The issue here is that the FDA and Abbot didn't treat it as an emergency when the Abbot facility was forced to close in the first place. Had they acted as if it was an emergency, they would have mobilized all available resources to clean and disinfect the facility, replace the faulty milk drying equipment, and get the facility back up and running. Here we are, months later and it's now an emergency. Sure, importing from other countries will help, but like toilet paper, it's a product that has a pretty consistent demand and there isn't a lot of surge capacity out there, even in other countries, so we really need to get the facility back online.
The issue isn't bad government policy - infant formula is strictly regulated for very good reasons, it's a lack of urgency from the government and private sector to make sure a medically critical product is available.
Also, of course, we shouldn't have let such a critical product mostly be made by 3 companies, but that's another rant.
Was just about to say as well. The more regulated an industry is the more consolidated it will become and the higher the costs will have to be, which either get passed on to consumers and/or in cutting capacity.
Why is that? I can think of "just so" explanations that would point in the opposite direction, that less regulation leads to more consolidation. For example, the less regulated an industry is, the fewer barriers there are to buying up competitors. Or the less regulated an industry is, the more companies in the industry will be forced to cut corners to remain competitive, decreasing resiliency and causing bankruptcy when conditions change.
Starting a company in a regulated field is hard. With unregulated fields like most internet companies, you "just do it" -- as long as you pay your taxes, the government will pretty much leave you alone. In a regulated field, the hard part is not following the rules but merely trying to figure out what the rules are. People who haven't dealt with this are probably picturing something straightforward and readable like "thou shalt not put poison in the groundwater" but what you really get is thousands of pages of incomprehensible nonsense that you don't stand a chance of understanding on your own. There are law firms that can help with this, but now it's scary and expensive enough that the 18 year old founders will stay away.
In purely unregulated fields like web hosting, there are tens of thousands of competitors because it's easy to create one. It's true that someone could go around buying up a bunch of them (and companies have done this), but even after they're done there are still thousands of competitors remaining. If a regulatory agency wrote couple thousand pages of rules for web hosts, many existing owners would probably sell their companies rather than embark of the emotionally draining task of trying to make sense of those rules.
Ironically, as the number of competitors declines, the ones that remain will feel more free to abuse both employees and customers. This will lead to demands for more regulation, which reduces the number of competitors further, and so on it goes.
Regulation usually implies not just behaving appropriately but proving you behave appropriately, which has significant costs and precludes the smaller portions of the market.
I don't have a good mental model for why excluding all firms under, say, $1M would have a different consolidation pattern from including everyone, but it's not totally unreasonable to assume something simple like starting with drastically fewer companies will end with fewer companies as well (that consolidation is monotonic). There might be some nice explanation for that difference.
what if gov't regulated industry must also come with a mandated set of startup tax breaks or grants, for fostering competition?
If regulation is what stops competition from forming, but the regulation is required for safety reasons, it makes logical sense to assist new competition into the market. This assistance should be limited to helping the startup be certified, etc, in such as way as to eliminate the barrier to entry resulting from the regulation (but not more - i.e., startups aren't getting extra help beyond that, so as not to artificially subsidize them but not their larger counterparts).
Aka Govt administered cartelism. Which we already have. The trick is changing the governance (incentives, transparency, accountability) to favor people over corporations (and finance).
Perhaps one step would be to stop thinking of corporations are superpersons, deserving of superrights. Instead, we could charter corporations and stipulate that they serve the public good.
I don’t think the commenter was talking about competition law (aka antitrust law), but rather lower level regulations concerning day to day operations. Stuff like food safety regulations, hours of service regulations for truck drivers, etc. I think many (but probably not all) of these regulations will tend to encourage consolidation simply by imposing an additional cost that benefits from economies of scale.
Because understanding and satisfying regulations has a high minimum cost and scales slower than revenue.
Consequently, in heavily regulated industries, it's more efficient for extremely large firms to design and implement the necessary internal gymnastics, and amortize that labor cost over a large amount of business.
Smaller firms still have to do much of the same (at some point, 1 person is the minimum in a role), but can't spread it over as large a customer base.
Or, to put it another way, it's easier to merge your way into larger profit margins in heavily regulated spaces.
There may be thousands of banks, but all but a few manage their funds at one of the big few, essentially acting as resellers of the big banks' services. For example, I my bank is "Ally Bank", but if I ask them for instructions on how to receive a wire transfer, they instruct me to direct it to "JP Morgan Chase Bank, N.A.", the largest bank in the U.S. I previously used the brand "Simple Bank", which provided accounts via "The Bancorp Bank", the 5th largest.
