 I don't know how many of you are following this story. Probably none of you, really. Because I don't know how many of you are parents to infants right now. But this is a big story in the United States right now. Over the last few months, there is a substantial, significant shortage in baby formula. And this is not a minor issue. This is a major issue. I mean, women who do not best feed rely on baby formula to feed their babies. I mean, this is how we feed babies. Baby formula is crucial. And there has been and is right now a significant shortage all over the United States in baby formula. There is, it's more so in some parts of the country than other parts of the country. But in places like Texas, it is a severe shortage. Some grocery stores, supermarkets, empty, empty. Now, this was ostensibly triggered by the closing of a Michigan facility that produced about 50% of Abbott's formula product. And but it can't just be that. Because even before the closure of this plant, there were already shortages. And of course, when you have shortages, prices go up. Prices are going up in baby formula quite faster than price inflation across other products. So what's going on? Because in a free market, even if a plant closes, you don't actually get shortages. What happens is prices go up. People ramp up production. They fill the gap as they ramp up production and they fill with more supply, prices start dropping. But here, while the plant in Michigan was closed, nobody stepped in to fill the supply problem. And the question, of course, is why? Why are there still shortages? Indeed, many retailers are rationing their baby formula. Now, some of this can be explained like everything these days. Every economic problem that we have, the Biden administration and the Democratic economist say, well, it's COVID. It's the pandemic. The pandemic caused it. Supply chain issues, eh. But is it really? The fact is that there's no shortage in baby formula in Canada. There's no shortage in baby formula in the European Union. As far as we know, there's no shortage in baby formula anywhere in the world except for the United States. If this was a supply chain issue, if this was an issue that was resulted from the pandemic, then they would have been universal. They wouldn't have been localized to particular geography, to particular countries like the United States. So again, what is going on? Now, part of it is, again, going back to COVID. During COVID, some parents stockpiled. And manufacturers saw this as increased demand. They produced more. And then the baby formula just sat on the shelf. So they interpreted that as a dream. In other words, the demand supply signals were distorted because of stockpiling. There was cause not by any economic issue, but because of fear that resulted from COVID. And yeah, I mean, that is possible that these kind of, these mothers panic. They bought a bunch of them. The manufacturers saw that there was no increased demand. They slowed down production. And there's some mismatches going on. And that might be global. But you'd expect that to pretty much quickly realign itself. One would hope. Robert, thank you for the tip. Thanks for being here. So I don't think it's just that. It can't just be the pandemic. So what is it? Well, here I have to get full credit to my now one of the economists I land up following the most these days. I've talked about him before. Scott Linsicum, who runs a, what do you call it, a sub-stack by the name of capitalista. Capitalisto, something like that. He writes about for the dispatch and he writes excellent stuff and he does excellent work. You know, he's more of a somebody who summarizes, does research summarizes the basic knowledge about a particular field and takes on issues like baby formula and digs in and to figure out what is actually going on. He's very good. Alejandro asks if he's an anarchist. I don't think he's an anarchist. I highly recommend his work. So I get a lot of info and the stuff on the baby formula, basically I've been following it through Scott on Twitter. Scott has an excellent Twitter feed. So you can go on Twitter and follow him. Definitely do that. Not John Cochran this time, although I'm a big fan of John Cochran's. Scott is a policy kind of economic policy kind of guy. He really digs into the details and into the trenches. So if it's not the pandemic, what's going on? Well, we know that when these kind of distortions, this wheat phenomena, places where suddenly supply and demand don't match up, where the market seems to fail, where markets are not working, where they don't behave like free markets, maybe it's because they're not free. So let's look at some of the ways. The baby formula market is not free. Now, I'm using this not because this is unique. I want to spend a little time on this and dig into this. Not because I think most of you particularly care about baby formula, but because I want to show you the distortive effects of government intervention all across the economy. Just imagine if this is happening with baby formula, what is going on with 1,000 other products, with 1,000 other products that are sold, that are used, that are imported, exported, regulated in the United States. So if we can take one