Friday, August 21, 2015

Book Review: Walmart

The Retail Revolution: How Wal-Mart Created a Brave New World of Business, by Nelson Lichtenstein, is a marvelous book. Published in 2009, I wish I had read it years ago.

Despite Mr. Lichtenstein's credential as a Leftist college professor unduly critical of Walmart*, this is not a hit piece. Though I have no independent ability to judge the facts, there was little in the book that didn't ring true to me. While Mr. Lichtenstein does not hide his own perspective, he makes a good faith effort to accurately represent the opinions of others, especially the company. Better than that cannot be expected.

The key question, to my mind, is this: Is the world a better place because of Walmart? Mr. Lichtenstein asks that question only indirectly, quoting Hillary Clinton.
"Is Wal-Mart a good thing or bad thing for America?" Hillary Clinton, who had served six years on the Wal-Mart board, answered cautiously. "Well, it's a mixed blessing," she said, noting both the inexpensive goods the company brought to rural America as well as the controversy over the company's health insurance program and its failure to promote women to management ranks.
Well, of course. Nobody can seriously claim that Walmart is an unalloyed good with no demerits. But still, if you add up the balance sheet I think the answer to that question is pretty obvious. The company substantially raised the standard of living for millions of people in rural America by selling quality goods at low prices. It invented a whole new way of doing retail, eliminating wholesalers, middlemen, and jobbers, thereby reducing costs. It provided jobs to hundreds of thousands of low-wage workers in the US. And it started China on a path to becoming the world's second largest economy.

The world is unequivocally better off because of Walmart. I think if you pushed Mr. Lichtenstein to the mat and forced him to answer he'd agree with that.

Mr. Lichtenstein evades the question by taking us on a grand tour of all the demerits--a fascinating and informative read to be sure. But at the end of the day it's something of a red herring. For example, he describes in great detail the unfortunate lives of women workers in Chinese factories. They work very long hours for low pay in tedious jobs under dangerous conditions. Factory fires occasionally kill hundreds. The government imposes apartheid-style rules on them (hukou) preventing them from becoming residents in the cities where they work.

It's terrible, awful, no-good. We should all be happy that circumstances in China are gradually changing for the better. But Mr. Lichtenstein's description, while not inaccurate, is somehow irrelevant.

He misses the mark in two ways. First, he blames almost everything on Walmart. If it weren't for the Bentonville behemoth squeezing suppliers and turning a blind eye toward illegal factories, then none of this would have happened. Instead, Mr. Lichtenstein implies, our Chinese friends would be earning $15/hour working in bright, airy factories, all while smiling and singing songs, just as depicted in those socialist realism posters.

But Walmart is just a link in the chain. Consumers (especially Walmart consumers) can't buy toys unless they're cheap. Walmart operates on very thin margins and has to squeeze its suppliers. Those, in turn, cut corners to maximize the business that comes their way. The subcontractors are under pressure to deliver on time and under budget. The Chinese government--more crooked than most--insists on its cut.

And Chinese workers are all to happy to go work in the factory. Especially considering the alternative: walking very slowly behind a water buffalo in some rice paddy somewhere, with no chance of ever having a better life.

Despite his prejudice, Mr. Lichtenstein does tell the truth:
Factory wages are low--about one hundred dollars a month--but far higher than in agriculture, and they are rising fairly quickly because of the labor shortage generated by the export boom in toys, garments shoes, and electronic devices.
Thank you, Walmart!

The second miss stems from Mr. Lichtenstein's misunderstanding about the role of capital. In 2015 Walmart earned about $16 billion on revenue of $486 billion, or approximately a 3% margin. My understanding (Mr. Lichtenstein doesn't tell us) is that the company has kept margins mostly constant over the years. That means as costs go down, then prices also go down instead of margins going up. The Walton family owns roughly 50% of the company. Therefore in round numbers, 1.5 cents on every dollar of sales at Walmart goes to them.**

So contrary to Leftist (and Mr. Lichtenstein's) imagination, the Waltons are not paying for Walmart employee's health insurance. They don't earn nearly enough money to make that possible. Shareholders never pay operational expenses. So who is paying that bill? There are only two other choices: the employees themselves, or the customers. Both of them are poor.

Progressives are simply delusional if they think health insurance is paid for by the shareholders. I think it is odd that Mr. Lichtenstein, along with most of the Left, is so upset about Walmart employees being subsidized by local governments, e.g., Medicaid or Medicaid-like programs. Surely taxpayers on average are richer than Walmart's customers. By saving their customers' money and pushing their employees onto the government's nickel, Walmart is helping poor people in ways that progressives should applaud.

Likewise, Mr. Lichtenstein happily recounts how local governments stick it to evil corporations:
In effect, these California cities were leveraging their zoning authority to recreate a set of mini-New Deals that ensured a more progressive distribution of the wealth generated by private interest ... But Wal-Mart would not play ball.
And good for Walmart! All of these extra costs that sundry civic corruptocrats thought were good ideas had to be paid for somehow. Those all come out of the hide of either customers or employees. Why does Mr. Lichtenstein want to make Walmart's employees poorer? A tax on Walmart isn't a blow to the wealthy--instead it's just ripping off poor people. And all the more so for Walmart since their customers are as poor as their employees.

Mr. Lichtenstein recognizes as much. In the new normal he envisions, Walmart will have to raise prices to cover the expenses of a "living wage," presumably not just for Americans but also for Chinese. He's never heard of market elasticity, i.e., when prices go up sales volumes go down. If Walmart could raise prices without hurting revenue they would certainly do so. The fact that they haven't means that they can't.

Walmart employees are precarious workers, which I defined as workers whose income depends sensitively on the market. That's true not just for the hourly employees, but also for Walmart's managers. Mr. Sam fired his executives with abandon when they no longer served the company. No loyalty there.

But unlike Mr. Lichtenstein, I think that precarious workers are our most productive citizens. They waste nothing! How different they are from government bureaucrats and professors who are immune from market forces. Those people are parasites.

The true road to wealth is not by government mandate or union featherbedding. No. Instead Mr. Sam got it right with his company's first mission statement: To give common folks the opportunity to buy the same things as rich people.

If you want to criticize Walmart, then the extent of their failure to live up to that aspiration is the place to start.

Down With Poverty!

*Mr. Lichtenstein hyphenates the company's name: Wal-Mart. However the firm no longer uses the hyphen. Except in quotes I use the current spelling: Walmart.

**The web, including Wikipedia, claims the Walton family collectively is worth $143 billion. But total Walmart equity is only $81B of which they own only half. And 50% of $80B does not add up to $143B, so something is wrong. I don't believe the $143B figure.

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