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The Colossus, Globalization, and More: Wal-Mart   (August 31, 2006)

My recent entry on Wal-Mart (scroll down to August 29) drew two excellent commentaries, which are reprinted below. But before we get to those, let's cover the context surrounding any discussion of Wal-Mart. (Note: this is a long entry, but well worth reading through to the end.)

1.   Size matters. Wal-Mart is by far the world's largest retailer. Though this chart is a bit dated (2005 sales at Wal-Mart exceeded $285 billion, and 2006 sales are on track to hit over $300 billion), the relative weight of Wal-Mart compared to its global competitors hasn't changed. It is the proverbial 800-pound gorilla. Its policies can literally move the world.

2.   Wal-Mart very ably tells its side of many issues on this website, Wal-Martfacts.com which I recommend checking out.

3.   For a variety of reasons, Wal-Mart excites emotional responses in many of us. I believe the reader-commentators I quote at length below make valid points and ask valid questions which are not emotionally biased; while I do not have answers for all the issues raised, I would like to clarify my own position. (Feel free to scroll down and read the corresponents comments first and then return to my own comments.)

4.   I don't "hate" Wal-Mart but I do see evidence that they rely on taxpayer funding as part of their low-cost business plan--something which not all their competitors do. Hence, they are gaming the system to the disadvantage of taxpayers. That is my core objection. If one retailer gets to off-load healthcare coverage onto the government/taxpayers, then all retailers should be offered that same advantage via a "level playing field."

If one retailer pays a decent wage and provides its employees with some medical insurance and 401K-type pension, while another pays lower wages and few benefits, because it knows the government will provide those for its employees if it doesn't, then who wins in the long run? The competitor (Wal-Mart) who is basically using the government to pay some of its employee benefits (medical and retirement).

Wouldn't it be fairer to require a level playing field for all retailers? In Hawaii, for instance, a law requires employers to pay 50% of all employees' medical insurance, regardless of the firm's size. (I think the cut-off is 20 hours per week, which of course can be evaded by hiring people to work 18 hours a week). The idea is, all employees get some help in medical coverage, and all employers pay some of those expenses. Hence: a level playing field.

5.   The alternative is what Japan and Europe offer employers and citizens: the government provides the medical coverage, freeing all employers equally from that burden. What strikes me as patently unfair and thus uncompetitive about Wal-Mart et. al. is that the government picks up the tab for thousands of their employees while other global corporations such as Ford, Boeing, Costco, Hewlett-Packard, etc. cover all or a significant portion of these costs.

6.   As for China and other low-wage havens, let's look at what U.S. retailers can do, even in a global workforce situation. If U.S. corporations require overseas contract employees to be paid, say, $120 rather than $80 a month, and that their work hours be limited to 10 hours per day, etc., then some factory will switch over to meet those standards in order to serve the U.S. market--or Wal-Mart alone, since it is basically a small nation in and of itself. Their competitors will eventually find it hard to recruit the best workers, as they have migrated to the better wages and working conditions of the factory meeting U.S. standards.

Since factory wages are such a small part of the final product's retail cost, U.S. retailers such as Wal-Mart can improve the global working conditions and wages for many workers without unduly jeopardizing their global competitive position. Companies such as Hewlett-Packard have made an effort to require minimal standards for the workplaces of their contract manufacturers (OEMs) in China (including inspections to oversee compliance); if H-P can do it, then why can't Wal-Mart?

7.   The argument that requiring Wal-Mart to pay modest benefits and decent wages would significantly impact its low-income customers is false. A 20% increase in wages and benefits would not translate into a 20% rise in the retail cost of goods. Although I cannot locate any statistics to use as metrics, I suspect the entire year's impact of slightly higher prices would be equivalent to about the cost of one meal for the family at McDonalds and an armfull of DVD rentals. Yet the impact on the employee would be very significant.

To summarize one argument offered in favor of the Wal-Mart model: their low prices outweigh the low wages if you consider the benefits to the entire community. But this is a false analysis. The question should be: how does Wal-Mart compare against a competitor such as Costco which pays decent wages and benefits while also offering low prices? Are Costco prices low enough to save consumers money? Yes. Do they pay employees more than Wal-Mart? Yes. Do they still make a profit? Yes. (While I know Costco pays well anecdotally, I was unable to find statistics to back this up-- if anyone has comparative stats on wages and benefits paid by Target, Costco and Wal-Mart, I would appreciate a link.)

