The firing of that Thanksgiving starting pistol for the peak mass consumerism season that is the holiday shopping rush led, as it increasingly does these days, to protests outside WalMart stores about how much they pay their workers. One of the obvious points being made, as is now traditional, concerning the great wealth of the Walton family, those inheritors of Sam Walton's cash and stock. It's not actually all that difficult to get people riled up about a store paying an average of $8.80 an hour (for non-supervisory staff) when the people who own the company have some $150 billion in wealth. However, that's not actually the correct response. And insisting upon a change in public policy so that some of that wealth is paid to those workers, or that it should be taxed away in some manner, would be very much the wrong answer. For, you see, those Waltons actually deserve that $150 billion: we should be absolutely overjoyed that they have it in fact.
Art Carden has written here about his various papers looking at the effect of WalMart on the communities that it enters. Good and useful work but I'd like to concentrate on two other pieces of economic analysis. The first is an entire sub-field of its own: what is the impact of low prices upon consumers? Usefully summed up by Jason Furman here (and he's currently Chair of Obama's Council of Economic Advisers. That doesn't make him correct by definition, of course not, but it does mean he's no lightweight and also that he's not some rabid market fundamentalist neoliberal like myself). The basic point being that, while estimates do differ, consumers benefit from WalMart's low prices by some $250 billion a year.
This is what is known as the consumer surplus. It doesn't show up in GDP because the consumer surplus simply isn't counted as part of GDP. And that consumer surplus is almost certainly, at our sort of stage as an advanced economy, of greater importance to our lifestyles than any one other thing in the entire economy. The consumer surplus of WalMart is the difference between what we'd have to pay in the absence of WalMart as against what we do actually pay given the existence of WalMart. And the best guess is around that $250 billion a year. That's what US consumers don't have to pay for their groceries and tchotchke as a result of WalMart being out there in the market and competing.
And no, this isn't all about buying in China and not paying the workers and putting all the Mom and Pops out of business and.....well, you know the litany as well as I do. It's actually real, proper, economic advance and increases in economic efficiency:
Where do these low prices come from? Paul Krugman, writing back in 1993, provides an answer: "The most significant American business success story of the late 20th century may well be Wal-Mart, which has applied extensive computerization and a home-grown version of Japan's 'just in time' inventory methods to revolutionize retailing." Many economists didn't expect the service sector to contribute much to productivity. Many non-economists still have a hard time believing it has. But Harvard economist Ken Rogoff has the numbers, and they are mind boggling:
[T]ogether with a few sister "big box" stores (
Target ,Best Buy , andHome Depot ), Wal-Mart accounts for roughly 50% of America's much vaunted productivity growth edge over Europe during the last decade. Fifty percent! Similar advances in wholesaling supply chains account for another 25%! The notion that Americans have gotten better at everything while other rich countries have stood still is thus wildly misleading. The US productivity miracle and the emergence of Wal-Mart-style retailing are virtually synonymous.
So, we get $250 billion a year and the Waltons, the inheritors of the man who started it all off, get $150 billion. We get more than they do: that sounds like a pretty good deal really. Except that is of course to grossly overstate what they are getting. That mountain of cash they've got is not an annual figure: that's the capital value, their wealth, not the income from one year. Our benefit is what we save in one year. That value of WalMart stock is the net present value of everything that WalMart is expected to make in profits from now until eternity (although obviously we use a discount rate so that something 40 years out is given less importance than something next year). So we need to adjust our $250 billion figure in the same manner to make the two numbers comparable.
The easiest way to do that is simply to ignore discounting and to also impose a 20 year time limit. Neither assumption is correct but it'll give us a nice rough and ready guess at the capital value to us all of those annual savings. And the answer if we do it that way is that the current value of WalMart's existence to the rest of us is $5 trillion. That's the number that is comparable to that $150 billion family fortune. They're both the net present values of future income streams which does indeed make them comparable even if that value to us is calculated in a much simpler manner than the way the stock market values WalMart.
At which point it looks like we're getting a massive bargain. We get $5 trillion and the people who made it happen only get $150 billion? Why aren't we cheering in the streets over this rather than demonstrating in them about how awful it all is? And it's also not as if this should be all that much of a surprise either. William Nordhaus did an excellent paper here:
The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.
The actual number the paper comes up with is that the innovators get 3% of the total benefits and the rest of us (financiers and consumers, but the vast majority of it is us the consumer as that consumer benefit) share the other 97%. That's the average of the US post-WWII economy. And surprisingly, that Walton fortune looks to be bang on that 3% level. In this analysis of "what has WalMart ever done for us" it ends up that we make about 30 times more out of the deal than the people who set up the organisation in the first place did. Which is, when you think about it, a pretty good deal for all of us.
After all, if someone came to town and said that they were going to create $5,000 of value, we could have most of it but they would only insist on keeping $150 of that newly created value, we'd be pretty stupid not to take the deal, wouldn't we? Sure, we'd be gullible and no doubt conned out of our money if he asked for the $150 up front. But if the deal was straight, here's $5k and y'all can have $4,850 of it and I'll keep $150, that really would be a good deal, wouldn't it? And that is the deal that innovation and capitalism (with those free markets thrown in for good measure) offer us. So it's very odd indeed to see people shouting about how unfair it all is.
The above also explains why, as a matter of public policy, we're quite happy with people making fortunes. Why we don't tax all the wealth off them and why we don't insist that profits must be fed into workers' wages rather than being, well, profits. Because this system makes us all immeasurably richer over time.
It's akin to that British idea of shooting an Admiral from time to time: pour encourager les autres. The reason we let the last generation of entrepreneurs keep their vast piles of cash is really quite simple. We'd quite like the current generation to include a few or more people who offer us similar deals: a few trillion here and a few trillion there and pretty soon we're talking about real money. And if we, us consumers, are going to enjoy 97% of those trillions then we'd all be pikers, ungrateful ones at that, if we didn't let those who create that wealth for us enjoy some small single figure percentage of what they've created. It's really not, at its economic heart, about what is righteous or just, nor even about property rights. It's simple incentives at work here. If entrepreneurs get to keep some of the value they create then there will be more entrepreneurs creating value for the rest of us to enjoy.
Far from complaining about the Waltons, their fortune, WalMart and wages we should perhaps, given that Thanksgiving is about giving thanks, be sending them thank you notes. For the truth is that we're on the right end of a terrific, fabulous, bargain here.
