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.

14 comments so far

  1. Charles Andrews on

    “China attempted to keep their currency cheap in order to prevent swelling unemployment at home.” In other words, China is not engaged in domestic economic development for the benefit of its people, merely using balanced foreign trade as a relatively minor means to this end. In the 1930s the Soviet Union was booming.

  2. mperelman on

    Thank you. I am not surprised that someone like you would mention that. You are 100% correct.

  3. […] Michael Perelman links Walmart to the current crash: The Economic Crisis: A Wal-Mart Economy Dimension … Low wages helped to give Wal-Mart a competitive advantage in retailing, which, in turn, […]

  4. robertdfeinman on

    I cited this posting on our Walmart-specific blog, The Writing on the Wal:

  5. javier hernandez miyares on

    very informative.

  6. Nora McFarland on

    Plus you also have to look at the more long-term repercussions we’ll begin seeing 20 or 30 years from now, particularly from Walmart’s destructive effect on the Environment. There was an article in the Financial Times today titled, “Wal-Mart’s ‘green’ plan struggles to convince everyone.” There’s certainly a good bit of skepticism from many environmental groups as to the true intentions of the retail giant, and I doubt anyone is being fooled. The problem is is that they try to shove all the blame off on the suppliers, when in reality they have the necessary muscle to force their suppliers to adopt more environmental standards.

  7. Nancy Wang on

    Whenever I look at those beautiful, comfortable, useful, beneficial, affordable products such as computer,TV,camera,fabric,clothing,shoes,toys, books,papers,pens,cookwares,jewels,machine, instrument,etc. which provide me an enjoyable, happy life with very little money, while I can tap my fingers on a notebook computer to put down whatever I think or I can work in a field full of fresh air, I just want to say,” Thank you, Wal-mart! Because of you, I don’t have to work like the ancient slave rolling the boat for the Roman Emperor in an unbearable environment.”
    Contradictory, if I don’t have work and I have time to read all your books and blog,then I might agree with you.

  8. Nancy Wang on

    My previous comment of work like the ancient slave rolling the boat for the Roman Emperor in an unbearable environment is exaggeration. What I try to say is that the manufacture of daily necessity and selling at very very low prices is very very difficult job. Wal-Wart creates jobs for those who want to work and brings easy, soothe, assist and affordable prices for those who want to buy. What caused the economic crisis, not Wal-Mart. There is always economic crisis from the beginning of history, such as The Great Depression, the worst economic depression in US history? Was there a Wal-Mart store?

    • Gary on

      There was the FED and global banks and no unions. There was always corrupt pracices, but Walmart is just obvious because they know the people are asleep.

  9. mperelman on

    The idea that Wal-Mart is a net producer of US jobs not very likely.

  10. Nancy Wang on

    Wal-Mart is an essential provider for people livelihood and beyond.
    Almost every one can dress not only to keep warm but also can look like a prince, princess or a movie star. One can have time not only to read and write, but also can afford a computer to be a software developer, a writer or an artist. One can afford utensil not only to cook but also can open a coffee shop or restaurant. One can not only buy home supplies but can collect and decorate like a palace or a museum. All of these prosperous works are possible because of Wal-Mart.

  11. Steve Matthews on

    Walmart executives have likely been thanking their lucky stars for the economic downturn we’re experiencing; they’re reaping all the benefits. Not only have they been draining our economy for years, but now they’re benefiting from our economic loss.

    From a Wall Street Journal article today:

    “Behind the figures is a confluence of trends fueled by the downturn. As strapped consumers look for cheaper goods, and weaker retailers go out of business, Wal-Mart is using its unmatched economies of scale to drive down prices, undercut competitors and squeeze costs out of suppliers ever more dependent on the Bentonville, Ark., behemoth.”

    All these companies must now pray at the altar of Walmart; to borrow a phrase, they are suppliers at the hands of an angry retail giant.

  12. Tacha on

    “The idea that Wal-Mart is a net producer of US jobs not very likely.”

    I keep hearing about people not being able to find jobs at this time and that worried as I began looking for a job two weeks before Christmas. I applied at Wal-Mart, not expecting to get it. I’ve now been there for over a month. So much for not being able to fing a job.

    And about the “low wages”, I get paid better at Wal-Mart than I did as a teller at a bank.

    • Kelli on

      I, too, get paid better at Wal-Mart than I did as an Assistant Manager at another retail store.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: