Perhaps some of you have been following the debates in various cities (e.g., New York, Chicago) over big retail stores that land in their backyard. I enjoy reading about attempts to regulate economic activity because I believe it raises a central contradiction of American society: phrased as a question, how much regulation is necessary to maintain the free market? Maybe this is not a contradiction, but a perennial challenge. Two areas seem ripe for inquiry: The need to monitor big financial institutions and the limitations that some want to impose on mega-retailers who crowd out the little mom & pop establishments.
Regarding the second issue, I came across a book I thought might interest you. Al Norman has been writing critically about the retail chain Walmart for some time. He brings his insights and passion together in a book called Occupy Walmart. Below is a brief Q&A.
Q. I want to begin with a basic economic question: Why do you feel that so many consumers support companies like Walmart if they are supposedly so detrimental to our economy and our social contract? I know hundreds of families that benefit from the prices and the commodities that Walmart brings to their town. How do we explain this apparent contradiction?
A. For many Walmart shoppers, their grasp of the economic ramifications of a decision to shop at big box stores is no bigger than the dimensions of their own shopping cart. There used to be a Walmart bumper sticker which read: “Outta my way, I’m shopping at Walmart.” But if you look behind the sticker price, there is a hidden price to our economy of shopping at the giant chain stores.
The story of blue jeans will illustrate the economic forces at work. Levi-Strauss was once the iconic symbol of American clothing. Because of pressure from big box stores to lower their prices, two things happened: 1) the manufacturer shut down all its U.S. stitching plants about a decade ago, throwing more than 3,300 Americans out of work, and 2) the company began making a special “big box” brand of jeans only for stores like Walmart, K-Mart and Meijers. Today, you can buy Levi-Strauss slim straight jeans for men anywhere from $22 to $26 at these box stores.
But Walmart also sells its own “Faded Glory” brand jeans for $10 a pair. None of these jeans are made in America, and the cheaper the price, the cheaper the quality. The fabric and the thread count in a Faded Glory jean are inferior to a Levi-Strauss Signature jean, which is inferior to the Levi 511 jeans. If I go to Walmart and buy a pair of Faded Glory or Signature Levi’s, I am supporting the outsourcing of jobs to Asian sweatshops, getting an inferior product that ends up in my town’s landfill in half the time of a superior product, and weakening the value of labor in the U.S. — often described as the shrinking of the American middle class.
When Levi-Strauss closed its U.S. plants, a company spokesman said, “There is no question that we must move away from owned-and-operated plants in the U.S. to remain competitive in our industry…Outsourcing production…helps us maintain strong margin.” Since 2004, a company called Li & Fung USA has been designing, manufacturing, and marketing certain Levi trademarks. In essence, a foreign company has become the “brand manager” for what was once the classic American clothing company.
Companies like Walmart have had a major impact on our trade deficit with China, our loss of millions of production jobs, and our switch from a manufacturing economy to a consumer economy. All this flows from the decisions we make as shoppers to buy Chinese-made jeans at an import store like Walmart.
Q. You have an intriguing chapter, entitled “Wayward Capitalism,” that looks at the Occupy Wall Street movement. You address the ways in which individual residents can affect the behavior of large corporations like Walmart for the greater good of their communities. Can you cite some examples where business and communities have worked hand-in-hand to satisfy the interests of both?
A. The only times I have seen local officials and developers work “hand in hand” is when they are colluding to approve a project by discouraging citizen involvement.
For the past twenty years, I have watched developers try to maximize profits by constructing the largest store possible on the smallest parcel of land. Properties with historic values, with wetlands, with surrounding residential properties — all have been fair game for big box developers
The land use model in this country is not based on town/corporate collaboration. There are situations where cities and towns have extracted commitments from large corporations regarding local hiring, even wages. Such “community benefit agreements” are rare. By and large, the developer’s job is to push for as many concessions from local officials as possible. Big box stores like Walmart, Target, Home Depot and Lowe’s will deliberately attempt to end-run local regulations, or even sue city councils if they dare to deny a project. Mayors and City Councils are reluctant to use public dollars to fight a wealthy corporation in court. Instead of sitting down with neighbors, developers will intentionally marginalize them. Walmart has often challenged town decisions at the ballot box, spending as much as half a million dollars to win a special permit in a public referendum.