baby formula and see how devastating regulations and tariffs and taxes and controls are, hopefully we can extrapolate that to more than just baby formula. Hopefully we can learn from this one example on how bad it is. I have interviewed Scott. I'm just going to call him Scott. Forget his last name, Scott. You can find the interview on my Ingenuism podcast. So the Ingenuism podcast I interviewed Scott on free trade. All right, so let's look at some of the things that are maybe not so free market around baby formula. For example, one of the things that you would expect to happen if you close a plant in Michigan that reduces the supply by this one manufacturer, Abbott, the largest supply of baby formula in the United States by half because the plant is shut down. What you'd expect is that people start looking around the world for surplus capacity in the production of baby formula. Let's say Europe, a very advanced baby formula market with a lot of companies that produce baby formula. And you would buy more from Europe. And you would say, please, send us more baby formula to the United States. We could really use it. Send it over here. And that's how the supply and demand get balanced out. The supply increases. The problem with that is multiple problems with that. One is the United States, we have really high tariffs on baby formula. On baby formula, we have really high tariffs, 17.5%. Now, it's a complicated system. It's 17.5% up to a certain quantity, and it can get higher, and it can get a little lower. But you can use 17.5%. So basically, you're paying 17.5% more for baby formula than they are in Europe for exactly the same thing. Because basically, American consumers are being taxed. It's not hurting the Europeans, it's hurting American consumers because of this tariff, 17.5%, which means that when production is eliminated in the US, we can just turn to Europe and bring it in. Because the price is going to be dramatically higher. 17.5% is almost 20% higher. I want to emphasize this to all of you who in the Trump era thought that tariffs were cool. We could penalize the Chinese. No, you're penalizing your own people. You're penalizing people who feed babies. Now, and to that, a lot of people said, we need to bring production home. We need to bring the production to the United States. Well, OK, baby formula production for a variety of reasons we'll get to in a minute, is mostly done in the United States. But now what happens when there's a problem with production in the United States? When one of your plants gets shut down, they were shut down by the FDA because they discovered deadly bacteria in the plant, not in the food, in the formula in the plant, then what do you do then? The whole beauty of a global supply chain, the whole beauty of having multiple sources of places where you can source material, the whole point of having a diversified sources is that whether production oversees something happens, a earthquake, a tsunami, or whatever, or whether it happens domestically, there's always access to other markets. The whole beauty of globalization, the whole beauty of free trade is you're not just going to get one place concentrating. You're going to get multiple sources. So for example, we could have gone to Europe and brought in. And indeed, we could have gone to Canada and brought in baby formula. I'll tell you why we can't go to Canada in a minute. But let's focus still on Europe. We've got the tariffs, one. But second, the FDA doesn't permit European companies to sell baby formula in the United States. Now why, you might ask, isn't baby formula sold in Europe pretty safe? Troy, wow, thank you. Really, really appreciate that. Thank you, Troy, for the 500 Australian dollars jumping in here with support. That's great. Why is it that we fear European baby food? Indeed, by many measures, European baby food, not baby food, baby formula, is safer than American baby formula. The regulations in Europe are stricter. Indeed, many parents who are into healthy baby formula try to import, try to buy baby formula in Europe and bring it in to the US even when there's no shortage. Now, they have to be careful because the customs will usually seize that baby formula and not allow it into the United States. Why? Because it hasn't met the arbitrary desires of the FDA. Europeans don't label their baby formula, and they food generally the same way as the FDA labels it in the United States. They don't provide you with the same kind of nutritional information that they're supposed to if they're going to sell in the United States. And on top of that, in order to sell baby formula in the United States, you have to register with the FDA, and you have to fill out the forms, and you have to spend all the money and the bureaucracy in order to become established as a baby formula producer and seller. So not only do we have high tariffs, but we also have major non-tariff, non-financial, non-tax restrictions on the ability of countries like Europe to sell a baby formula in the US. And then on top of that, we have restrictions in Canada. Now, here you can blame the Trump administration's trade negotiators as part of the renegotiating of NAFTA. You remember they renegotiated NAFTA because Trump was