The Summer of Shortages - with Scott Lincicome
Air travel this summer seems broken.
On some days, major airlines have been canceling 10 percent of their flights. In normal times, it’s something like one in a hundred that are canceled.
How did this happen? Is there an explanation beyond just the obvious – which is the turbocharged rebound from the past two years of pandemic-induced turmoil in the airline industry?
Today’s guest thinks there’s something else going on that the post-covid travel summer has simply revealed.
It’s a structural problem that predated the pandemic, and he also sees similar forces at work in other industries, including the baby formula crisis.
It’s the structural roots of crises of scarcity that we get at today, with Scott Lincicome. Scott is at the CATO Institute, a Washington think tank, where’s he’s the director of General Economics & Trade Policy Studies. He’s also a visiting lecturer at Duke University Law School, and spent two decades as a trade law negotiator, advising some of the largest multinationals. He also writes a Substack called “Capitolism”. And he’s with The Dispatch news & analysis site.
Transcript
DISCLAIMER: THIS TRANSCRIPT HAS BEEN CREATED USING AI TECHNOLOGY AND MAY NOT REFLECT 100% ACCURACY.
[00:00:00] As you all probably know, air travel this summer is broken. On some days, major airlines have been cancelling 10 percent of their flights. You show up at the airport, security lines lasting 4, 5, even 6 hours, but at least you're hoping that you're not booked on a flight that is among the 1 in 10 flights cancelled.
Keep in mind, in normal times, it's something like one in a hundred that are cancelled. So, from one percent of flights cancelled in normal times, to ten percent now. Now, how did this happen? Is there an explanation beyond just the obvious? Which is the turbocharged rebound from the past two years of pandemic induced turmoil in the airline industry.
After 9 11, we saw a single digit percentage decline in air travel in the year or so afterwards. In 2020, during peak [00:01:00] pandemic, the drop was north of 70%, so consumer demand has come barreling back after the entire industry was all but shut down. So of course there was going to be some inevitable stress on the system, but today's guest thinks that there's something else going on that the post COVID travel summer Has revealed it's a structural problem that predated the pandemic.
And he also sees similar forces at work in other industries, including the baby formula crisis. It's the structural roots of crises of scarcity that we get at in today's conversation with Scott Lincecum. Scott is at the Cato Institute, a Washington think tank, where he's the director of general economics and trade policy studies.
He's also a visiting lecturer at Duke University Law School, and spent two decades as a trade law negotiator, advising some of the largest multinationals. He also writes an indispensable sub stack called Capitalism. Capital, with an O in the middle. We'll post it in the show notes. I highly recommend that [00:02:00] you subscribe to it.
And Scott is also with The Dispatch, a news and policy and political analysis site. The summer of shortages. What's really going on? This is Call Me Back.
Scott, welcome to the conversation. Thanks for having me. All right. So, uh, Scott, I am, uh, I, I inhale what you write, uh, about, um, badly needed public policy reforms, especially as it relates to our economy before the pandemic, but especially during the pandemic. And I want to talk about one of these, what What on the surface appears to be a pandemic sparked or a pandemic catalyzed crisis, which is what we're all dealing with this summer, for anyone who's tried to Travel by air, commercial air travel, uh, seems to be in a crisis and I, you, you've written a lot about what's happening and then like what's really happening.[00:03:00]
So let's, before we get to the, what's really happening, let's start with what's happening. Cause like on the surface, it looks like, I mean, as I said in the introduction, you know, I went through some of the data, you know, normally you get like 1 percent of flights. Domestically in the U S on major carriers being canceled.
And now depending on the day or the week, you're somewhere between eight, 10, 12, in some cases, 14 percent of flights being canceled in a given day. So, so the number of cancellations has gone up exponentially this summer. And like I said, on the surface, it just looks like the economy shut down and therefore air travel shut down or big parts of the economy, but specifically air travel shut down during second half of 2020.
2021 beginning of 2022. So demand goes down supply therefore goes down and then demand comes barreling back this summer and supply just hasn't caught up with the demand. So can you just first talk about that? This is just, is this just a normal [00:04:00] trajectory coming out of the pandemic for just about any industry?
For which there was lower demand during the peak of the pandemic. And you're right. I mean, some of this is very much your classic pandemic story. Um, when everybody stopped traveling, uh, the airlines, um, shuttered capacities. So they, uh, you know, idled workers, put them on furlough or had them, uh, some enter early retirement for pilots and, and the rest.
Um, And then, um, all of a sudden, uh, faster than expected demand roared back this spring. Everybody, uh, was sick of being stuck in their houses and in their towns and they wanted to fly. And they, uh, of course, fueled a bit by, by stimulus and, and good old monetary policy, but also just, You know, stopping, we were all buying goods and now we're back to buying services.
That kind of demand also rushed back as well. And airline just simply could not, um, [00:05:00] get things up and running again, most quickly. And the biggest issue was again, um, on the, on the labor side of things. Okay. So what, so where the shortages were that they, that they, uh, reduced the airlines reduced during the pandemic were pilots, crews, baggage handlers, maintenance.
And even at the, even on the regulatory level, uh, air traffic controllers and stuff also. And, and so really severe staffing shortages across the industry. And I think, but I think the biggest one is pilots because, uh, a lot of pilots went into early retirement and that was encouraged by the airlines. Um, and then, uh, when, uh, they needed, there was intense demand for pilots.
Well, uh Pilots in the United States need a lot of training, um, and, uh, by regulation. And, uh, we can, you know, you can debate whether that's needed, whatever, but that's, that's the rules. Well, no, it's an important point, though, because to be a, a U. S., uh, certified, U. S. licensed commercial pilot, you have [00:06:00] to do a minimum of 1, 500 hours of flying before You can be hired by an airline, right?
