The country’s ongoing shortage of infant formula has been exacerbated and prolonged by a long list of counterproductive government interventions: from tariffs and trade restrictions to price-distorting subsidies and nonsensical labeling requirements.
New York City Mayor Eric Adams has decided to throw one more log on the fire by issuing an emergency order limiting price increases on infant formula.
“The nationwide infant formula shortage has caused unimaginable pain and anxiety for families across New York—and we must act with urgency,” said Adams on Sunday. “This emergency executive order will help us to crack down on any retailer looking to capitalize on this crisis by jacking up prices on this essential good.”
The mayor’s order invokes city rules that prohibit merchants from raising prices more than 10 percent from where they were 30–60 days preceding the emergency. Adams urged people to report potential gouging to the city’s Department of Consumer and Worker Protection.
The only thing surprising about Adams’ order is that more politicians haven’t followed suit. Laws and regulations outlawing acute price hikes in response to a sudden shortage, i.e. price “gouging,” are as politically popular as they are economically counterproductive.
Obviously, no one likes rapidly rising prices, particularly on a product as essential as infant formula. But letting prices rise freely is the best way to deal with the negative effects of the current shortage.
In the immediate term, sudden price hikes discourage people from engaging in harmful and unproductive hoarding.
When news of a real or expected shortage starts to spread, people’s first reaction is often to buy up as much of the endangered product as they can before it disappears entirely.
One way to discourage that panic buying is to let prices surge. When would-be panic buyers encounter far more expensive formula prices, they buy less. That leaves more product available for the next person.
But when price hikes are constrained, the people who get to the store first will buy more formula. The people who get to the store later will either get nothing or, at best, pay even more inflated prices in the inevitable baby formula black market.
Preventing prices from rising with demand creates an arbitrage opportunity for people buying up stock from price-regulated primary retailers and selling it on the unregulated secondary market.
Adams’ own emergency order cites the plea from the Food and Drug Administration (which has played a major role in creating the formula shortage) that companies impose “purchasing limits” to prevent “predatory behavior”—i.e. people buying up baby formula and selling it at higher prices on the secondary market.
But those purchasing limits are only necessary in an environment where prices can’t rise to meet demand. The mayor’s price gouging order might outlaw that predatory behavior. It also makes it more likely.
In the intermediate term, one will expect Adams’ order to prolong the city’s shortage by discouraging would-be suppliers from entering the market.
Higher prices make once unprofitable activities suddenly lucrative. For example, it’s usually not profitable to drive 100 miles to sell people bags of ice. That calculation changes when a hurricane drives up the price of ice to $15 a bag.
Conversely, if price gouging laws force a bag of ice to be sold at $1, hurricane or not, a lot fewer potential suppliers are going to be induced to take that trip. The result is more people go without ice.
Adams’s order will similarly deprive New Yorkers of much-needed formula. Out-of-city suppliers who might have incurred higher transportation costs to reap the rewards of higher prices in the Big Apple will instead sell off closer to home. That’ll be particularly true if they’re located in a jurisdiction that hasn’t banned market prices on baby formula.
The federal policies driving the formula shortage—whether that’s prohibitive tariffs on baby formula or labeling rules that keep European products off the market—are outside the control of local officials like Adams, who are nevertheless expected by their constituents to do something.
The least the mayor could do, however, is not make the formula problem worse. His emergency order shows he can’t even clear that bar.