A few weeks ago, I was scrolling my Facebook feed and came across a video taken outside of an Australian supermarket. The video featured about half a dozen Asian customers purchasing baby formula, two tins at a time, and stacking them neatly in a large pile outside of the market. Then, like a revolving door, they would return to the store to purchase two more. The pile amassed must have been at least 50+ tins of baby formula.
Confused by the relevancy of the post, I looked to the comments to find animus condemnation from other mothers. Accusations of extortion, unethical behavior, law breaking, outright rage, and even racism towards Asians.
For the past several years, Australia has been experiencing a shortage in baby formula. To cope with dwindling stocks, supermarkets have implemented a two tin per customer policy. However, this shortage isn’t a result of a baby boom down under. It’s a result of a lack of reliable formula in a country in the opposite hemisphere, China. Hence, the reason you find Chinese people buying all of the formula. They are sending it home.
By the time the formula reaches China, the retail price increases three-fold, but that doesn’t deter the Chinese from buying it. Demand remains steady in a country that births about 17 million babies a year. In the eyes of many viewers, they saw people preying on the misfortune of others through price gouging. For those of us that understand economics, we saw the market working efficiently.
Price gouging is often touted as an ‘exploitation’ of desperate consumers. Governments try to crack down on the practice by enforcing price caps on products. In the United States, thirty-five states and the District of Columbia have enacted legislation to keep prices down, even during emergencies. However, these well-intended laws have a negative effect on consumers, leaving shelves empty and people still in desperate need.
By artificially keeping prices low, customers are encouraged to buy as much as possible, often more than they need. Higher prices encourage conservation. If the first customer in the store during a hurricane purchases the entire water supply, that leaves nothing left for anyone else. Higher prices force consumers to be more mindful of their purchase and the price hike signals to suppliers to increase production ASAP.
Price gouging isn’t some nefarious behavior meant to line the pockets of manufacturers. It is nothing more than the market reality that when supply is low, the demand increases and prices go up. Conversely, when supply is high, demand decreases and prices go down. No natural disaster or regional economic problem will change the basic laws of supply and demand.
But why exactly is there a shortage of formula in a country like China that has a robust, self-reliant economy? The problem isn’t a general lack of formula, it is a lack of reliableformula. In 2008, six babies in China tragically died due to melamine-laced baby formula and another 54,000 babies were hospitalized. Four years prior, 12 infants died from a watered-down milk scandal. In short, the Chinese, rightfully, have no faith in the Chinese-made brands and refuse to buy them. There is even skepticism among western brands in China due to the enormous counterfeit market. The Chinese haven’t just mastered replica designer bags, they can fake the baby formula too.
The contaminated formula scandal led to a slew of criminal prosecutions, imprisonment, resignations and even two executions. But why would formula developers put melamine, a compound used to make plastics, into baby formula? The reasoning goes back to the highly praised but incredibly dangerous practice of price capping.
Until recently, the Chinese government extensively employed the use of price caps for a wide range of commodities and services, including baby formula. This was meant to make items affordable to China’s largely poor population. Unable to use quality ingredients to create baby formula and subsequently charge a fair market yet competitive price for the formula, makers turned to a cheaper and in this case, deadly option.
As usual, the government’s regulatory means to keep costs down for consumers eventually produced health problems for those same consumers and was the catalyst for the price gouging that exists today.
Only in 2015 did the Chinese government rescind the price control policyfor about 80% of the products including the formula. But the damage has been done and the effects are long lastingas market confidence has yet to recover for Chinese manufactured baby formula.
What the Chinese were and still are experiencing is a paradox of leftist fiscal policy. Government malfeasance that was disguised as ‘helpful’ through price caps which has led to today’s inflated value due to the ‘harmful and extortionate’ price gouging that is keeping Chinese babies healthy and alive.
Worse still is that common opinion among western governments and their constituents is that the former policy is beneficial while the latter is harmful, when nothing could be further from the truth. Had the Chinese government left the market alone, developers would have been incentivized to create the very best quality formula at the best possible price. The 18 poisoned infants would have been spared and the Australian market would be stable today. But as usual, the state insisted on ‘helping’ consumers.
What’s that saying about the road to hell again?