Obama on Wal-Mart

Josh Wright —  29 November 2006

Steve Levitt is impressed with Barack Obama’s book The Audacity of Hope, and notes that though he does not agree with all of his political views, Obama may very well be a future president. I don’t know much about Obama,and haven’t read his book, but I was disappointed to see him jump aboard the Wal-Mart bashing train at a recent event (HT: Greg Mankiw) with this gem of economic logic:

“Wal-Mart is making a large profit and they don’t have foreign competition. What they are doing though is driving wages down significantly for not only workers at Wal-Mart, they’re also driving down wages for competitors.”

This analysis smacks of an assertion that Wal-Mart’s failure to pay higher wages is a function of a simple refusal to pay what they can afford. And that the wages indicate the presence of monopoly rents. Nonsense. Of course they can afford to pay more, just like I can afford to pay $100 for my morning coffee rather than the posted price or George Mason could choose to make me the highest paid professor in all of the land. I haven’t and neither has GMU, but the inferential leap to monopoly rents here is a long one and should be taken with extreme caution. The implication of this statement is that Wal-Mart is earning supra-competitive profits in the retail industry, and it could use these profits to pay out higher wages. Repeat with me: the retail industry is competitive, faces low economic barriers to entry (spare me the Stigler v. Bain debate for the moment), and has exhibited consistently low average profit margins over time.

Of course, if it were not, Wal-mart’s hypothetical (and dubious) strategy to earn monopoly rents through reducing labor costs would be easily undone by rival seizing a profitable entry opportunity to compete with Wal-Mart on price and increase wages! The other argument could be that Wal-Mart is refusing to increase prices and generate revenues which could be applied to increased wages. Nonsense again. This implies that Wal-Mart would be better off by increasing prices but refuses to do so, i.e. our daunting monopolist is not maximizing profits. And let me preempt Elizabeth’s question (see, e.g. the comments to this post on Wal-Mart’s drug plan) … No, this is not a claim about predatory pricing, i.e. low prices now associated with losses recouped by monopoly profits later. Rather, this is a claim that the monopolist’s profit-maximizing strategy is to offer low prices in order to not be able to afford higher wages.

Obama may be charismatic, and a great writer, and may well become the next POTUS, but if this quote represents his sense of economics (it may not, it is just one excerpt) and specifically, of competition and Wal-Mart, I’m not impressed.

See also my previous and related post responding to Barry Lynn’s unconvincing antitrust call to arms against Wal-Mart in July’s Harper’s Magazine.

18 responses to Obama on Wal-Mart

  1. 

    Whoops! I somehow found myself on Josh’s post on Wal-Mart from November. Oh, well. The arguments still seem to apply (although now we all seem to find ourselves closer together).

  2. 

    I haven’t read Obama’s book, either, but I do not believe Josh’s quote from the book says anything about monopoly rents. Furthermore, Obama is making a political statement, not an economic statement. He is trying to get elected president. I cannot think of any legitimate presidential candidate who has known anything about economics. What they do, if they are elected, is hire people who know about economics. Obama will have to do this, too. So in itself, it doesn’t mean much that he bashes Wal-Mart. There are legitimate reasons to not like Wal-Mart, and what it represents (a pretty callous disregard for the welfare of its employees), just as there are legitimate reasons to admire Wal-Mart, and what it represents (absolute contributions to improving consumer welfare).

    I think everyone has complicated feelings about Wal-Mart. They are a capitalist success story, but at the lowest common denominator of what such a success story might mean. Costco is in the same business with Wal-Mart, and they are absolutely a classier organization (I don’t say this because Costco is headquartered in Seattle, not Bentonville :-)). Crappy companies can succeed admirably in the marketplace, and even bring enormous gains in consumer welfare. Microsoft (another Seattle company) is also a crappy company (for different reasons) that has brought incalculable gains to the consumer. So it is quite possible to dislike a successful business (schadenfreude?) and still believe they have the right (within the boundaries of the law) to practice business as they wish. It is important to separate political from economic rhetoric. On the other hand, Wal-Mart’s catch-me-if-you-can limit-testing on employement law is a bit appalling.

  3. 

    Antitrust protects the competitive process and against conduct that threatens to reduce consumer welfare. Both economic logic and evidence suggest that WM has been good for consumers. I cannot make you read the posts in a sensible manner, but it sure would make for a more interesting conversation in the comments if you would. I do find it quite amusing, however, that you accuse those using economics and evidence to illuminate the argument rather than anecdote and banal rhetoric of losing objectivity.

