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Economists are weighing in on America's baby formula shortage

MARY LOUISE KELLY, HOST:

Some good news for hungry babies and their anxious parents. The Food and Drug Administration is taking emergency steps to get more baby formula on the market in the coming weeks. Baby formula has been hard to find, really hard to find in some parts of the country since suspected contamination led to a recall and the shuttering of a big manufacturing plant. That plant reportedly produced as much as one-fifth of all the infant formula in the country. So how did we get here? A question for NPR's Scott Horsley. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi, Mary Louise.

KELLY: All right. So the FDA has now cleared the way for that plant to reopen. There will be new safety measures. But it's kind of mind-blowing how a single plant can have such a huge role to play in feeding the nation's hungry babies.

HORSLEY: It really is. And this episode has highlighted just how concentrated the baby formula industry is. Abbott Laboratories, the company behind that shuttered plant in Michigan, is one of just four companies that control about 90% of the U.S. formula market. And in some ways, the federal government has contributed to that.

KELLY: How so?

HORSLEY: One example is the Agriculture Department's WIC program, which provides low-income families with baby formula and other food. The way it works is each state signs an exclusive contract with one of the formula manufacturers. So the government gets a big price break, and in exchange, the company gets a captive market. And because WIC is such a big customer, it has an outsize impact on the whole formula industry. Whichever company has the WIC contract in a state tends to get the most shelf space at the grocery store and the most recommendations from pediatricians. Claire Kelloway, who's with the Open Markets Institute, says that really crowds out the competition and helps the big players get even bigger.

CLAIRE KELLOWAY: Because the WIC program is such a large purchaser, it buys about half of the formula on the market. Once a company has an exclusive deal to service a state, competitors don't have a financial incentive to compete in that state.

HORSLEY: Abbott, the company with the shuttered plant, had the WIC monopoly in about two-thirds of all the states, and the administration has asked states to temporarily relax those monopoly rules so that WIC recipients can use any brand of formula they can find.

KELLY: Another piece of this is the FDA is also opening the door to importing more formula from other countries. How is that going to change things?

HORSLEY: Ordinarily, the U.S. brings in almost no formula from other countries, and that's because there are steep taxes and regulatory barriers that make it very difficult to bring formula in. Those barriers are ostensibly designed to protect the safety of infants, but they also protect the domestic suppliers. And this illustrates a larger point. You know, some people have argued the best way to bulletproof supply chains is to bring manufacturing inside the United States. But we've basically tried that here with baby formula. And as Mary Lovely at the Peterson Institute for International Economics says, you can see the results.

MARY LOVELY: This shows that just having one or two, you know, factories in the U.S. or suppliers in the U.S. is not the way to be resilient. In fact, it's a recipe for being vulnerable.

HORSLEY: Lovely says what you really want is a bunch of suppliers, so don't put all your eggs in one basket or all your baby formula in one bottle.

KELLY: Meanwhile, if you have a baby and you're worried, how am I going to feed this baby, this is really urgent. How soon will these moves make a difference?

HORSLEY: Not overnight. Authorities say it can take weeks to restart production at the Abbott plant and weeks to bring imported formula into the U.S. In the meantime, the administration is working to get existing formula where it's needed most. You know, these emergency fixes are designed to be temporary in nature. But FDA commissioner Robert Califf says longer-term concentration in the formula industry is also worth a look.

ROBERT CALIFF: The question of whether we need more diversity in terms of the overall supply is one that I think will be much discussed and needs to be considered in light of the levers we have to make that happen.

HORSLEY: And the government does have some important levers as both a regulator and a customer.

KELLY: Thank you, Scott.

HORSLEY: You're welcome.

KELLY: NPR's Scott Horsley.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.