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:
â€œWal-Mart is making a large profit and they donâ€™t have foreign competition. What they are doing though is driving wages down significantly for not only workers at Wal-Mart, theyâ€™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.