February/March, 2004

From the Editor

Below The Surface

One of the most common mistakes made in business and public policy is to look at the obvious consequences of a decision, action or event and ignore those consequences that are less easily discernable.

In public policy, this is an especially problematic situation, because it is common for the beneficiaries of a given policy to be identifiable and for those benefits to be concentrated —meaning that a few people will have intense interest in seeing this policy adopted or sustained. In many cases, those who will be hurt by a given policy are widely dispersed and difficult to identify, which means they will have little incentive to vote or contribute based on any politician’s actions regarding a given policy.

This is why one finds politicians doing what would seem to be counter-productive things. For example, in a close race, a Presidential candidate might, on election eve, fly to a dairy state to announce his support for higher dairy price supports. Since this translates into higher milk prices, one would think it political suicide for a Presidential candidate to run around the country pledging to raise the price of milk for almost 300 million Americans.

But that is not the way it works. Dairy farmers are few, and milk consumers many, so a politician who proposes to raise the cost of milk for a typical consumer by, say, $3 a year is proposing a course of action so insignificant that 99 percent of the voters will never even know he did it. Even if the voters did know, the cost is so small that it will hardly be the criteria upon which these voters will place their vote or make their political contributions.

On the other hand, this small tax on each consumer translates into an almost billion-dollar windfall for dairy farmers. Since dairy farmers are few in number; when you divide a billion dollars amongst them, there is real money at stake. Plus, dairy farmers have associations and publications specifically to monitor stuff like this. So the dairy farmers will both know and care what decision is made, and that decision could well motivate both votes and campaign contributions.

Retailers that would rather fight their competitors in the political arena than fight by delivering superior value to consumers are all across America fighting to restrict the growth of Wal-Mart supercenters. They want state legislatures and city halls to restrict the size of retail stores and, in other ways, throw up barriers to competition.

For a politician, it is an easy call. If Wal-Mart and its low-price philosophy enter a market, the losers are identifiable and obvious. Supermarkets and other retailers that can’t compete will either close or fail to grow. If one of the reasons they couldn’t compete is they had unions that had wrangled a wage in excess of what market forces would have produced, well many of those employees will either have to renegotiate and accept less or lose their jobs.

It is, of course, regrettable that anyone should have to go out of business and that anyone should have to accept a pay cut or lose a job. However, in a capitalist economy, capital flows are always changing, both creating and destroying jobs. By far the most under-read economist is Joseph Schumpeter, who found that the very essence of what makes an economy grow is the process of “creative destruction”. Under this process, resources of all types — capital and labor both — are transferred from old ways (buggy whip factories) to new, more productive uses (automobile factories).

What is missing from all the attacks on Wal-Mart is the flip side. If Wal-Mart is so much less expensive that it will seize large market share, drive competitors out of business and reduce food industry wages, what will happen to all the money that consumers will save from buying so much more cheaply?

In the face of a movement to get Los Angeles and various California towns to ban supercenters, Wal-Mart gave a grant to the Los Angeles County Economic Development Corporation to study the impact of Wal-Mart’s entry into Southern California.

The study is a must-read because it quantifies what up till now has simply been ignored.

After first pointing out that Wal-Mart is likely to only grow slowly in Los Angeles, what with the difficulty of getting good real estate, etc., the report also points out that Wal-Mart wages may not be so low anyway. It points to four mitigating factors: 1) Supercenters are so new that there are no senior employees in most places. What a 30-year Wal-Mart Supercenter deli clerk will get paid can’t be known for decades. 2) The current geography of Wal-Mart Supercenter stores pulls down the average wage, and wages tend to be set locally. 3) Wal-Mart provides benefits that have been of great value, like stock discounts and an unlimited catastrophic health plan, 4) Wal-Mart tends to promote from within.

But even accepting that Wal-Mart’s wages are lower and will remain so, the study is revealing. By having competitors that will lower their prices to compete with Wal-Mart, the report estimates that Southern California consumers will save $3.76 billion dollars each year. This translates into the equivalent of a massive wage increase. With this money consumers will buy more of other things, pay down debt, travel, etc. The report also estimates that the expenditure of the Wal-Mart savings will result in 36,400 new full-time equivalent jobs in the Southern California area.

This is the problem: In Los Angeles and around the country, all the focus will be on those who are losers from Wal-Mart. But who will speak for the 36,400 new jobholders who will get jobs because Wal-Mart helps people save money? If we don’t hear their voices, we won’t make the right decision.  DB