And that was increased dramatically after, um, there was a, uh, an air accident, uh, several years ago. And that, that increased, um, the Congress increased the requirements dramatically. Um, people in the aviation industry will disagree about this, but I think most would say. That that number is sort of ridiculous that, um, it's really about the type of training you get, not the number of hours you get.
Um, but look, I mean, and 1500 hours is a lot of training. Um, you just simply can't snap your fingers and get, get new pilots. Uh, and the U S number on the number of hours is considerably higher than countries in other parts of the world, specifically Europe. Exactly. And, uh, you know, the airlines have looked at bringing in foreign pilots.
We have, uh, a small, uh, immigration program for the U. S. Australia FTA that lets, uh, certain pilots, [00:07:00] Australian trained pilots come here. It's really small and, and let's face it, it's Australia. It's not going to do the trick. Uh, and so there's, uh, been, uh, a really dramatic staffing shortage, but that again, I mean, regulatory staffing shortage.
That is a very classic pandemic story. Uh, intense demand. You don't have the supply. You can't find the workers, uh, add the training bit in there that adds to the problem. That's your pandemic story. Okay. But just, just before, before we move, move off that though, if two questions, one, if you, if you furlough pilots and.
Can't you then try to rehire those pilots that were already trained and they'd seem like much more of a turnkey solution than relying on newly trained and licensed pilots? And that's, and that's what I think has been going on, is airlines have been trying to coax pilots out of retirement. And, uh, that, that has happened, but it just doesn't happen very quickly.
Uh, [00:08:00] so you hear that the. Projections are that, uh, this will eventually get better, but it's just, you know, there it's a, a wave of demand hitting a pretty slow moving supply adjustment, and so you're just going to get, you're going to get these problems. And then of course, you know, look, you have other. Uh, pandemic related problems in the supply chains on the repair and maintenance side of things on getting equipment on jet fuel prices.
I mean, you name it. There's just a lot of this stuff that's, that's gumming up the industry and preventing the supply side from adjusting, uh, really, really quickly. The federal government. Bailed out something to the tune of about 50 billion with a B billion dollars during the pandemic Uh of the airline industry What was that money supposed to be used for?
It was supposed to be used to keep the workers. Um employed And, uh, that's, I think they're, you know, [00:09:00] and, and this goes a little bit out of, out of my specialty, but it's my understanding. I think there's going to be some, some, uh, some hard looks at where that money went and how it was spent. Because again, some of the stuff I've read about this is that, uh, they were paid, uh, you know, basically early retirement packages were, uh, some of that money instead of, instead of keeping them actually employed, it was paid.
Bank basically to get them off the books. Right. Um, and that goes back to, uh, like a lot of industries, um, auto industry being another one where they just didn't expect, uh, the pandemic, the economy and demand to bounce back like it has. Okay. So now I want to get into the specific regulatory issues. Uh, that you believe are contributing to this crisis this summer that aren't necessary, necessarily related to the pandemic.
I mean, they are exacerbated by [00:10:00] the pandemic, but they existed, uh, and their roots lay long before. The pandemic. So before we get to that, can you just for purposes of, of, of background for, for our listeners and for me, can you talk about the deregulation of the airline industry in the 1970s and why that was so important before we get to what we're dealing with now?
Um, so, uh, the United States airline industry back in the golden era of flight, you know, we see all those hilarious pictures of people in suits smoking cigarettes and having a, you know, Chateaubriand on those airplanes. Uh, well, the golden age of flight was, was not so golden for most people. Um, prices were insanely high on an inflation adjusted basis.
There weren't a lot of carriers. There weren't a lot of routes. Um, so as part of the, uh, unheralded Carter era deregulation and, and then going into the [00:11:00] Reagan era to, um, the airline industry was dramatically deregulated in terms of, uh, controlling prices. So controlling fares, uh, and in terms of allowing new market entrance, uh, deregulating the types of routes and where planes can, can go kind of used to be basically the market was all carved up and fares were set and.
That and that was it. Um, so all of that was deregulated, um, in, in the late seventies and eighties and the result was, uh, a, a really a wonderful free market success. Um, not only did fares. Drop dramatically, um, but also, uh, roots in increased. So we now had, uh, planes flying to a lot of places that, that, uh, you know, there used to not be planes flying.
Um, you had an air travel in general became widely accessible to the masses. Now we. Certainly today [00:12:00] complain about having to pay baggage fees and about long lines and stuff, but essentially, uh, the, the market did what the market does, and that is kind of commodify air travel, making it accessible to, uh, the common man.
So if you look at statistics on, uh, the price of, uh, uh, a commercial fair, or sorry, uh, uh. Economy fair. Um, and you see that, you know, there's really been a dramatic decline in inflation adjusted terms over the year. If you look at just nominal terms, it's been about the same price for the last couple of decades, which is really incredible.
Um, and that even, um, for for high cost. Uh, you know, first class business travel stuff. Um, it's, it's about the same price as it was back in the day. And that, you know, business first class travel is, is basically comparable to what it was back in the day. So you can still get that level of service. You can, [00:13:00] I mean, other than the smoking cigarettes and, and that kind of thing, uh, you can still get that level of service.
Uh, but now everybody else can fly too. So it's been pretty impressive. Um, now that said, All of those deregulatory benefits slowed down, other than prices, slowed down pretty substantially, um, about 10, 15 years ago or so. Um, we actually saw because airlines, um, there was a lot of consolidation in the industry.