It's a similar case to cell phone providers: although there are hundreds in the U.S., all but four do not operate their own network, but rather resell the network of one of the big four.
It's an interesting question, though, how much this consolidation is due to regulation versus being a result of a natural monopoly, i.e. high barrier to entry for the type of business.
> It's a similar case to cell phone providers: although there are hundreds in the U.S., all but four do not operate their own network, but rather resell the network of one of the big four.
Three mobile networks, since Sprint was merged into T-Mobile. It was also inevitable since it does not make much sense to have many different organizations install cell towers and run all that wiring all over a country the size of the US, and split a limited resource like wireless spectrum conducive to data transfer.
IMHO, both situations are true. There used to be more regulations in the US to prevent monopoly formations in media in a region [1] that once relaxed lead to more concentration. Banks had/have some regulations on M&A [2] which when relaxed generally result in smaller banks getting bought out. Concentration are natural trends in many markets without regulation to limit it. Maintaining the "invisible hand of free markets" isn't actually a naturally stable equilibrium in many markets. Especially those where fungibility is low (local media, local banking, ISPs, healthcare, etc).
Now in other markets a high bar of regulations conversely encourage concentration due to increase costs of meeting the regulations. Reforms like Frank-Dodds can be a mix, both making it more expensive to meet the accounting and reporting needs favoring larger companies, but also imposing rules limiting concentration of ownership. However regulation heavy fields can still be opened up by startups/new entrants if they're significantly better than competitors (SpaceX comes to mind).
It's multi-faceted game theory, not a simple rule or sliding scale.
Most of the 'banks' in that count serve as the local monopoly, or as part of a duopoly, or triopoly in their region and are protected by and regulated primarily by state laws as well. Many state banking regulations are significantly more lax than federal banking regulation.
The handful of banks in the U.S. that serve multiple states and fall under federal banking regulation seem even more consolidated than the baby formula industry on a variety of metrics.
Certainly more consolidated per dollar of cash flow. Probably more consolidated per dollar of net profits.
etc.
Which would be the expected outcome of the theory if the baby formula industry in the U.S. were less regulated than federal banks but more regulated than state banks.
Winner takes all outcomes are inevitable without regulation to preserve competition.
Orthogonal to administrative burden, regulatory capture, politics (dairy lobby, protectionism, whatever). Which are all also base states which must be actively thwarted.
The world is more complicated than Chicago School of Economics' Kiplingesque just so stories.
Why do you believe winner takes all outcomes are inevitable without regulation?
Anyways, if you can devise a way to regulate millions of people spread across thousands of organizations with even 10% less 'administrative burden, regulatory capture, politics' you will certainly become the most influential person of all the time, assuming you keep on delivering year after year.
That explains the likelihood of a winner-takes-most situation developing. But that doesn't equate to a winner-takes-all situation.
I can easily see the 3 largest companies in a given sector taking 90% marketshare, or more. But to imagine 1 company taking 90% marketshare? I haven't seen a credible argument for why that would generally develop outside of some specific niche.
Just like the telecom industry, Making it ludicrously easy for an attacker to taken down communications during a war.
I hope the current world events forces the governments to rethink their strategy of keeping the telecom industry an oligopoly and decide that reducing the barrier for entry to the telecom industry is vital for the national security.
Capitalism will solve everything! Private business is efficient! Competitors will surely recognize this opportunity and swoop in to save the day! High demand and low supply == increased prices and everything still works great! /s
Not really no. Plenty of things are much less regulated and just as consolidated (in fact, many examples that are also consolidated into exactly this same set of companies). So it may have some effect but clearly isn't the main one since we see this result for all kinds of products at every level of regulation.
Although the linked article does not address it, the FDA is certainly working to mitigate any fallout from the plant closure. Much of the complexity is that WIC is administrated at the state level, so the FDA must work with each state individually to address the shortage.
Of particular note:
>more infant formula has been produced in the last four weeks than in the four weeks that preceded the recall, despite one of the largest infant formula production facilities in the country being offline during that time.
Had they acted as if it was an emergency, they would have mobilized all available resources to clean and disinfect the facility, replace the faulty milk drying equipment, and get the facility back up and running.
But why wasn’t it a priority for Abbott? They don’t care about sales or making money?
They spent a lot of money on stock buybacks [0]. Maintaining production capacity was not a priority. Never forget what Milton Freedman said, the first priority of a company is to increase profits for its shareholders. With the recent evolution of finance, that priority term is getting shorter. The value must be brought for the next quarter. What happens 6 months from now is becoming less and less relevant.
