Friday, October 17, 2008

The Economic Crisis: A Wal-Mart Economy Dimension

Wal-Mart offers a valuable window into the current economic crisis. Before addressing the current crisis, let's put Wal-Mart in perspective.

Wal-Mart is, at least in part, both a cause and a symptom of what went wrong in the economy, as well as a hint of what might be done to correct the problem.

Wal-Mart represented a logical business strategy to an economy in which real hourly wages have been stagnant for more than three decades. Wal-Mart presented the face of low prices (which were not in reality always lower than elsewhere). At the same time, Wal-Mart contributed to the low wage environment that made it such a successful business.

Besides paying low wages to its own workers (and sometimes not even paying all the wages that it owed), Wal-Mart helped to lower wages elsewhere. For example, grocery stores have put enormous pressure on their unionized workers because of competition from Wal-Mart's nonunion operation. Admittedly, Wal-Mart displaced some small retailers that may have paid lower wages.

As is well known, part of Wal-Mart's strategy was to rely on imports from countries that paid low wages. Competition from these imports both destroy jobs and limited wages from jobs that remained in the U.S.

According to a somewhat dated report, if Wal-Mart were a country, it would rank as China's fifth-largest export market, ahead of Germany and Britain.

Goodman, Peter S. and Philip P. Pan. 2004. "Chinese Workers Pay for Wal-Mart's Low Prices: Retailer Squeezes Its Asian Suppliers to Cut Costs." Washington Post (8 February): p. A 1.

Here is where we can begin thinking about the current crisis. Because of the lack of investment in production in the United States, the annual imbalance between its exports and imports is approximately equal to the $700 billion bailout. To pay for these imports, the country must borrow about $2 billion every day of the year.

China alone holds about $2 trillion in U.S. debt. Until recently, a substantial amount was held in paper from Fannie Mae and Freddie Mac.

Here is a report from the Wall Street Journal:

"It turns out the biggest supporter of the Fannie Mae and Freddie Mac bailouts has been the Chinese government. The Chinese own about half a trillion dollars in Fannie and Freddie securities and they've put the warning out to Treasury Secretary Hank Paulson they expect to be repaid in full. The fear among Mr. Paulson and other Treasury officials is that if Fannie and Freddie debt isn't repaid at 100% par, the Chinese may start dumping their hundreds of billions of dollars of Treasury securities, possibly causing a run on U.S. government debt and sharply raising Uncle Sam's borrowing costs."

Moore, Stephen. 2008. "Bailing Out the Bank of China." Wall Street Journal Political Diary (30 July).

The Chinese had already sold about a quarter of their holdings of Fannie and Freddie, by last summer. Earlier, Chinese officials had already said that they intended to diversify their holdings of foreign assets rather than committing is much to the United States.

Bloomberg later reported:

"A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank. 'If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,' Yu said in e-mailed answers to questions yesterday. 'If it is not the end of the world, it is the end of the current international financial system'."

In the end, Fannie and Freddie were saved, along with the investment of China and other exporters, who will be expected to purchase more US debt to pay for the bailout.

Obviously, Wal-Mart is only a small part of the complex set of conditions that led to the recent crisis. Even so, we can tell a simplified Wal-Mart story to explain the linkages involved here:

Low wages helped to give Wal-Mart a competitive advantage in retailing, which, in turn, helped to spur off-shoring, leading to a serious balance of trade deficit. The low-wage exporters, especially China, attempted to keep their currency cheap, in order to prevent swelling unemployment at home.

To keep the value of its currency low, China and the other exporters sent much of their profits back to the US buying investments in Fannie, Freddie, and U.S. Treasury debt. These funds helped to keep interest rates low, which stimulated both consumption and speculation. In this environment, housing prices and financial assets increased in value, creating even more consumption and a greater knowledge of trade deficit.

Wal-Mart also offers a hopeful pointer. Here is a company whose sales may be greater than the GDP of half the members of the United Nations. Using modern technology, the company has been able to create magnificent efficiencies, along with its less-desirable exploitative consequences. Someday, maybe we can create an economy that can take advantage of the beneficent innovations of business and turn them to public advantage rather than private profit.


Doug said...

Brilliant piece.

Myrtle Blackwood said...

Walmart might be a typical prototype for the 'Dollar Wall Street Regime' that Peter Gowan writes about.

"The 'central nervous system' of globalisation lies in the way in which international monetary and financial relations have been redesigned and managed over the last quarter of a century. This new monetary and financial regime has been one of the central motors of the interlocking mechanisms of the whole dynamic known as globalisation. And it has been, NOT in the least a spontaneous outcome of organic economic and technological processes, but a deeply political result of political choices made by successive governments of one state: The United States. it is a state-policy dependent phenomenon....This international monetary regime has operated both as an international 'economic regime' and as a potential instrument of economic statecraft and power politics. the name given to it here is the 'dollar wall street regime' DWSR. We will try to trace its evolution from origins in the 1970s through the international economics and poltics of the 1980s up to the Asian crisis and the panic of 1998..."

[The Global Gamble: Washington's Faustian Bid for World Dominance
Peter Gowan]

"Half of the world's 500 billionaires and a third of the 27 million millionaires call the USA their home....Five of the top ten banks are US, six of the top ten pharmaceutical/biotech companies, four of the top ten telecommunications companies, seven of the top information technology companies, four of the top gas and oil companies, nine out of the top ten software companies, four of the top ten insurance companies and nine of the top ten general retail companies.....The concentration of economic power is even more evident if we look at the top ten companies in the world: 90 percent are US owned; of the top 25, 72 percent are US owned; and of the top 50, 70 percent are US owned. Within the inner circle of the biggest companies, the US has an overwhelming presence and dominance. Africa and Latin America are absent from the list. And the so-called Asian Tigers have three companies among the top 500, less than 1 percent. "

Facts on the US Economic Empire
by etra Jaimers. Eat the State. Volume 7, #3 October 9, 2002

Anonymous said...

Well, I was at least able to derive some small comfort today. i read an article stating that Walmart's profit could suffer from a plan to force suppliers to meet new quality and environmental standards. The CEO, Lee Scott, was forced to admit that their profit margins may go down.

But then he followed up with the typical corporate scare tactics that it would hurt the consumer by driving up prices. As if they couldn't absorb the costs.