We saw airlines adopting this hub and spoke model where, you know, you have just a couple of major airports and then airports, you know, the airlines fly into that and fly out to smaller destinations. Um, you started to see after years and years. Of, um, of increasing routes and increasing availability, starting to see some consolidation and actually a reduction in, in routes.
Um, and so while prices have continued to be pretty good, uh, and, and, and quite accessible, um, [00:14:00] there are, there have been some warning signs in the industry, particularly related to market concentration, um, and again, the reduction in the number of, uh, available flights. Okay. And that then set up. a perfect storm or contributed to the perfect storm that we have right now for this summer.
So can you explain what a cabotage law is? And then we'll talk specifically about how it manifests itself in the airline industry, but what is a cabotage law? So cabotage, a very funny word, looks like a sabotage just with a C, um, essentially is a restrictions on Uh, transport of goods or individuals, um, by various means of transportation.
In this case, we're talking about air cabinage rules. We have similar ones, um, for cruise ships and, uh, container ships in the Jones Act. People might know about the Jones Act. It's been in the news a bit. Um, essentially we have the Jones Act for, uh, for Air travel, [00:15:00] um, for civil. So wait, just, just, can you explain what the jones act is?
Yeah. So the jones act is a law that restricts uh container shipping commercial shipping between two u. s ports to ships that are only That are made in america that are owned by americans that are accrued by americans So we essentially have the same law for air travel. The only difference is that, uh, it's not the crew requirements, um, are not there.
Um, and also we don't have the made in America. Requirements, but the big ones are that, um, it has to be owned and operated by Americans, um, or American companies. So essentially that means that you're only going to have, uh, us based carriers operating between two us airports. Um, and that's the key, right?
You can still fly internationally, just like the Jones act. You can still ship products [00:16:00] using international shipping companies like Maersk. Um, you can still fly internationally using. Carriers, uh, British airways, Lufthansa, whatever. Um, but you can't do that if you want to fly from say Miami to New York, um, you have to use an American carrier.
So, so if Emirates airline or, or Lufthansa. Or Air Canada wanted to offer a flight say between New York and Miami and many of these airlines would like to compete in this market. They are, they are barred by U. S. law from being able to participate in the U. S. market domestically. Right, they would, they would basically have to create a U.
S. shell company then and there's a lot of stats because it basically, it's a foreign investor rule. So the big example of this is that Richard Branson actually wanted to have Virgin Air, uh, airlines or airways. He wouldn't have Virgin running domestically. And he looked at all these, uh, potential ways [00:17:00] to do this.
And he finally gave up because, uh, it was, he was simply going to have to give up too much control of the airline. To a us based entity and said to heck with this i'm not going to do it So all of those airlines that uh listeners might know from traveling abroad Um, whether it's in the middle east or asia or europe in particular or canada or you know, wherever Um, sorry, they don't they are not allowed to operate here by law And that as we'll i'm sure you'll get into has significant economic implications Okay, so can you explain?
Yes, let's get into it. So, so what are the economic implications exactly? So, uh, the biggest and most obvious one is on price if you Compare and the comparison that the experts make is if you compare the united states with europe where europe has. Um Had a modest, uh, liberalization of its air cabotage rules, uh, in part because of the creation of the EU, but also they've expanded this out to [00:18:00] some of the kind of peripheral countries that are attached to Europe, but not part of the EU.
Um, so if you compare prices in Europe versus prices in the United States for very comparable flights, you find that prices, uh, fares in Europe. Are uh, 25 to 50 percent lower depending on the flight So, uh, the first big one is that cabbage rules in the united states raise prices now I I said at the beginning deregulation has been great for prices, but um, we don't know we're we don't know just how Great they could be it could be even better if if we were allowed if we liberalized some of the restrictions on on air cabotage here so for example instead of it costing maybe 250 bucks to go from atlanta to new york it might cost 200 or whatever which is let's face it a nice nice savings for uh for for the folks out there right um but and by the way in europe you see.
Competitive pricing, particularly with these airlines [00:19:00] like Ryanair and whiz and easy jet. I mean, these, they're offering like 50 between, you know, Paris and London for, you know, discount what seemed like crazy discounts across the board. Yeah. And, and importantly, it's not the discount airline stuff is crazy.
You're right. I mean, 50 fare is even cheaper sometimes. Um, I remember I was over there once and I was. I was like, I was some deals like 20 fares or something, which made like no sense to American me. Um, but the other big thing is that it drives down good old competition doing what it does. It drives down the fares of these legacy carriers.
So, uh, Air France, Lufthansa, BA, you name it. Also they're forced to compete and they offer, it is a different quality of service. There's no doubt, right? I mean, Ryanair is, is basically a bus with wings, which I think this is what exactly what the CEO called it. Um, but, uh, so, so the legacy carriers are, are not going to go that cheap.
[00:20:00] Uh, but they know that they're offering a better quality and they're still going to have to compete a bit on price. They have to make it worth, uh, passengers time and, and worth their money to, um, to, to, uh, to fly on, on their airlines. So And, and airlines, one could think are comparable airlines in the U. S.
like Spirit Air or Southwest. They don't They, I mean, they are competitive, but it's nothing like what you see with these European, uh, no frills. And they're much smaller. Um, you know, that's the other thing that even, I was startled when I was doing the research for this column, is that, um, some of the discount airlines now run, uh, more routes, have more capacity than the legacy carriers.
In Europe. In Europe, in Europe, correct. Whereas, you know, here, um, even today, even here in Raleigh, where we have a little Southwest hub, uh, the, the legacy carriers dominate, right? The discount guys, um, they can provide a little help on the price side. [00:21:00] They're going to be able to run to certain destinations, but they're not doing anything like, like what's going on in, in Europe.