  4. 

    I find it ironic that, like Mr. Hodak, my knowledge of WM goes back more than 30 years and is based on a family members experience with WM in Southern Missouri. My father was a banker involved in financing one of the earliest WM’s built in So. Mo., although not the first, so I have considerable first hand knowledge about the key drivers of WM’s success and its impact on other local businesses.

    Those interested in the discussion might find this discussion from Wikipedia useful:

    “In 1962, Walton opened the first Wal-Mart store, Wal-Mart Discount City, in Rogers, Arkansas. Within five years the company expanded to 24 stores across the state of Arkansas and reached $12.6 million in sales. In 1968 the company opened its first stores outside of Arkansas in Sikeston, Missouri and Claremore, Oklahoma.

    The company was incorporated as Wal-Mart Stores, Inc. on October 31, 1969, and in 1970, opened its home office in Bentonville, Arkansas, as well as its first distribution center. There were now 38 stores operating with 1,500 employees and sales of $44.2 million. The company began trading stock at this time as a publicly held company on October 1, 1972, and was listed on the New York Stock Exchange shortly thereafter. The first stock split occurred at a market price of $47. By this time, Wal-Mart was operating in five states: Arkansas, Kansas, Louisiana, Missouri and Oklahoma, and entered Tennessee in 1973, and Kentucky and Mississippi in 1974. As the company moved into Texas in 1975, there were 125 stores with 7,500 employees, and total sales of $340.3 million.”

    Once WM was a public company, it very skillfully picked on targets that it could easily defeat and was immensely successful at such. Sam Walton found a battle that he could win and such was immensely profitable to him. He found a weakness in the system and fully exploited such.

    As for workers accepting low paying jobs, the same is true of owners of capital, who often accept low returns, having no better alternative. However, when owners of capital combine to gain economic power no one raises an eye brow. Thus, merely because workers for WM are willing to accept a job on WM’s terms at the outset has nothing to do with their right, afterwards, to organize for even better wages and working conditions.

    As for the other criticisms of WM, the fact that WM treats suppliers poorly is very well known, its switch from Made in the USA to Made in China is such common knowledge that everyone gets Leno’s joke, and its unfair labor practices, today, are fairly well understood.

    To be balanced about WM, I should point out that unlike many many any other companies, it does have very honest book keeping and reporting of financial results, which is a big plus for its present management.

    All of this leads me back to my original point. Why is defense of WM such an article of faith? The company is a human institution, with strengths and weaknesses. What is there about the company that requires “academics” to give up objectivity and choose sides?

  5. 

    JD,

    If you critique simply comes down to what constitutes a “fair fight,” then let me at least comment on that, especially in light of your assumption that I don’t know how Wal-Mart grew.

    My mother-in-law began working for Sam Walton in in Store #17 southern Missouri. By her account, and all accounts written about Wal-Mart’s early years, Sam and his managers worked harder in figuring out what would sell, in finding the right products, and in pushing for the best deal they could get for them. He pioneered the use of computer tracking of inventory. He introduced a generous profit sharing for his store managers and gave all his employees the ability to buy his shares cheaply. (One of the attitudes that most peeves my normally unflappable mother-in-law is the accustation that Wal-Mart is “anti-worker.” She points out that not a single worker was compelled at the point of a gun to work for them, yet they never had any problem filling openings, including among the friends and families of all those “ruined” competitors.)

    You turn the idea of a “political” response on its head. Against some utopian fantasy of how a company is supposed to behave, I’m sure Wal-Mart falls short, but I don’t see how an assertion that Walton and his team worked harder and smarter than the next guy is a “political” statement. What strikes me as “political” is criticizing their success in language of “abusing suppliers,” “breached trust,” and “unfair labor practices.”

  6. 

    I took a moment this afternoon to go back and read this note and the following comments on WM and what immediately struck me was the “political” nature of the defense of WM. It is as if belief in WM as presented by today’s stock analysts is an article of faith.

    Someone needs to go read a little of Peter Drucker, for there are a lot of assumptions being passed off that may not fit the reality.

