Wal-Mart as red herring

September 19, 2006

Free Market Foundation

Pretending to nationalise Wal-Mart is a useful thought exercise. It shows why Wal-Mart as a government agency would actually provide fewer public benefits than it would as a grubby, profit-seeking colossus. The company’s incentives would shift. Instead of trying to lower costs, improve efficiency and raise its profits, it would focus on pleasing its political patrons and complying with their demands, says columnist Robert J. Samuelson.

Wal-Mart would deliver more political benefits to favoured constituencies workers, suppliers, competitors and fewer to the public. Retail prices would be the biggest casualty. Scholarly studies show Wal-Mart’s price reductions to be sizable:

Economist Emek Basker of the University of Missouri found long-term reductions of 7 to 13 per cent on items such as toothpaste, shampoo and detergent.

On food, Wal-Mart produces consumer savings that average 20 per cent, estimate Jerry Hausman of the Massachusetts Institute of Technology and Ephraim Leibtag of the Agriculture Department.

All told, these cuts have significantly raised living standards. How much is unclear, says Samuelson:

A study by the economic consulting firm Global Insight found that from 1985 to 2004, Wal-Mart’s expansion lowered the consumer price index by a cumulative 3.1 per cent from what it would have been.

That produced savings of $263 billion in 2004, equal to $2,329 for each U.S. household.

Because Wal-Mart financed this study, its results have been criticised as too high, but even if price savings are only half as much ($132 billion and $1,165 per household), they’d dwarf the benefits of all but the biggest government programmes.

No company should be above public scrutiny. But much of the political criticism of Wal-Mart is shallow and, if followed, undesirable. Wal-Mart doesn’t pay high wages and benefits mainly because it’s in an industry (retailing) where those are rare.

Source: Robert J. Samuelson, Wal-Mart as Red Herring, Washington Post, August 30, 2006.

For text (subscription required): http://www.washingtonpost.com/wp-dyn/content/article/2006/08/29/AR2006082901043.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 12 September 2006