Um, So, so obviously price is, is, uh, an issue, uh, and would be improved through, uh, liberalization of, of air regulation. Um, but the bigger thing I think for, for today's purposes is on expansion of route. Um, and on, um, simply the availability of, of total system wide capacity, right? So when Europe liberalized, um, yes, they got lower fares, but they got tons of far more capacity.
So far more flights, far more destinations, um, and, and that is critically. Important right now for the United States, because we're suffering from a lack of capacity. And in fact, there are big problems out in smaller places, smaller airports out west. They [00:22:00] can't even get carriers to come to their airports anymore.
The legacy carriers, you know, and American united delta are cutting roots dramatically because they're trying because they don't have the resources. They don't have the labor. Um, so there are then they're scaling back. So these airports are having to bribe. Legacy carriers to service them, um, or they're using the federal government to essentially force the carriers to service them because, uh, there are, there's a law in place that simply requires, uh, there to be air service in some of these places.
So they're essentially saying you can't leave, which is not a great, you know, uh, business, uh, model either. Um, So, you know, uh, air cabinets provides a potential safety valve in this record. Um, you know, one of the things I write about a lot is that, um, you know, we tend to think of things as U. S. capacity and foreign capacity, but it's better to think of it as like total [00:23:00] global capacity, right?
And to the extent you can create a larger System you have better opportunity to mitigate potential shocks right so we have a shock to domestic air capacity and there is the potential for having additional foreign capacity to kind of fill those fill those gaps and the primary. Uh, objectives behind the, the air cabinage laws, uh, or air cabinage law is, are, include obviously protecting domestic carriers, so part of it's just plain old, you know, economic protectionism, right?
Okay. And then what about security? Could an argument be made that, you know, the nature of air, the nature of air travel and the kind of security threats and actual, uh, incidents, crises, security crises we've faced here in the United States around [00:24:00] commercial air travel is such that we, we're going to have a higher standard and we are going to have some good old Fashion protectionism, not only for economic protection of certain industries, but to actually make sure we dramatically Heighten our oversight over these players that are coming in flying these foreign players that are coming in and flying around our skies I mean, I think there's a, a national security argument against unlimited air cavities, right?
I mean, I think you can come up with even a zany libertarian like me can, can envisage some sort of limitations on liberalization, right? Um, but. Uh, that doesn't really seem, uh, valid when you're talking about, uh, large carriers from Europe, or Korea, and Japan, and these other places, right, where the safety standards are the same, the jets they're flying are the same, and they're all [00:25:00] flying Boeing, Airbus, and Breyer, you know, those types of jets, um, the training is comparable, uh, the safety records are comparable, The vetting, the vetting of the personnel operating the vetting, Is comparable and of course you could have your own vetting.
There's no, there's no reason why you, the, you know, there couldn't be a rule that said that foreign pilots flying here have to go through a screening of some sort. Right. And we're already allowing these airlines to fly into the United States. So it's not like they're, they're being kept out. They're already flying into the United States because the cabinetry laws does not affect International travel and they're flying into the largest metro areas in the country, save maybe Chicago, but even there they're flying in, um, because we of course have international flights, uh, going, going inland as well.
So, um, yeah, and that's, I think that's, that's another great point. That that these things are already happening and it's again, very much like the Jones Act. Um, you hear all the time. We can't have foreign ships going from [00:26:00] port to port, but we already do. Uh, the only difference is they're not going in between 2 U.
S. ports. It's a very artificial, uh, restriction. Um, but, but I think the other thing to note is that to the extent we're worried about. From a security perspective, um, you know, just, and from a safety perspective, um, you know, the age of planes, the, the availability of the total capacity here in the United States, um, you know, the fact is that protectionism does kind of what protectionism does.
And that is it. It discourages innovation. It discourages, uh, upkeep, it discourages, um, you know, uh, the, the constant improvement of the facilities and the services. Um, and so, you know, more competition would likely produce a better industry, uh, in the longterm, a safer industry as well. Although safety's look, safety's pretty darn good these days compared to the old and the good old days.
Um, but, uh, [00:27:00] there's, there's no. You know, for somebody like me who flies a lot particularly on these kind of regional, uh jets It's not like we're um, we're flying, you know tip top models of uh, wonderful brand new jets out there, um, you know, and and That part of part of the reason for that is, uh, just simply there's you know No reason to they don't have to compete.
Why would they uh provide a a nice fancy new new jet for me to fly on? Okay, so I want to Pivot from air travel to the baby formula shortage, the other big shortage news story of the summer. And obviously they're, they're very different, although maybe, maybe not. And so I just, so for starters, there's, we're, we're experiencing the context of the pandemic shortages.
We're hearing about shortages of chips, computer chips, semiconductors of used cars. I mean, just every other week, there's a new story of some major. Shortage, obviously construction supplies, um, baby [00:28:00] formula. So what on again on the surface, what is the story of the baby formula shortage? And then I want to get into some of the regulatory issues.
Well, yeah, so the surface you all you again start with the pandemic, right? Um, uh, baby formula producers in the united states were expecting, uh Depressed demand because nobody was having babies. Um, and then when the economy bounced back and everybody started having babies again, um, They were scrambling Producers were scrambling to catch up and then you throw in again, the usual supply chain stuff, trucker shortages and the rest you had problems.
And then, um, the, the real match that kind of set the blaze though, was this Abbott, uh, laboratories factory closure in Michigan. Um, there were, uh, a couple unfortunate. Infant deaths that they thought might be connected to some Abbott baby formula. That still hasn't been totally proven, but, um, better safe than sorry.
