Saturday, August 24, 2013

That's not how it works (or how it's been)...

Your sales are off, you're concerned that you may not see a pickup anytime soon, and you've, therefore, lowered next year's earnings forecast. I have an idea; give all of your employees a big fat raise!


Well, not according to the Washington Post's Harold Meyerson. He attempts to convince his readers in For retailers, low wages aren't working out that Wal-Mart would post better results if it paid higher wages. That paying what Wal-Mart and its employees agree fairly compensates for their production (not nearly enough according to Meyerson) is the reason Wal-Mart's sales declined by 0.3%, and it's the reason it had to lower its earnings forecast.

Now it would seem to me (and you, reader, if you'll admit it) that if you raise the price of your labor (in the absence of an accompanying increase in productivity), you'll hurt your bottom line. Although I do appreciate Meyerson looking under the surface, that's what good economists (not that he [or me] is an economist) do; they look for the unseen. He's thinking that if Walmart were to raise its wages that folks would live better, happier lives and thus become more active economic agents---ultimately boosting the retailer's bottom line as a result. Sounds nice, but that's not how it works. I think even Meyerson might agree that if only Wal-Mart were to increase its wages, Wal-Mart would recoup only to the extent that its own two-million employees spend their raises at Walmart. And, you know, the net profit on a dollar of sales doesn't come close to the net cost of a dollar of wages. I.e., even if every employee spent every dollar of his/her wage increase at Wal-Mart, Wal-Mart would lose a ton of money due to the pay raise. Ah, but Meyerson is really lobbying for a hike in the wages for the world---for Wal-Mart's other 243 million customers as well. As if such an across-the-board hike in wages---occurring for its own sake, as opposed to the result of increased productivity---will, by some magic, result in something other than higher across-the-board prices and less employment. Can't happen.

He plays the New Deal card---proposing that correlation is causation; that the amazing evolution of the American condition during the 20th century was the result of government intervention as opposed to entrepreneurialism, competition, tenacity, innovation and personal liberty:
In the ’20s, Edward Filene, whose family owned both its eponymous chain and the Federated Department stores, called for the establishment of a minimum wage, unemployment insurance, a five-day workweek, legalized unions and cooperatives where people could do their banking. (He helped establish some of the first banking co-ops himself.) The Straus family, which owned Macy’s, and shoe-magnate Milton Florsheim endorsed similar measures and were among the more prominent business leaders who supported Franklin Roosevelt’s New Deal. They were well compensated for their clear understanding of how to make an economy thrive: During the 30 years of broadly shared prosperity that the New Deal reforms made possible, department stores catering to the vast middle class were a smashing success.

There Meyerson fails to look below the surface: You would have been hard-pressed in the '20's to find smaller retailers endorsing a minimum wage, unemployment insurance, unions, etc. Not because they didn't care about their employees, but because they---as Filene surely knew---couldn't compete with the likes of Filene under the weight of such increases in labor costs. The Straus family, Florsheim and Filene were indeed "well compensated", not, however, for "their clear understanding of how to make an economy thrive", but for their understanding of how to harness the power of government.

And, lastly, here's Meyerson entirely misunderstanding (if not misrepresenting) the amazing evolution of the American condition since the mid-20th century:
Today’s economy, alas, has increasingly more in common with the pre-New Deal era than with the more robust and egalitarian mid-20th century.

So, hmm, the 1950s were more robust and egalitarian? Really? Here's economist Don Boudreaux once again helping us see below the surface:
But the Gasoline Back then Did Contain Lead

Here’s a letter to Washington, DC – based WTOP radio:

You report that “A new Economist poll finds that a majority of Americans yearn for the bubble gum days of the 1950s” (“Which era do you prefer? Poll finds Americans long for the 1950s“).

It’s hard to believe that these poll results reveal people’s informed preferences. Rather, these results likely reflect nostalgia mixed with misinformation spread by a barrage of news ‘reports’ on the allegedly stagnant – or even deteriorating – economic fortunes of middle-class Americans.

I challenge you and other Americans to do what I did and lay your hands on a Sears catalog from the 1950s. My catalog – bought recently on eBay (a company founded in 1995) – is from 1956. Peruse the catalog. What do you see? You see, for example, Sears’s cheapest TV (black’n'white, of course), priced so that a typical full-time manufacturing worker in 1956 had to toil 61 hours to earn enough money to buy that TV. Today, the typical American worker can buy an infinitely superior TV with only ten hours of work. And this lower cost in term of work-time is true for nearly everything else that Sears sells: clothing, kitchen appliances, automobile parts, office furniture, sporting goods, children’s toys. The list is long.*

An even longer list can be made of what you don’t see in that catalog or in any other record of the economy’s offerings to Americans in the 1950s: no digital cameras; no lightweight waterproof sportswear; no microwave ovens; no CDs, DVDs, or MP3 players; no personal computers; no cellphones; no GPS devices; no indexed mutual funds; no soft contact lenses; no statins; no measles or meningitis vaccines; no portable defibrillators; no oral contraception; no MRI machines. Commercial jet travel did arrive in 1958 – but at fares well beyond the reach of most Americans.

While today is far from perfect, I’ll bet my defined-contribution pension that any American – even any white, male, Christian, heterosexual American – transported from today into the 1950s would struggle to get back to the future with a fervor that would embarrass the 1985 movie character Marty McFly.

Sincerely, Donald J. Boudreaux Professor of Economics and Martha and Nelson Getchell Chair for the study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

1 comment:

  1. The problem at Wal-Mart isn't simply that it's stingy with workers. The company has paid hundreds of millions of dollars to settle claims that it denied workers pay and benefits, for instance by forcing them to work through breaks. But we shouldn't pretend that it is a singularly malign influence anymore when it comes to wages.