8.   This discussion also raises another theme with which readers of this blog are familar--the looming crises in American healthcare (or lack of it). According to The Wall Street Journal, the number of people without health insurance increased to 46.6 million in 2005. (About 45.3 million people were without insurance the year before. Hey, a million here and a million there, and pretty soon you're talking about a lot of people.)

Then there's the millions of people like myself, self-employed or small business owners, who are hanging onto their insurance coverage by a thin thread.

Many people (myself included) believe that the U.S. will get a national healthcare plan only when Corporate America finds their medical costs so heavy that there is simply no other way to stay in business but to off-load healthcare onto the Federal government. At that magical tipping point, all the objections and all the rah-rah about free enterprise will suddenly vanish, because profits (or in the case of the U.S. auto industry, their very survival) will be at stake.

In summary: Global corporations can afford to pay their employees wages and benefits such that said employees don't need public assistance to live. If we as a nation want retailers to offer some form of work-welfare, then all retailers should share the same government benefits/support structure.

OK, on to the readers' commentaries. Here is one who points out that small business games the system by paying wages under the table, avoiding both taxes and benefits costs:
My first "real" job back in 1979 was inside a grocery store (I was the clean up boy in the butcher shop working for $2 an hour cash + free cokes and candy). When I graduated from High School in 1983 I had moved on from clean up boy to carry out boy to cashier and weekend manager of the little Burlingame store. The Italian Immigrants that owned the place never put me on payroll, paid any taxes or gave me any health care but they more than doubled my salary to $5 an hour cash + let me have a case of beer every now and then...

I had to laugh when I read: (from a previous entry on Wal-Mart, link at the end of 8/29 entry)

"The low wages and benefits paid by Wal-Mart insures that a significant percentage of their workers' medical costs are paid by taxpayers via Medicaid. Yes, Medicaid--the medical benefits reserved for the poor of our nation. Those $7-8/hour jobs place the workers solidly in the extreme poor of our nation, those earning $15,000 or less annually. (This is more than most writers earn by scribbling, but that just shows lousy pay isn't enough to deter fools.)"

I know it is popular to hate Wal Mart, but what is the difference between Wal Mart paying $8 an hour without any health care and some hip Berkeley coffee shop paying $8 an hour without any health care. The difference is that while Wal Mart may not pay high wages, and they may not pay heath care, but at least they hire legal Americans and pay taxes (I know that a company Wal Mart hired to clean stores did get caught with illegal aliens). Almost everyone I know in the restaurant, retail and real estate business hires more illegal aliens, pays less total cash compensation and pays less taxes to the government than Wal Mart...

I do a lot of retail lending and addition to your blog I read www.morningnewsbeat.com (which has a "Wal Mart Watch" section) on a regular basis. Sure Wal Mart and Super Wal Mart are making it hard on other retailers, but Safeway and Luckys forced the closure of almost all the little stores in SF where my parents shopped as kids and most of the little grocery stores on the Peninsula (including the one I worked at).

It is not popular to say this but the small business that are much loved by the liberal left are a "double whammy" to the economy. Not only do most small and family business hire as many illegal aliens as possible (and pay rock bottom wages) or pay US citizens cash but they avoid lots of income taxes by rarely declaring much (or any) of their cash income.

As a commercial real estate lender I see the tax returns of all our small business owning Borrowers and many of these guys worth millions "make" (according to their tax returns) about as much as a Wal Mart employee or a struggling writer. As much as people hate Wal Mart at least they withhold taxes from paychecks and have audited financial statements and pay taxes on their income.
Next up is correspondent Michael Goodfellow, who last contributed an incisive analysis of the looming Social Security crisis. He observes that the key drivers to many of these issues are larger than Wal-Mart: technology and education:
Wal-Mart seems to have become a symbol of globalization (especially goods from China) and low-paying jobs in the U.S.. Wal-Mart stores have drawn a lot of local opposition from activists, despite their popularity with shoppers. States like Maryland are trying to force them to provide health insurance. I would really like critics to give honest answers to the following questions:

1. Why is there a huge line of applicants for those crappy Wal-Mart jobs whenever they open up a new store? Do none of those people know how horrible it all is?