a free trader. All of you guys told me. Everybody said, no, no, no, you don't get it. Trump is really just twisting the arms. He's really just using tariffs to get more free trade. He really believes in free trade. Well, he had an opportunity. He could have pushed NAFTA to be a true free trade agreement. He could have, God forbid, just lower tariffs to zero on baby formula, on everything else. But here's an example. The NAFTA 2.0, negotiated by the Trump administration with Canada and Mexico, actually has provisions in it to explicitly discourage Canadian suppliers from producing baby formula. Why, you say, why would they do that? Well, to protect the American baby formula producers. But more importantly, to protect one of the most powerful lobbies in Washington DC. And that lobby is the milk lobby. You didn't know there was a dairy lobby, dairy products lobby in Washington DC. Huge, powerful, lots of money. It's Wisconsin and Minnesota and Michigan and all the states where dairy is a big deal. They don't want. They don't want Canada to use its dairy for the production of baby formula. Imagine if NAFTA 2.0 had declared baby formula to be zero tariffs with Canada. Canada would have invested heavily because it's got a lot of milk, got a lot of milk products, dairy products. They would have invested heavily in increasing production of baby formula, lowered the prices, and maybe made it less profitable for the dairy industry in the United States to run its little scam. God, there's so many layers to this. Everywhere you look, there's a special interest group pushing for something. And it all around some innocuous product like baby formula. Who cares? So Canada, which was about to make a Chinese company, was about to make a large investment in Canada in increasing the production of baby formula. Didn't because they couldn't then export it to the United States because the Trump administration wanted to protect dairy farmers in the upper Midwest. And as a consequence, played dramatic restrictions on Canada, the quantity of baby formula that Canada could export to the United States. And it goes on and on and on in terms of the complexity and the ridiculousness of the whole thing. It's absurd. But there's one more layer I want to get into. And then we'll move on. I mean, remember that dairy farmers also have price and income supports. The government often buys their excess milk. There's a million ways in which the government is subsidizing and controlling milk production and milk distribution and milk prices. And everything that comes out of milk, from baby formula on the one hand, all the way to cheese and everything else on the other hand. Milk in the United States is one of the most heavily controlled, regulated, subsidized products. Ooh, but you're on. It's a national security issue. Really? Really? So we will see. So that's a situation, but I want to add to this one more thing. And that is the special supplemental nutrition program for women, infants, and children called WIC. It's one of the 1,000 different welfare programs that the United States provides poor people. And in this particular program, low-income Americans add up a little 185% of the poverty line. That's almost double the poverty line. They get, basically, to buy formula at approved retailers at dramatically reduced costs. Now, what happens is that to buy this formula, to make it possible to sell it at dramatically reduced costs to these poor people, the USDA, which administers the program, it's the Department of Agriculture, basically has these large contracts with baby formula manufacturers. And they basically drive down prices dramatically. So they buy it from the formula manufacturers, and then make it available for people to distribute. And it turns out that half the formula, half the formula sales in the United States are done through the WIC, through the special supplemental nutrition program for women, infants, and children. Half. Now, when they negotiate prices with the infant manufacturers, infant formula manufacturers, they negotiate really, really, really low prices. They have incredible market power. They're buying half. On average, they get 92% below wholesale prices. In other words, the formula manufacturers are losing money on what they sell to the government. But they want to sell to the government because they get shelf space, they get visibility, they get the credibility of selling to the government. And then they try to ramp up prices on the other side to try to make up for it. And of course, they don't face foreign competition. So they don't have to worry about that. So they can afford to lose money to the government as long as they can make money off of regular consumers. Now, this has an unbelievable destructive and restorative effect on the market. Again, it's no free market. The government is a massive purchaser. Now, you can extrapolate the consequence of this to what would happen or what is happening when the government is a massive purchaser, for example, medical drugs from Big Pharma. The same kind of restorative practice has happened. The same kind of malinvestment, lack of proper investment happens. Half the market for baby formula is controlled by a single buyer that demands