[00:29:00] Abbott did this massive voluntary recall and the FDA swooped in as they do. Um, and Abbott's biggest facility in Michigan was the Shut down now that was in late February, early March, and it just punched a massive hole in the U. S. market, which is 98 percent supplied by domestic producers will get into why that isn't just a sec, but look, you punch a massive, massive hole in the supply.
You have continued demand plus. People start getting worried, you know, as a parent myself, um, you get, you like your formula, you like the formula you're on. If you start seeing their shelves get a little bare, you're going to buy a little extra. Everybody does that. Boom. Uh, you have a big demand side problem.
So that's, that's, again, that's very much a, a pandemic story with the added factory closure, um, adding insult to injury. Um, but again, uh, we see that the big problem has been, um, that 98%. [00:30:00] Um, yeah, so we have, uh, high tariffs, um, on, uh, imported infant formula from basically everywhere. Okay, so just again, for our listeners, just think of tariffs as taxes on imports.
So, yeah, that's all right. So, taxes on imports. So, uh, If you, if you want to buy baby formula from a foreign country, you are paying a higher price because of a tax that the U. S. government mandates the, the, uh, foreign supplier, the foreign brand, uh, pay that gets priced into that product. Right. And, uh, in this case, you're looking at a Effective tariff rates of around 25 percent, but it's actually worse than that because these are things we call tariff rate quotas Which means you actually the tariff rate gets higher as more quantity is imported so if you're an importer and you [00:31:00] Aren't sure about whether you're going to trigger that higher duty what you're going to do.
You're not going to you're not going to import, right? Um, so that's a further that uncertainty, uh further discourages importation. So that's our first wall around the country, but we also have Really onerous fda regulations related to infant formula in the united states We regulate infant formula more like a pharmaceutical than a Food product.
We're one of the only countries that does that. Um, but the FDA also has very strict rules on labeling and scoop size and of course nutritional information and the rest. Um, and those rules, uh, are a non tariff barrier to imports. Um, and have really created, uh, combined with the tariffs, an effective blockade on imported formula, including So if a foreign, if a foreign, if a foreign producer of baby formula wants to compete in the U.
S. market. They have to go through this, what some would argue, an onerous FDA process in order to [00:32:00] play in the market. Right. At the very least, we can say it's a costly and time consuming process, right? Even though those producers products have been approved in their countries, where there are regulatory bodies that are Well respected by the FDA and are, you know, in other contexts, we'd be perfectly prepared to recognize the approvals given to other products by those regulatory bodies in other countries.
Yeah, and, and where, uh, there are Americans clamoring for these products, there's demand for that product. So, um, the big, the big, uh, producer, region here that everybody's talking about is Europe. So Europe is the largest formula producing region in the world. Uh, Europe exports a ton of formula around the world.
Um, the, uh, there is high demand for European baby formula in the United States. Um, but, uh, like we said, uh, there is no [00:33:00] European formula here. I mean, until. Very recently, um, because of the combination of tariffs and FDA requirements, manufacturers in Europe, um, simply said, you know, to heck with this, I'm not going to, the United States is not a growing and dynamic market for baby formula.
We're not having a lot of babies these days. Um, and because of that, they basically have said, you know, look, we're just not going to spend the time and expense to, to, uh, you know, in the sales and distribution channels and all that kind of stuff. We need to compete in the U S market. So, uh, instead, importation of baby formula from Europe has been left to third parties and kind of a gray market, um, and has actually resulted in there were seizures at the border by customs and the FDA, um, because the scoop size was wrong or the labels were in German or, or, uh, uh, Dutch or whatever.
And, um, a lot of, a lot of. Uh, crazy stuff like that. Um, and, and again, uh, leaving the market to a handful of, of domestic producers. [00:34:00] Um, now adding insult to injury is that the domestic market was further distorted by a, a welfare program, a food assistance program we call WIC, Women, Infants, and Children's, part of the SNAP program.
Um, 30 seconds on that. So Women, Infants, and Children is a, It's one of the largest programs from within the Department of Agriculture, and it, it basically provides, it's a government subsidy, understandably, for, uh, baby formula, uh, baby food, for, Segments of the population that can't otherwise afford it exactly and and again even heartless libertarians like me or like, you know, feeding poor babies That's that's okay uh, but but it does mean that the federal government now is basically You're responsible for about half of the entire infant Formula market.
Yes. And there's yeah, so there's two problems with wick when it comes to supply chain stuff And the first is that wick has grown to encompass more than [00:35:00] half of all baby formula sales in the united states So we effectively have a government monopsony. We call it right, you know monopoly Monopoly is when the when the producers have all the uh, uh are There's a concentration of producers who have all the power monopsony is when the Buyers, there's a concentration of buyers that have all the power.
And in this particular case, you're saying that that buying power is the federal government, right? And so the federal government used that monopsony power to, to essentially low ball formula producers, um, requiring formula producers that want to participate in WIC to offer discounts of up to like 90%. Um, and look, that's a great deal for.
Taxpayers, uh, that saves taxpayers a lot of money. Uh, the problem, however, is that it, it dramatically limits the number of players that can participate in the WIC system because, you know, you have to offer massive upfront discounts. Now the government realized this, so the government gives them, uh, uh, [00:36:00] some, uh, enticement WIC program.
And that is that if you win a WIC contract, which are administered at the state level, Um, you get, uh, an effective WIC monopoly in that state. It's a sole source contract. So what that means in practice is that parents that have WIC vouchers can only buy from one producer Abbott laboratories, or, um, there are, you know, there are a couple of Rickett is out there as well.
Um, and that is a. Another concentrating effect for the domestic market because, uh, studies have shown that a company that wins the WIC contract ends up becoming the dominant seller in the non WIC market. They get preferential shelf space. They get of the government street cred, right? You get the stamp of approval and all that kind of stuff.