2. The "taxpayer subsidy" critics mention is of course government programs like food stamps and Medicaid, which large families with low income qualify for. Wal-Mart is hardly unique in this since they pay well over minimum wage.

So the current situation is that all taxpayers fork over a bit of money to low-paid workers. If Wal-Mart raised its compensation they would also raise their prices to pay for it. So then you'd have Wal-Mart customers paying extra to subsidize low-income workers. But since Wal-Mart customers are disproportionately low-income themselves, the price increase would hit the portion of the population least able to afford it.

What's more, if Wal-Mart is required to offer health insurance, they would rationally discriminate against elderly employees, part-timers or ones with families. Is this really what you want?

3. If Wal-Mart didn't exist, would China raise all its prices and pay all its workers more? Or would they just sell to other retail outlets? If they did get more for their goods, would any of that reach workers there?

4. Third-world workers in general are not slaves. Press gangs do not drag them off the streets to make Nikes. If they have taken a job in a sweatshop, it's because that's the best job they could find. If you close that factory, won't they just go to the next, crappier job that they had previously turned down?

5. If you make third world countries obey U.S. environmental standards and working standards and pay standards, what advantage would they have left? It's not like they have a better educated workforce or anything else to offer. Cheap labor is their only way into the world market. It's their first step up the ladder to first-world status. This has worked for Japan, South Korea and now China. Why would you want to stop it?

6. In more socialist countries, Wal-Mart might not exist. Instead we'd have a core of long-term unemployed people like in Europe, plus expensive retail with poor service. Is that better?

The point of these questions is that by slapping down Wal-Mart and what it stands for, you might not be helping anyone, least of all the low-wage employees you are so worried about.

It's also worth wondering why Wal-Mart exists in the first place? The criticism of Wal-Mart makes it sound like a symptom of moral decline. Weak unions, Big Business exploiting workers with crappy wages, slave-labor economies in China, etc. It's far more likely to be due to changes in technology.

For example, consider overseas call centers. You might explain these as simple greed -- corporations reducing their costs by sending jobs overseas. But companies have always wanted to reduce their costs. Why didn't they send those jobs overseas 30 years ago? The answer is technology. Back in the 70's, overseas calls were something like $1 a minute. If an Indian worker was paid 50 cents an hour and an American $6, it didn't matter, since the phone call was $60 an hour. Now the cost of phone calls has dropped to a couple of cents a minute (a dollar an hour) and suddenly an overseas call center makes a lot of sense.

I've read similar things about containerized cargo. Before that was introduced in the 60's and 70's, cargo was unloaded and repackaged multiple times in transit. With containers, it all moves more cheaply, more quickly and more reliably. This in turn enabled all the just-in-time worldwide supply chains that make a company like Wal-Mart (and many other companies) possible.

Cheap computers and networks are also a factor. I've read that Wal-Mart is as much an information technology story as it is a retail story. After all, according to their annual report, they have 1.6 million employees, 68,000 suppliers, and thousands of stores. Getting everything where it should be in a network this size just wasn't possible back before computerization.

We want cheap phone calls, cheap computers and cheap shipping. The side effect is global supply chains and the creation of large companies like Wal-Mart and all the other big-box stores that are killing small retailers. When retailing becomes a technology and supply chain story, the "mom and pop" stores just can't compete.

Finally, wages would be higher if there weren't a worldwide oversupply of unskilled labor. This is especially ridiculous in the U.S. considering how much we spend on primary education. A high-school graduate here has received anywhere from $70,000 to $150,000 in education. It's a crime that for so many people, this expensive education gets you the skills to tote boxes around at Wal-Mart, or compete with nearly illiterate factory workers in third world countries. We should be moving up the chain and producing more valuable goods. Wal-Mart should be forced to pay more wages, not because government passes a law, but because there are so few people who want those jobs.

I don't see this situation getting any better. As technology improves, more and more low-skilled work will be automated. We've let education stagnate for years, with only trivial increases in test scores. The tests themselves measure little that has any value in getting a job. Large numbers of low-income people willing to work for Wal-Mart wages is the price of that neglect. It's not a story about greed.
Thank you, Michael and our other reader, for such cogent commentaries. Thanks to you, I have a better understanding of the issues raised by critiques of Wal-Mart.

For more on this subject and a wide array of other topics, please visit my weblog.


copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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