    My two cents about WM is that: (1) it did not face serious competition as it grew in size–WM went started where it faced little competition–small town mid and south USA; (2) WM has a long track history of abusing its American suppliers; (3) WM breached considerable trust with its customers when it switched from “made in America” to “made in China” (Did anyone catch Leno’s joke on this point this week?); and (4) WM is openly anti-worker and a notorious free rider on health care (in my state taxpayers are funding more health care for WM employees that WM).

    COSTCO is a far better run company, in much of the same space.

    Having said that about WM, does not mean that it should be excluded from opening new stories, etc. It merely means, be honest about the company.

    As for the comments on price and earnings,perhaps they reflect a successful attempt by WM to implement one of Drucker’s points, “The only sound way to price is to start out with what the market is willing to pay—and thus, it must be assumed, what the competition will charge–and design to that price specification.”

    Viewed in this light, that WM’s return on capital has averaged about 8%, which is not out of line for successful retailers and their profit margins of about 3%” really don’t tell us anything.

    As for M. Hodak’s comments, he needs to become familiar with how WM grew. It did not go to America’s urban centers, opening in direct competition with public, well financed companies.

    Instead, WM went where there was no competition–small towns serviced by local “small box” stores, with limited managerial skills, no equity financing, and limited access to debt financing. It used this model, over and over, repeatedly putting local hardware, pharmacies, clothiers, etc., out of business. It was absolutely true that WM was selling for less than these companies could buy the same product. This has absolutely nothing to do with antitrust law as best I can tell, but everything thing to do with why a lot of people don’t like WM–they and their friends and families lost what were often the investment of several lifetimes. Consumers as a whole may have benefited but capitalism creates loosers and those that have lost don’t have to like it, especially when they are astute enough to know they lost what wasn’t necessarily a fair fight.

  7. 

    Actually, Obama got me on ““Wal-Mart is making a large profit…”

    Without adjusting for their scale, Wal-Mart of course has a huge profit, but that doesn’t account for the investment, which only makes sense if you don’t care about the investors. Wal-Mart’s return on capital has averaged about 8%, which is not out of line for successful retailers. Their profit margins of about 3% are not much different Target, Dollar General, or other discount retailers, and were historically lower than K-Mart’s, no doubt from their “lower price” policy. Wal-Mart historically created value through its superior management of inventory levels and inventory turns. In other words, they were just better retailers, able to grow their low-margin, high-turnover model to a very large scale. To call this model “making a large profit” and focusing on their overall profit is, I think, disingenuous.

  8. 

    Thanks for the comments.

    Montgomery, I agree with you that this question lends itself well to empirical testing, a la Staples/ Office Depot. From what I have seen, e.g. Hausman’s study linked to in the previous post, the empirics demonstrate that WM substantially increases consumer welfare.

  9. 

    I think the bigger problem with Obama’s statement is that it seemingly confounds Wal*Mart’s competition in the retail market(s) for the products it sells with competition as a purchaser of unskilled labor. That is an example of sloppy pseudo-economic reasoning that, standing alone, seems implicit in his statement.

    As for the substance of the question, it certainly lends itself well to numerical analysis. I suspect that there are some communities in which Wal*Mart is one of the largest employers. It would be worth analyzing how Wal*Mart’s average wages vary from store to store, controlling for geography/cost of living, Wal*Mart’s share of the big-box retail market, and its share of the labor pool.

    Unfortunately, this is not the kind of question that lends itself well to speculation. As we saw with prices in Staples/Office Depot, these kinds of store-by-store comparisons can sometimes yield interesting and surprising results.

  10. 

    Also, I just updated a study on predatory pricing, and it seems clear that this branch of anti-trust has completely withered both in the economic and judicial ends. The economic rationale died in the 50s and 60s with various empirical studies. The judiciary finally got wise to the fact that not a single case of monopolistic recoupment has ever been proved, and that the vast majority of predatory pricing cases were brought by large companies against small companies undercutting them in order to get a foothold in the market. Alas, like the spurious charge of ‘witchcraft’ centuries back, it may take a while for the charge of predatory pricing to be banished from civilized society.

  11. 

    I don’t know why you waste time rebutting a silly-ass contention such as “Wal-Marts (sic) had a lack of robust competition.” I’m sure it’s an argument that some lawyer could make if they were paid enough to do so, but no one in anti-trust has bothered to try.

    As far as I can see, the people bothered by Wal-Mart are squishy liberals who don’t like anyone behaving according to interests that aren’t theirs, and the one group actually exempt from our anti-trust laws–labor unions.

  12. 