Um, people are very brand loyal. So if they go. Off the WIC program. They stay with those brands, whatever it [00:37:00] is. Um, and that allows them to use that market power to effectively push out new market entrance. So you combine the WIC programs effects with a basic heavy regulation of infant formula. Like I said, like a pharmaceutical and you have like no market entrance.
In, uh, the domestic sector, um, the first, we, we hadn't had a new market entrant in 15 years until just a few weeks ago. Um, and it costs millions of dollars, uh, hundreds of millions of dollars to, uh, meet all the FDA requirements to get up and running. Um, and, uh, years. To to to to do um, and so you combine that together and we have a market that is walled off from foreign competition and concentrated domestically Among a handful four producers control basically the whole market here now if that sounds familiar It should because it sounds a lot like the airline market, right?
Exactly, and it and [00:38:00] it shouldn't be surprising if you know the economics literature, you know that the two things that uh, Two things that Dramatically increase market concentration are protectionism. So import import protection from import competition and regulations. So the higher the level of regulation, the fewer players you're going to have.
And then you combine the sole source contracting and government procurement on the airline side. And boom, I mean, you have very similar, uh, effects in terms of having a highly concentrated, but also highly. And to be clear, fragile, you meaning we have no redundancy built into the system, so And no, and yeah, no redundancy and no flexibility.
So what happens when you have any sort of shock, um, whether it is a factory closure or, um, a, you know, domestic labor dispute, if you're talking about airlines, whatever it is, um, you're, the system, [00:39:00] Simply can't adjust, uh, because there's no additional capacity. Um, again, globally or domestically, uh, you don't have new market entrance rushing in, you know, normally when you have a supply problem, prices go up, the prices are a signal to other suppliers to enter the market.
Well, we have all these rules, tariffs, FDA regulations, uh, uh, cabotage rules and the airline side that don't allow new suppliers to come in. And then the political economy is the last nugget that is very similar. And that is that you also, when you have these, this protectionism and these regulations, you create new constituents that are going to fight like heck to keep those protections and those regulations in place.
And so, for example, when I talk about air cabbage. Liberalization the first thing you hear is yeah but the legacy carriers would fight that to the death that unions would fight that to the death [00:40:00] when i talk about liberalizing the infant formula market people say yeah abbott labs would would would the dairy farmers in the united states for very powerful very powerful we would never let that happen and we're seeing exactly that right you know it is going back to infant formula.
Congress, uh, just today, the Senate just today, uh, announced that it, it unanimously passed a six month waiver of the tariffs. Um, but that's five months. It's been five months since we've had an infant formula crisis. Um, what was operation fly formula? This was the Biden administration's. What was their, what was their initial response, their initial attempt to deal with it?
That's, that's right. So immediately after the White House realized there was a crisis here, they looked to import supplies and they, they initiated Operation Fly Formula, which is a very well intentioned idea. We're going to have military jets and [00:41:00] commercial planes flying in formula from All over the world.
The problem is that there's the scope of this project of this initiative is just simply not enough to fix the U. S. market. I, this week, I wrote an update on formula and, you know, you're looking at, um, through the middle of July that we're about. 55 million a bottle, eight ounce bottle equivalents of formula brought in through operation fly formula.
That sounds like a lot, except it's less than a week of us consumption. Um, and, uh, you're talking about store shelves that remain 30, 40, even 50 percent empty, just not doing the trick. Um, and you need, you need again, broader, more. to kind of allow for the market to, to have sales and distribution channels in place to have, um, reputable, you know, reputational effects for consumers to actually want to buy this formula and, uh, you know, retailer agreements, all that kind of stuff.
Um, it just [00:42:00] doesn't exist. So the government can't. Flip a switch as well intentioned as fly formula is they can't flip a switch because these are much bigger markets than something That a few c 130s can handle. Okay. So why? Is government So ill equipped to anticipate these shortage crises. I mean if if you talk to people in the airline industry You certainly talk to people in the auto sales industry I mean i'm not I mean this is all anecdotal but I just remember months and months ago They were talking about the coming shortage crisis.
They, they were anticipating it, those in private industry, and yet it was not on the radar at all of government. Why? It's, uh, I think it really boils down to incentives, right? You know, uh, whether it is grocery chains, and, and I've been stunned, amazed by the level of granular, real time data we can get on infant formula [00:43:00] store shelves, right?
I mean, infant formula is not a Huge product. Uh, but yet we know exactly. They're like online trackers, right? There's, there's these sites, right? And, and, and every week Bloomberg's like, uh, you know, uh, Des Moines, Iowa has 53 percent inventory and you're like, this is incredible. Right. Um, but that's because grocery stores, uh, wholesalers, producers in the business have a intensely strong.
Profit motive to know inventory levels to know their supply chains and to make sure that they can get out in front of any problems that arise. Now, they're not perfect. You can't stop a pandemic from happening. You can't stop natural disasters, whatever. But, uh, it is their jobs. It is their sole focus to, uh, know what's going on in these markets at an extremely granular level.
And again, in real time. Um, it is just, it's not the government's focus. It's [00:44:00] not what, uh, the government, I mean, leaving aside, except for maybe the defense supply chain, which, you know, DoD in that case does have a grasp on and, and should, and has a, uh, Strong motivation to do that. Um, outside of that, when you're talking about commercial markets, um, I mean, 1st of all, there's a classic Hayek and knowledge problem, right?
I mean, you're talking about millions of private actors, thousands of grocery stores and so forth and so on. Um, but the other thing is just simply, um, and then the availability of information. You know, the government, uh, when the government wants information, it has to ask for it generally. Right. Um, you know, we were trying to map semiconductor supply chains and semiconductor companies said, uh, that's proprietary.
