Monday, February 10, 2014

Book Review (#16 of 2014) The Wal-Mart Effect by Charles Fishman

At first, I thought The Wal-Mart Effect: How the World's Most Powerful Company Really Works--and How It's Transforming the American Economy was going to be a puff piece on Wal-Mart, but that's not the case. You can see various reviews of the book on the book's website and see it's mostly been praised for its even-handedness. It's simply an attempt to get one's head around Wal-Mart's policies, particularly in regards to their supply chain, and their consequences. Fishman sees Wal-Mart as a "reflection of our money." Wal-Mart is democratic in the sense that we vote with our dollars and it does exactly according to what we vote for.

Fishman (2006) starts at the early beginnings of the company, but doesn't go in-depth. Sam Walton, the richest man in the world, used to drive around in a beat up old car with no hubcaps. He would borrow a car if he was visiting one Wal-Mart store in driving distance of another. Wal-Mart executives were compensated for meals while traveling, but only up to a 10% tip. That attitude permeates everything Wal-Mart does: Always low prices.

Many anecdotes are famous about Wal-Mart, but Fishman tries to find stories from Wal-Mart suppliers or former suppliers, and employees of those companies. Suppliers live "in fear" of Wal-Mart, refusing to publicly comment on the company's practices. Wal-Mart is a monopsony determined to hold down price. Suppliers who do business with it will see their profits whittled down (as confirmed by economic studies) by inflation in their own inputs while Wal-Mart is determined not to pass that inflation along to consumers. A company who does more than 20% of its sales with Wal-Mart tends to end up in bankruptcy more often than those who only rely on Wal-Mart a smaller percentage of the business. 

Fishman's look at Snapper mowers is insightful-- Snapper ended its relationship with Wal-Mart after the company pushed Snapper too low on price, and suggested it create a cheaper, lower-quality, line of mowers just for Wal-Mart. You can read that chapter published as an article for Fast Company.

"Wier had determined to lead Snapper to focus on quality, and through quality, on cachet. Not every car is a Honda Accord or a Toyota Camry; there is more than enough business to support Audi and BMW and Lexus. And so it is with lawn mowers, Wier hoped. Still, perhaps the most remarkable thing is that the Wal-Mart effect is so pervasive that it sets the metabolism even of companies that purposefully do no business with Wal-Mart."

Interestingly, as of 2013 Wal-Mart is again selling Snapper mowers, which is now owned by Briggs & Stratton. Snapper dealers appear to have mixed feelings, similar to how they felt in 2005.

Most interesting to me are the economic impact studies. The book was published in 2006, when a 2005 study by Baker was prominent. David Neumark has done an updated study with a correction for what he sees as errors in Baker's instrumentation. Neumark finds that Wal-Mart opens stores where it sees potential economic growth, so one has to control for that growth and see if Wal-Mart increases employment beyond that or actually brings it down. (Neumark is generally considered "conservative" as he's written strongly against the minimum wage lately.) While Baker found that employment in a county, overall, increased by 30 jobs five years after Wal-Mart opened (which Wal-Mart was eager to tout), Neumark et al find:
The employment results indicate that aWal-Mart store opening reduces county-level retail employment by about 150 workers, implying that each Wal-Mart worker replaces approximately 1.4 retail workers. This represents a 2.7 percent reduction in average retail employment. The payroll results indicate that Wal-Mart store openings lead to declines in county-level retail earnings of about $1.4 million, or 1.5 percent (emphases mine). 

Wal-Mart makes a big overall impact on prices in America, which went unrecorded by the Bureau of Labor Statistics who intentionally leave Wal-Mart out of their price surveys. If properly measured, it would have lowered the rate of inflation in the U.S. dramatically.

Our estimates are that the BLS CPI-U food at home inflation is too high by about 0.32 to 0.42 percentage points, which leads to an upward bias in the estimated inflation rate of about 15% per year.

Other studies have found Wal-Mart increases poverty. However, if you factor in the CPI bias above, prices in those areas are improperly measured and would have fallen-- meaning one can argue the income effect is not quite as bad. Jason Furman, President Obama's current CEA chair, put it like this in 2008:

The lower prices at Wal-Mart are staggering. They are eight to 40 percent lower than what people would pay elsewhere. The total annual savings in one recent study...for consumers are $263 billion. That’s $2,300 for every household in America. They’re very few public policies that I’ve advocated in my life that would make as big a difference as that.

Compare that to estimates of wage suppression by Wal-Mart... $5 billion a year in lower wages due to Wal-Mart. $5 billion, $263 billion – it’s just an enormous differential. Because of that I called my paper, and also to be a little bit provocative maybe, "Wal-Mart: A Progressive Success Story," and part of it is the progressive benefits that Wal-Mart has delivered. ...

Wal-Mart, even if we didn’t do anything, would be a force where the good vastly outweighs the bad. But the good isn’t good enough and we need to do a lot more, and Wal-Mart should act in what it claims it’s interested in doing on behalf of its stakeholders and work with all of us to do things like expand Medicaid, food stamps, EITC, raise the minimum wage, which Wal-Mart has finally come around to supporting.

One recent study found a new store opening causes an increase in local home prices.

By in large, there is no environmental impact mentioned in the book. But when one considers that Wal-Mart makes it cheaper to buy things like mowers every year or two rather than repair the broken one, the result in our landfills should be measurable.

Fishman ends with a look at a Wal-Mart supplier from the view of employees who were laid off as manufacturing was shipped abroad. While earlier in the book he contends that we should really laud this globalization, gains from efficiency and competition, and lower prices he uses his last chapter as a way to (in my view) stoke racist (ie: "the Chinese") nationalist sentiment. But his broader point is worthy: What kind of society and economy do we want? Do we want a vibrant downtown with small specialty shops, or big box stores that deliver lower prices on the outskirts of town that require infrastructure to support driving to them? Our nation has voted with its dollars and feet for the sprawl. Fishman correctly contends that it's important we think about the consequences of this.

3.5 stars out of 5.

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