    Sorry John, I have to pull rank on the subject of what the post I drafted was about. Then again, that is fairly clear from the text of the post, so lets move on to more interesting subjects.

    It is true Obama’s single line excerpt here does not necessitate that his view is that Wal-Mart’s wages have something to do with lack of competition. It is hard to square that with the language he used. This, again, is obvious. I do leave open, as I did in the post, the possibility that the single line does not accurately reflect his views.

    Also, Mr. Wright did not “have to concede” that the fact that WM is not above the law are grounds with “economic substance.” That just doesn’t make any sense. If you’re argument is that WM’s 20-30% share in retail gives it the power to flout the law … well … I am quite happy to concede that argument is outside the scope of (at least) this post.

    Finally, the evidence (not just anecdotes) here is really not on your side with respect to the claim that WM is not facing competition at the retail level. An obvious test here is the fact that WM has not raised prices! Monopolistic predatory pricing involves increasing prices at some point … not simply offering lower prices than all rivals, all the time. If WM ultimately raises prices in an effort to monopolize retail, I will be happy to reassess my analysis … but perhaps the best antitrust policy stance in the meantime is to enjoy the substantial increases in consumer welfare.

  13. 

    Contrary to what Mr. Wright, now says, his post was not about “the relationship between WM’s so called “lack of competition” and its ability to depress wages.”

    Mr. Wright merely took, out of context, a statement by Obama and then projected onto that statement the basis or foundation for the statement.

    My comments merely pointed out that there were other grounds on which Mr. Obama could have arrived at his conclusions, grounds which Mr. Wright had to concede have bona fide economic substance.

    As for Wal-Marts, as I have posted before, there are sound arguments that its success has less to do with Wal-Marts that generally believed and far more to do with the lack of robust competition in the areas where it did business.

    As for the arguments like barriers to entry, etc., those statements are broad generalizations far removed from the realities of the local markets where Wal-Marts grew, markets for which, at worst, good anecdotal evidence exists that there was neither management skill nor capital available to compete with Wal-Marts.

  14. 

    If not Wal-Mart… the barter system… les halles… farmer’s markets? The Wal-Mart problem, if it is a problem, should be solved by entreprenurship.
    I think the bashers may want smaller parking lots and better service. Why don’t we compete based on service? I think we do.
    Wal-Marts are ugly, and isn’t Obama from Chicago? Wait… he went to Harvard.

  15. 

    Exactly. If Walmart is paying such low wages, why can they attract employees? It is either because the employees they attract don’t have other options (Such as low-skilled newly-arrived immigrants, in which case Walmart is doing them a favor), or it is paying at least equivalent to what they would make elsewhere. Walmart is not the only retailer in America.

    By the fundamental nature of markets, it cannot both be competitive and drive down wages for the TYPE of worker that it employs. Either it has no competitors for labor to drive wages down on, or it does have competitors and it can only drive wages up.

    I still like Obama though. Nobody these days seems to understand economics that well. I think he is perhaps just playing to the crowd here.

  16. 

    The post is about the relationship between WM’s so called “lack of competition” and its ability to depress wages. If WM is violating the labor laws, committing torts, discrimination laws, criminal acts, etc., they should face the appropriate sanctions for violating those laws. Conceding that WM is not above the law, however, has not a bit to do with the mistaken claim that WM’s “lack of competition” or “economic power” allow it to extract monopoly rents by reducing labor costs.

  17. 

    what if Wal-Mart is using unfair labor practices to prevent unionization?

    you would certainly agree that Wal-Mart’s has considerably more economic power than the individuals who work for Wal-Marts. Shouldn’t those who work for Wal-Marts be as free as Wal-Marts shareholders to combine for their own economic benefit?

    and, what if Wal-Mart is using discriminatory hiring and labor practices, to the same end?

Trackbacks and Pingbacks:

  1. TRUTH ON THE MARKET » Clinton, Obama, and Wal-Mart - May 3, 2007

    […] You see, Wal-Mart was all good in its nascent stages when it was not so big  — Guilt-free low prices for families for low and moderate income families!  But those, you see, were the good ol’ days before it grew.  You know, the days when Clinton sat on Wal-Mart’s board, a.k.a. the days when an attack on Wal-Mart and free trade weren’t in the compulsory portion of the campaigning program.  I don’t mean to just pick on Clinton.  Obama has taken the bait to engage in a little Wal-Mart bashing as well at least once. […]