We don't want to give that to you. Uh, we don't exactly trust you to keep it private. When I was in private practice, I remember, uh, in being involved in a couple, uh, government investigations. Uh, and, uh, my clients were like, there's no way in heck we're giving that. To, uh, the United States government, these were [00:45:00] foreign companies and no way we're giving them.
I mean, you can, you know, you can kind of get it right. Uh, so, um, there is an information problem and then an incentive problem. Um, they, the government just simply doesn't have the same motivations. Um, you know, this is classic, what we call public choice, right? The, um, we think of government officials, whether they're politicians, elected officials, or bureaucrats as being.
Yeah. These wholly disinterested, uh, public servants that have nothing but, uh, the national interest in mind, but the reality is they are human, just like we are, and they will, uh, be concerned about their own self interests a lot of the time. Um, and so you combine the informational asymmetries with the motivation and incentives, and you just don't have, uh, a, an entity in government that is really good at, uh, knowing, you know, seeing.
crises on the horizon and then, um, adapting and, uh, sharing information [00:46:00] when the crises hit. Uh, before we wrap, I, I just want to hit one other point, which you've alluded to earlier in this conversation, but I just, I just want to put a kind of a fine point on it. In much of the policy debates these days that have outflowed from the Pandemic response, there's a big push for reshoring or on shoring or whatever term you want to use bringing supply chains into the United States, not relying on global supply chains and in many industries, it makes a lot of sense given how.
Um, how dependent we are on certain industries and how, how, what bad shape we were during the pandemic when we couldn't access some of these key supplies and things, specifically medical supplies, some pharmaceuticals. So, so I hear this now more and more, and by the way, it's historically been a province of the left, and now I hear it on the right that, that the, you know, we, we, we need to think from a nationalist perspective on this sort of [00:47:00] bringing supply chains home and.
You are skeptical of that and, and, and you think actually the, the, the, the, what we're experiencing now is like, you know, case, you know, like it's like, it's like a case study and what can go off the rails when you are dependent on, on a, a, a domestic solely dependent on a domestic supply chain. Sure, so let me say as an initial matter, um, I am perfectly fine with private companies deciding, as many have, to, uh, reshore or friendshore, that means moving them kind of nearby to Mexico, Canada, wherever, um, certain supply chains.
You know, where there is a business case to do that, whether it is for, uh, efficiency reasons or resiliency reasons, go for it. Um, that is, that is their business. They know it better than I do. But again, to be specific, that is the private enterprise making that decision. Exactly. And look, you know, we're, we're, we have a big debate in Washington on semiconductors [00:48:00] right now.
Um, but private. Semiconductor manufacturers have dedicated tens of billions of dollars with the U. S. market primarily not because they're going to get a subsidy from the federal government, but primarily because they see the need to have more capacity in the United States. They see a workforce and equipment and stuff, and they want to do it.
There's a lot of industries. That, uh, at least at the micro level have decided, uh, to, to do that, uh, bring it to the United States or to Mexico as well. Um, and that's all well and good. The macro story is still quite pretty muddled. I don't know if it's actually happening in mass, but some companies are doing that great.
Go for it. My, my problems come in with the forced reshoring model, um, essentially using tariffs and subsidies and regulations and procurement contracts and the rest to, uh, either coax or coerce, uh, companies to, uh, manufacture here. Um, and, you know, I think the reasons that my skepticism arises from, from three [00:49:00] places, uh, one is.
Um, in terms of natural disasters and and global pandemics and you name it, um, the, a lot of the same problems that affect global supply chains affect domestic ones, right? So pandemic is a good example of this, but there are certainly others. Um, you know, uh, we had truck shortages and labor shortages and material shortages here in the United States.
States similar to what they were having in Germany or Japan or China or wherever, um, you know, certainly there were discreet issues at ports that were very specific to kind of the global supply chain. But a lot of the problems that affected global supply chains affected domestic supply chains as well.
But the bigger problem, I think, is that a reshoring really just trades one vulnerability. So you you're no longer vulnerable to external shocks to foreign shocks for you're just trading that for vulnerability to domestic shock. [00:50:00] Right? So maybe, you know, you're not. Vulnerable to, um, a, the Fukushima disaster in Japan, um, or China going zero COVID and shutting down its ports.
You're not vulnerable to that, but you are vulnerable. And in fact, more vulnerable to, uh, say a freak ice storm in Texas, which shut down tons of, uh, chemical supplies here in the United States. And it's still actually rippling through certain supply chains, even today, and things like foam for furniture.
But then also a factory closure in Michigan, uh, can shut down, um, a collapse, a domestic supply chain and domestic supply of infant formula. So you're really just trading shocks, but the economics literature shows you're not just trading shocks. You actually end up worse off. Um, shocks that hit nationalized supply chains, domestic shocks actually impose greater damage, which makes, I think, sense from kind of a basic [00:51:00] rational logical level.
Um, you know, when you put all your eggs in one basket. Uh, and then, uh, the basket breaks, uh, you have bigger problems than if your eggs are spread out all over the world. Um, and, and that's, you know, basically what the economics literature shows that you, you actually become worse off. And then of course, you know, you're poorer in the process, you know, reshoring.
Protectionism, all these things tend to raise prices. That's the whole reason why offshoring occurred in the first place was to deliver benefits to consumers in terms of cheaper prices and more availability. Well, you're going to reverse all that. You're going to get higher prices, less availability.