They either had a profitable product line or not. If it was profitable, they had every incentive to fix the problem. Stock buybacks don't change any of that - in fact, they need profit to actually do buybacks.
And not thinking long term? I mean Abbott has been making formula for decades? You're telling me their CFO is like "meh, who care if that multi-billion dollar business goes under in 6 months"?
No. The article is an opinion piece not an in-depth reporting. You can read this "straight to the point" news source [0] to get some facts on that particular matter.
I am not saying that the current crisis is entirely due to this event. But it made what was probably already a bad but manageable situation into a full blown crisis.
This "newsletter" piece [1] in the NYT mentions several other aspects like business concentration.
The issue is absolutely bad government policy. The Reason article isn't very good but its premise is correct. I'm surprised to find myself saying this, but Truthout wrote a much better investigative piece almost a month ago: https://truthout.org/articles/company-responsible-for-tainte...
This is why government policy is at fault:
- Around two thirds of all infant formula is purchased through a single government program
- The government requires that there only be a single supplier of formula for this program in each state
- Through the natural tendencies of capitalism this has led to consolidation where one provider, Abbott, enjoys government-mandated monopolies in 34 states and a controlling share of the formula produced in the US
- Through the natural tendencies of monopolies which are unchallenged by competition, they sought to maximize margins above all else, concentrated their production and poisoned their own product, leading to the production shutdown and the shortage.
The government screwed up. Rather than blaming the problem on hoarding moms, Vladimir Putin or whatever next week's appallingly self-serving disinformation will be, they should amend the law which maintains a monopoly in the formula market. If the industry was not so consolidated by the government's addiction to picking winners, Abbott's screwup would have been more disastrous for Abbott and less disastrous for moms.
Well it’s not like they were compliant with regulations anyway. The only reason they got pinned here is that they killed multiple babies too quickly from their negligence.
They also left out a another key point. Trumps renegotiation of NAFTA into USMCA created significant restrictions on importing formula from Canada.
> Absurdly, provisions were added to the United States‐ Mexico‐ Canada Agreement (USMCA) to restrict imports of formula from Canada, supposedly because China was investing in a baby food plant in Ontario, and this new production might eventually enter the U.S. market (heaven forbid!). [1]
>>>>>"(Note to my MAGA readers: Trump's renegotiation of NAFTA helped make these products worse in an effort to "protect" American formula producers from Canadian producers"
What an absurd statement. It's a factory in Ontario with a foreign investor, subject to Canadian CFIA oversight. Literally everything you rely on to live your life is made in China, this is a very strange place to draw the line as children are dying.
Why don't we stockpile it, though, like other critical items like petroleum and medicines, for temporary shorateg relief? Surely that's a government failure.
It expires. I don't know at what point it becomes unhealthy/dangerous but infant formula is one of the few shelf-stable items that's illegal to sell past the use-by date. Many things are perfectly safe/stable past their 'sell by, best by, use by' dates (bottled water, most canned food) but I haven't read data on this specific item.
Sure, it may not be possible to stockpile every niche product, but this is literally food, perhaps the most obvious thing (up there with water and medical supplies) for governments to stockpile.
It's food for a specific niche though. More broadly, the US government does have a strategic grain reserve, holding wheat, corn, sorghum, and rice. Or at least, there was one, until 2008 when food prices spiked and the grains were all sold off. The reserve, called the Bill Emerson Humanitarian Trust, continues to exist to this day, but only holds cash/securities and no longer holds grains/commodities.
It's easy to see in hindsight that a certain item should have been stockpiled in anticipation of a shortage. What's hard is predicting what's going to be a shortage years into the future. Petroleum is an easy choice since energy is almost always in demand.
> it's a lack of urgency from the government and private sector to make sure a medically critical product is available.
Yes and no. But mostly no. It's that we're optimized for the best case scenario. We're in love with theory, of economies of scale and a world with no pot holes (so to speak).
That's profitable. But it's also ridiculous and stupid.
If Abbot being compromised can lead to this then that smells like a monopoly. Or at least a bad case of cronie capitalism. Three companies is not a rant. It's The Root Problem.
The issue isn't bad government policy - infant formula is strictly regulated for very good reasons, it's a lack of urgency from the government and private sector to make sure a medically critical product is available.
Also, of course, we shouldn't have let such a critical product mostly be made by 3 companies, but that's another rant.