unprofitable prices and compliance with piles of state and federal regulations. That's how you get a concentrated market. Who else is going to be able to do this? Nobody else can sell to the government except three big companies. And they have to be massive and huge so that they can make money elsewhere so they can subsidize the sale to the government. Gene, thank you. So they get a massive subsidy that is captured by these big manufacturers, a baby formula, and then for there's no competition inside the United States. And again, we've talked about there's no competition international. Price signals are completely distorted. In a free market, when you have shortages, prices should go up. And again, encourage production. But here, most of production is sold at 92% discount. So prices are not significant enough to cause increases in production. They're getting the same price from the government. These are long-term contracts. So again, you can see how this would affect drug prices. You could see how this would affect the medical industry. It's just unbelievable that this is America, that people are under the delusion that this is somehow capitalism, under the delusion that somehow we live in a free society. The baby formula crisis that we have today is not caused as Elizabeth Warren and Joe Biden would like us to believe by greedy corporations. It's caused by bad US policy, bad US policy, by Republicans and Democrats. Bad US policy in terms of tariffs, bad US policy in terms of FDA restrictions, bad US policy in terms of structuring a welfare program that distorts markets and therefore hurts everybody. If you want to do welfare, there are far more efficient ways of doing it. One of the advantages Scandinavia has over the United States is that they're more efficient at distributing welfare. They don't distort the market as much as America in the welfare system, which is unbelievably destructive. So US policy makes any kind of shock to the system worse. Trade barriers make everything more expensive, restrict consumer options. And again, we're not talking about, ooh, baby formula from China and who knows what they're putting into it. We're talking about German and manufacturers in the Netherlands who, again, are being regulated by their own states. So imagine a world in which the president of the United States facing a crisis in baby formula. And again, it's really a crisis. If you're a parent, you know how crucial this is. Would say, OK, I'm going to get a bill through Congress that does a few things. One, it eliminates tariffs on baby formula, eliminates them, zeroes them out. Two, it requires the FDA to allow into the United States any baby formula that has been approved by an equivalent regulatory agency outside of the FDA, outside of the United States. So I'm not going all out lezific capitalism here, right? Not ready for that yet, the world. But just common sense, just simple stuff. If the Germans have approved it, it's probably OK for Americans to. Three, we're going to do away with this subsidy for poor mothers. We're going to give them instead of voucher and make them consumers. We're going to make a voucher for a particular amount of money so we'll subsidize, we'll continue to subsidize. But we, the government, won't be buying the formula. We'll let consumers buy the formula. We'll just subsidize their purchase. We'll give them a voucher to buy formula. And now increase the market, not shrink it. What if you just passed a simple bill like that? We're going to zero out tariffs on baby formula. We're going to change FDA regulations to allow the importation of baby formula if it's been approved by an equivalent agency overseas. By the way, you can do the same thing with drugs. Why do we need Europeans to prove it and the Israelis to prove it and Australians to prove it? And then the Americans maybe will approve it too. Why can't there be some reciprocity under the assumption that all those agencies use basically the same methodology and are very, very similar to one another? Given that we already have those agencies, I'd like to do away with all of them. How about somebody in the political spectrum offering actually a market solution to these problems? Now, what does the Biden administration want to do? They want to do the same thing that the Nationalists want to do. They want to do the same thing that the Trumpists want to do. Oh, let's use the emergency production powers act or whatever it's called to force domestic producers to make more. Let's bring the supply chains back home. No, that's exactly why we have the disaster we have. We need a diversity of sources. We need to be able to produce goods all over the world. Thank you for listening or watching The Iran Book Show. If you'd like to support the show, we make it as easy as possible for you to trade with me. You get value from listening. You get value from watching. Show your appreciation. You can do that by going to iranbookshow.com. I go to Patreon, subscribe star locals, and just making an appropriate contribution on any one of those channels. Also, if you'd like to see The Iran Book Show grow, please consider sharing our content and of course, subscribe. 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