices non-WIC recipients pay go up between 26-35%. In other words, taxpayers still end up paying more, but in a different way, and with another consequence being all the problems that come along with a lack of market competition via monopoly perpetuation.
This is where Abbott needs to be introduced into this story. Because of the above arrangement of state-by-state WIC contracts, Abbott is the monopoly provider of baby formula in two-thirds of all states. As a result, this one company provides 43% of all baby formula in the US, and around 20% of all baby formula was produced in just one of its factories until that one factory shut down. The reason it was shut down is that the hospitalizations and deaths of multiple babies were linked to that one factory. Shutting down this one factory is the single biggest immediate cause of the baby formula shortage, because of how many states relied on that one factory for baby formula. Getting the plant back up and running should end the shortage in due time, but it won’t solve the real issue, which is a systemic lack of choice leading to supply fragility.
The biggest buyer of baby formula in the United States is WIC. One of the first things states did in response to the sudden drop in the supply of Abbott-produced formulas was to allow WIC moms to temporarily choose other brands of baby formula. Some states allowed one other choice, some two, some three, and one state allowed no other choices at all. That state was Illinois. Congress then stepped in and passed a new bipartisan law (that only 9 members of the House voted against) that says in emergencies that WIC moms are allowed to temporarily have more choices.
It’s important to know that there are at least some choices available. There are six FDA-approved manufacturers, although only four together dominate 90% of the market. Some states are hurting more than others right now in terms of alternate choices, but only six states have out-of-stock rates higher than 50%. Shelves in states that didn’t have WIC deals with Abbott are doing a lot better (the average in-stock rate nationwide is 79%), and according to the FDA, the total supply of baby formula is greater than it was before the shutdown as other plants ramped up production to compensate.
So if there’s physically enough baby formula, why are shelves empty? Well, once again, part of the story is the supply chain. It doesn’t matter to a hungry baby if the baby formula he or she needs is on the other side of the country. And it doesn’t help if parents are so afraid their babies will go hungry, that they end up buying a lot more baby formula than they usually would. So like how shelves were empty of toilet paper during the pandemic, part of the story is also about hoarding.
Yet another part of the story is about tariffs and regulations and how difficult we make it for imported baby formulas to be a new choice. The US produces 98% of its own baby formula, which on the one hand is great in terms of self-sufficiency and protection from the kinds of global supply chain disruptions we’ve seen as a result of Covid. But on the other hand, it does make it much more difficult to ramp up total supply when a plant shutdown happens, and more expensive when those options are actually made available. The US imposes tariffs of up to 17.5% on imported baby formula, so that can end up meaning buying a can for $21 instead of $18. That price increase can quickly add up, especially in an already inflationary environment where everything already costs more.
That’s pretty much the story of where we are, how we got here, what we’re doing, and what we still need to do to solve this latest crisis, but now let’s imagine a counterfactual. Let’s imagine that WIC was a cash program. What if moms got cash, and they could spend it on any baby formula they wanted?
In a scenario of parental choice, there would be more choices available in each state. Instead of one company being responsible for virtually all the baby formula in a state, the shelves in each state would be full of baby formula produced by all six domestic manufacturers, and more, especially if imports were also available and more domestic competitors started up. The loss of one manufacturer would have less of an impact thanks to more competition. It’s also likely that baby formula, in general, would be less expensive, especially with companies no longer hiking prices for non-WIC recipients.
What would a cash program like this look like? It would look pretty much like the enhanced monthly child tax credit that Congress let expire. All the CTC would need to do would be to include pregnant women. If we’re comparing the enhanced CTC to WIC, we also need to mention that where WIC reaches 60% of all eligible recipients, the CTC reached 84% of them. Why is that? Well, the primary reason is that WIC comes with stigmas attached. Cash doesn’t.
Here’s a story that reflects that stigma. Four years ago, a Reddit user posted in the /r/legaladvice subreddit about how her boss saw her in the grocery store using WIC to pay for a can of baby formula and other groceries:
“He texted me afterward, to say ‘It reflects badly on me if my employee is using WIC. It makes it look like I don’t pay you enough. I hope you can understand that if I find out you are continuing to use government assistance, I will have to fire you.’ I responded back apologizing and requested that we talk about it in person (at work) the next day. During that conversation, I explained that the only government assistance I get is WIC which is a benefit of about $75 a month, and that if he was willing to raise my pay by $75 a month I would stop using the checks. He refused.”
Now obviously, there are indeed legal implications to firing someone for using government assistance programs, and we should all keep in mind that when it comes to assistance programs for the rich, it’s considered bad business to not take advantage of them, but it’s important to recognize that any non-cash program because it’s not cash, can be stigmatizing. It can lead to someone not wanting to be “that person” or draw negative attention from those who feel that recipients are leeching off of taxpayers when they see an EBT card being used. But when it comes to cash, there’s no way of knowing from where it originated. It could be someone’s salary, or it could be a birthday gift, or it could be an inheritance, or it could be interest accrued from savings, or it could be a tax refund, or it could be a government benefit.
Because cash can be anything and can originate from anywhere for any reason, people treat it differently, and that includes the recipient. One of the problems with non-cash programs like WIC is that many people who qualify for them simply don’t want to actually accept them. Making it easier to qualify for a program, making it cash, and including a larger population than just those with low incomes, results in fewer people deciding to not use something being offered. This is also why so few people decide to opt out of the home mortgage interest rate deduction, which is basically just an annual check for having a mortgage. It’s easy and it’s money and claiming it says you’re rich, not poor.
Having the parental autonomy to make your own decisions as a parent as to what’s best for your family also means more parents actually being able to choose to breastfeed. Right now, the lack of parental leave means that many parents who would prefer to stay home and take care of their babies until they’re ready to return to their jobs are instead forced back into employment soon after giving birth. More than half of newborns aren’t exclusively breastfed. This leads to many moms buying formula who would rather not buy formula, which is an entirely valid choice for a parent to make, that every parent should be free to make. No mom should have no choice but to seek paid work versus the unpaid work of being a new mom and raising the next generation.
None of this is to say that WIC is a bad program that shouldn’t exist. Thanks to WIC, besides better nutrition for moms and kids, and less food insecurity, kids raised with the assistance of WIC even have lower rates of ADHD and other mental health conditions. They also aren’t forced to repeat grades in school as often. It’s just to question if the way we go about helping families right now is the best way, especially if we already know there are better ways we’ve just tried, and that the current way leads to unintended negative consequences. We currently have a food system that is less resilient due to the fragilities introduced by a shared monopoly that a program called WIC in its current form helped create.
This is a bipartisan issue. Senator Romney has suggested a monthly child allowance payment that would be higher than the enhanced CTC and yet be revenue neutral, partially by replacing WIC. I think some kind of compromise between Democrats and Republicans along such lines is something that deserves serious consideration as a response to the baby formula shortage. If we can reduce child poverty while also helping to prevent another baby formula shortage, plus give moms more individual freedom to choose the baby formula best for their kids while making it more affordable for all parents, I think all of that is something worth working together across the aisle to achieve for American families.
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