The Costco Butter Recall of 2024 Is Not What You Think

The FDA should step in only when markets can’t. The Costco butter debacle shows how rarely that actually happens.

The news is ablaze with stories of Costco being forced by the FDA to recall almost 80,000 pounds of butter because the manufacturer failed to place a label warning consumers that it might contain milk. AOL, The New York Post, and CBS News, plus a slew of local news stations, have covered this story. Stephanie Gravalese, writing at Forbes, uses this as an opportunity to “[underscore] the importance of accurate food labeling and the impact it has on consumer trust and safety.” In USA Today, Jonathan Limehouse pokes fun at the idea that consumers might not know that milk contains butter.

I’ll confess that when I first read about this story, it piqued my interest because of course the federal government would require something as asinine as this. The truth, however, is markedly different and evidences exactly what classical liberals have said would happen in a free society: that successful companies are kept honest by the twin pressures of competition and reputational effects.

To set the record straight, Costco was not “forced” to do anything by anyone. The FDA incident report details that this was “Voluntary: Firm initiated,” meaning that Continental Dairy Facilities Southwest LLC – the firm that provides Kirkland branded butter in Texas – came forward with their error on their own volition. In fact, Costco and Continental Dairy Facilities worked together to issue a memo to the Costco members who purchased the affected packages of butter. As they write, “If you purchased the recalled butter and you do not have a milk allergy, this butter is safe to consume. If you prefer not to consume it, please return the item to your local Costco for a full refund.” 

The typical American almost assuredly knows that butter contains milk, so the warning label is likely superfluous to begin with. Further, people with milk allergies are intimately aware of which products are known to contain milk and are conscientious enough to only purchase items that contain “dairy free” somewhere on the packaging. As a result, the amount of the affected butter that will be returned is likely going to be extraordinarily low.

What this story underscores is not the excesses of government meddling (though there’s plenty of that), but of the power of markets in a capitalist system of profit and loss. The fact that customers can so easily vote with their dollars and effectively fire a grocer which does provide quality food at a reasonable price disciplines every firm in the market and forces them to compete on dimensions of quality and price. That’s how they win, and secure profits, in a capitalist market system.

Further, consider the reputational effect of this voluntary recall. Even if all 79,200 pounds of butter are returned to Costco, the cost of such a return would be less than $300,000. Balanced against its $7.37 billion profit for this past year, this sum reflects hardly even a rounding error. But the reputational effect that Costco and Continental Dairy Facilities will enjoy is easily worth far more than this. Costco customers now have concrete evidence that if they purchase something from the store that does not fully live up to even absurd and superfluous regulatory standards, they will be notified and will receive a full refund, no questions asked. This type of reputational publicity quite simply cannot be bought: it can only be earned. In an ironic twist, Costco just sent a message to the rest of the business community: the best way to be perceived as reputable and honest is to be reputable and honest.

Classical liberals are correct: in a competitive market system, dishonest firms will be driven out of the marketplace by honest firms. A dishonest firm will quickly find themselves devoid of customers to fleece, thus earning zero revenue while still incurring costs. An honest firm, however, will find themselves with a growing number of customers and with repeat customers, effectively giving them a constant stream of people to serve.

Contrast this with the narrative that so many political pundits will spin: that we need agencies to protect consumers from the nefarious ne’er-do-wells that occupy corporate board rooms across the country.

In 2022, Politico published a report finding “that the Center for Food Safety and Applied Nutrition, the little-known food arm of FDA, has repeatedly failed to take timely action on a wide range of safety and health issues the agency has been aware of for several years, including dangerous pathogens found in water used to grow produce and heavy metal contamination in baby foods.” This led to Senator Murray (D-WA) issuing a letter to the FDA Commissioner Robert Califf, writing that she is “deeply concerned about a new report into longstanding, significant delays and dysfunction across food safety efforts at the U.S. Food and Drug Administration (FDA).”

Each year, the FDA publishes a Justification of Estimates for Appropriations Committees. This year’s report is damning. It reads, “At present, FDA’s drug program is double its food oversight, and CDER [Center for Drug Evaluation and Research] is five times larger than CFSAN [Center for Food Safety and Applied Nutrition]. This funding shortfall means CFSAN’s operational capacity has not grown to meet 21st century challenges or stay current with evolving industry and food protection practices.”

At the same time, at the Friends of Cancer Research Annual Meeting, Commissioner Califf said that the FDA is currently “at peak performance.” Though in fairness, he did qualify by noting that he is “biased.”

Accurate labeling on packages is important and there can be no real doubt about this. However, the infantilization of consumers by the FDA is not nearly as necessary as Washington bureaucrats would have us believe. Likewise, corporations are nowhere near as nefarious and reticent to do the right thing as these same people imagine.

Markets and capitalism contain within them mechanisms for addressing the legitimate concerns of so many people. The FDA needs to take a back seat and step in only when markets fail to deliver. As the Costco butter example illustrates, this is far less frequent than is commonly understood.



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