Mises Wire

Why Are the Feds Subsidizing Baby Formula Companies?

Last month, when a host of media outlets began talking about the Trump administration’s alleged “battle against breastfeeding,” few of them — if any — mentioned the fact that the US federal government continues to subsidize the baby formula industry to the tune of billions of dollars.

A survey of articles — including The New York Times, Foreign Policy, Politico, and The Guardian — on this supposed conspiracy to favor the formula industry did not mention even once that the US’s Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) has been a significant source of income for formula companies for decades.

For example, in 2004, government spending on the program totaled nearly 4.8 billion dollars, mostly dedicated to the distribution and subsidization of baby formula. By 2016 this total had increased to 6.5 billion. As of 2014, more than 8 million Americans were covered by the program.

While US and British pundits complain that the US refuses to sign off on UN regulations that bar advertising and free samples from formula companies, they ignore the fact that the US government is “provid[ing] more than half of the formula that is used in the US.

Now, one does not need a lot of formal training in economics to understand that when a product is being this heavily subsidized, it is going to be used by customers far more than would be the case in the absence of the subsidy. Lindsay Gartman Baker has noted that just as formula companies were beginning to see threats from revived interest in “natural” child feeding methods, the formula industry was buoyed by the new federal WIC program: “[WIC] was introduced and essentially subsidized a large fraction of the U.S. demand for infant formula, and thereby arguably increased that demand.”

Empirical evidence has shown that WIC does not just “arguably” increase the demand for formula. It’s effects on demand and prices have already been frequently observed. According to George Kent in The International Breastfeeding Journal:

The retail price of formula is high. Significantly, the retail price is higher where WIC is most active. Grocers and other merchants know that WIC will cover the retail price of formula sold through WIC vouchers, so they are motivated to push the price up. The pattern is well documented. This also allows the wholesale price to creep up. Even if these price increments were relatively modest, added up across the country, they would produce a significant increase in cash flow to the manufacturers over what they could have obtained in a genuinely competitive market.

WIC’s involvement produces upward pressure on retail prices. This does not affect WIC clients immediately and directly, but it does mean the price is pressed upward for those who are not WIC clients. There is in a way a cross subsidy, with non-WIC clients helping to fund formula supplies for WIC clients.

In other words, the presence of WIC drives up prices for all parents who are unable or unwilling to breastfeed. Middle-income families, for instance, will pay more for formula than they would in a competitive market because demand is so heavily subsidized by the government. And even people on WIC eventually pay more since, “Families get free formula from WIC for only a limited time. They must face the inflated retail prices when they leave the WIC program.”

It is impossible to say how many mothers would use formula in the absence of the WIC program, but, at least among lower-income households, it’s a safe bet that the number would be far lower. Indeed, as Baker, observes, just when higher-income and more-educated mothers were turning back to breastfeeding in the 1970s, lower-income mothers embraced breastfeeding more slowly. It’s very likely the ease of obtaining “free” formula was a significant factor.

Essentially, the WIC program functions as a huge “free samples” scheme paid for by taxpayers and non-subsidized users of formula.

When we look at the history of government meddling in dairy prices, the story becomes even more convoluted. Historically, the federal government has funded a dairy price support program to ensure that the price of dairy — the main ingredient in most baby formula — does not fall below a certain level. (Market prices have been sufficiently high so as not to trigger price support actions since 2009. Should prices fall, programs are in place to purchase dairy products such as powdered milk, butter, and cheese “at support prices.)1

So, the federal government simultaneously acts to keep dairy prices high — thus driving up the cost of formula production — all while enrolling over eight million Americans in a program which increases the demand for formula.

If confronted with this fact, though, it is unlikely that many “experts” and medical professionals would go on the record calling for an end to the WIC subsidy program. After all, are they going to call for a cut to a program that is supposed to help low-income mothers and babies?

These experts beat their breasts over the wording of a UN resolution about advertising, but meanwhile, formula companies in the US are receiving enormous amounts of corporate welfare. The disconnect is odd, to say the least.

If critics of the Trump administration were concerned about formula companies taking advantage of vulnerable consumers, it would seem a far more reasonable place to start would be with the WIC subsidy or the dairy price support programs.

But this is politically unfeasible. The Trump administration could never win on this front, of course, because if it did support a cut back in corporate welfare for formula companies here in the US, it would be accused to abandoning low-income nursing mothers. Indeed, in June, the Trump administration proposed increasing eligibility requirements for receiving WIC vouchers, which would essentially trim the subsidy. Predictably advocates for more spending on government benefits, oppose this move.

  • 1See: https://www.ers.usda.gov/topics/animal-products/dairy/policy.aspx and http://nationalaglawcenter.org/wp-content/uploads/assets/In%20Focus/IF00060.pdf
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