You're going to be dedicating resources in the United States that could go to higher productivity activities, you know, whether it's tech or whatever, and is going to be dedicated to lower Productivity activities like low skill manufacturing or whatever. So you end up, you know, poor in the process. Um, but then the third big reason is that, um, this domestic, the [00:52:00] reshored system that relies again on government policy inevitably becomes sclerotic and inflexible.
So, you know, you go back to baby formula or airlines, and I mentioned this already, but, um, look to the Biden administration's credit. They realized during the infant formula crisis that they needed to bring in. Imported supplies, even the FDA has realized the notoriously sclerotic FDA has realized, wow, um, this is a pretty, um, this is not good for resiliency.
That was their word, not mine. Um, that we need more import competition to boost national resiliency. Um, the problem is that the system. It just can't adapt that quickly. You know, again, you have the political economy issues, you have, uh, protected interest groups, you have bureaucrats that like their turf, whatever it is, the system just doesn't want to adapt.
And of course it, uh, outside players can't enter the market until the system, until the policies. Adapt. Um, and then of course you have just simple [00:53:00] congressional inaction, right? Congress is more of a debating society today than a legislative body. Um, Tweeting, tweeting society, right? And, and so you combine all of those things together and you see that the, the closed system is, uh, almost impenetrable even in times of crisis.
And, you know, you go back to baby formula, um, where it took Congress five months to do a very simple thing like suspend tariffs for A mere six months to the end of the year on infant formula. So for the last five months of empty shelves, we've had 25 percent tariffs on infant formula. That's crazy, but the system just doesn't work quickly to, to fix problems.
Um, whereas a open system certainly, surely vulnerable. To shocks, there's no doubt, but the open system, uh, adapts very quickly because as we talked about the players in that system have a really strong profit motive to adapt quickly, right? [00:54:00] Automakers don't like empty car lots, uh, grocers don't like empty store shelves and they are going to work like heck to.
do whatever they can, whether it's reshoring or finding new suppliers or whatever, to get those supplies back in stock for consumers benefit as well. And that system, for as messy and unpredictable as it is, turns out to be more resilient in the long run than the supposedly resilient protected one.
Before we let you go, what is the next Shortage crisis that we're not paying attention to where we'll, we'll be talking about it the way we've been talking about baby formula and air travel. Oh, gosh, that's tough. But, um, the, uh, the, the one we might have a re crisis of sorts, um, but I think the, the one that I'm looking at right now is West Coast port situation.
You know, we had a Big backup on the West Coast [00:55:00] ports last year, and that was a big story, but that seems to have died down. And, you know, supply chains seem to be doing a lot better. So I don't really see major good shortages on the horizon, except there are a confluence of events happening at West Coast ports right now.
That could really cause some problems here in the fall. Um, the first is that, uh, California labor law called AB 5, which was intended to turn gig economy workers into employees. Um, it has caused some pretty serious blowback among truckers in California because it was, um. It's application to truckers was delayed pending a Supreme court case, but the Supreme court rejected it, uh, the case.
And now AB five is applying to truckers who have, um, an owner operator, independent model that has suddenly become illegal. Um, now that has pushed about 70, 000 truckers in California [00:56:00] into this, uh, zone of uncertainty, whereas they don't know if they, how to, where they're going to work and how they're going to do.
And, but now you have like a thousand truckers or so are protesting at the ports. They're protesting AB5. And a group of truckers is even blockading the port of Oakland right now. So, uh, that is a first problem. 70, 000 truckers in California where, you know, our biggest ports are located, um, are now suddenly in limbo, um, and there's major protests.
The second big port issue out there is, uh, the. Unions and the ports themselves are in a, uh, labor negotiation. So the longshoremen's union out there. Um, and that has become quite contentious to, uh, the contract is officially expired, but nobody has, uh, walked off the job yet. But, uh, there is a chance that if the two sides don't agree this fall, that you're going to have some sort of, uh, work stoppage lockout or [00:57:00] strike that would affect.
All West Coast ports, including L. A. Long Beach, which handles about 40 percent of all container traffic in the United States. So, uh, potential crisis number two. Um, and then third is we have rail labor negotiations that are nationwide, but again, uh, would have a really particular impact on, uh, the California kind of ports out there because a lot of rail that comes inland from there into Chicago and the rest.
Um, And there again, uh, the rail companies and the unions, uh, are at loggerheads. And in fact, under US rail labor regulations, uh, the president has appointed an emergency board to try to oversee this. Um, but though that board's, um, cooling off period, but for, so nobody can strike, no blockouts ends again in the fall.
So here we have three huge labor rate related events happening. All basically at the same time and all affecting the most important [00:58:00] ports in the entire country So if I were to pick one area where we could potentially see some pretty serious problems Uh in the months ahead, it would it would again be back out there.
Wow. Well, thank you for the good cheer uh Uh, we will work out. Maybe I know I know right We will uh, we will leave it there Um, I just, I'm listening to you, I'm reminded of that, that, uh, essay by Tom Wolfe many decades ago called The Great Relearning, where he says, with these, these policy debates become, seem obvious to us, and the policy prescriptions that flow from them just become the way we govern ourselves.
And, uh, and they should endure, but they don't, and then we forget, and we have to relearn all over again. And, um, and so, having you on is helping. me at least think about getting back to basics. I think it's important and I have a feeling we're going to need more of it. So I hope to have you back on. Hope you'll come back.
Definitely. Thanks a lot. It's a good time.[00:59:00]
That's our show for today. To keep up with Scott Lincecum, you can follow him on Twitter at Scott Lincecum, L I N C I C O M E. You can also follow his work at the Cato Institute. You can find them online or at Cato. C A T O institute. Then also you should follow and subscribe to the dispatch at the dispatch d i s p a t c h Call me back.
It's produced by ilan benatar until next time. I'm your host dan senor