Q. What is an example of a large corporation that you believe operates in a more sustainable way vis-a-vis its workers?
A. I believe that the phrase “sustainable large corporation” is an oxymoron.
Employee-owned companies tend to treat their worker/owners better than a company like Walmart, which basically operates like a retail plantation. In the retail sector, the number of employee-owned companies like Publix Supermarkets, Hy-Vee, or Price Chopper can be counted on two hands. Publix, with 152,000 employees, is one of the largest employee-owned operations in America — yet its workforce is only one tenth the size of Walmart’s. Founded in 1930, Publix Super Markets describes itself as “ the largest and fastest-growing employee-owned supermarket chain in the United States.” The company boasts of a employee stock ownership plan that gives stock to workers each year at no cost; has a group health, dental and vision plan; and company paid life insurance.
Unlike Walmart, Publix has been listed for the past 15 years in Fortune magazine’s 100 Best Companies to work for. You won’t find Walmart, Target, Home Depot or Lowe’s on that list—because employees have to put you there. Walmart has more employee-based lawsuits than men’s suits.
Walmart is a chain store. At every link of that chain—from the sweatshops in Shenzhen, China, to the sales floor in Sheboygan, Wisconsin—someone is being exploited. This business model is simply not sustainable.
Q. People defend Walmart as a big-box retailer by saying that they just play the game better than others — meaning, they play the “free market” game better than others. Are you suggesting that the game is rigged, or that they are rigging the game? I’m trying to figure out if Walmart gets help from the government or otherwise operates in way that is not true to free market principles.
A. I am not sure what people mean by the “free market,” unless it refers to companies that are trying to get something for free in the marketplace. The capitalist enterprise in America is not “free” of restraints and rules. It is part private capital, part government intervention. There is no question that large corporations have many advantages in this environment — and companies like Walmart will milk everything from tax increment financing to elaborate tax dodges to reduce its operating costs.
For example, in 2007, the Wall Street Journal ran a story revealing that Walmart paid billions of dollars a year in rent for its stores, but in 25 states — most of them east of the Mississippi — it had been paying most of that rent to itself, and deducting that amount from its state taxes. By so doing, Walmart avoided paying several hundred million dollars in state taxes.
Based on a scheme developed by its accounting firm, Ernst & Young, for a “local tax reduction strategy,” Walmart’s financial self-dealing allowed it to pay rent to itself through a maze of eight corporate subsidiaries, including Real Estate Investment Trusts (REITs). The rent appeared as an expense on state tax forms, and was deducted from its taxable revenues. Under an agreement with itself, Walmart paid 2.5 percent of gross sales monthly as rent to its own REIT, which then wired the money quarterly to Walmart Property Company in the form of a dividend, which was then paid to Walmart Stores as a tax-exempt “dividends received.”
All of these transactions were handled through a “cash management agreement” between all the parties. Neither the REIT nor the Property Company ever had any employees. The REITs didn’t pay taxes, as long as they paid 90 percent of their income out in dividends to shareholders. In Walmart’s case, the REITs were owned by Walmart subsidiaries registered in Delaware, a state that has no corporate income tax. Walmart got the benefit of the rent expense, but also the benefit of the non-taxed dividend, on the same monies. The dividends escaped taxation, and the original rent that created the dividends was deducted from taxable income in the states where the “expense” was incurred. The rent, in essence, went from one Walmart pocket, into another.
It took some states years to figure out how Walmart was cheating them of taxes due. Add to this the millions of dollars in “corporate welfare” that cities and towns give Walmart in tax write offs for infrastructure like roads, sewer, and traffic improvements. There is no reason why a company with Walmart’s bottom line should get any public financing, but taxpayers have been subsidizing their destruction of smaller firms by underwriting many of their costs of doing business.
Q. Today progressives are complaining about Walmart, but tomorrow it will be someone else. Isn’t capitalism perfectly engineered as an economy to produce bigger and bigger companies? Isn’t that always going to happen?
A.As I state in my latest book, capitalism is inherently very wasteful and inefficient. Defenders of this “free” marketplace like to quote the Austrian economist Joseph Schumpeter, who popularized the concept of the “creative destruction” of the capitalist enterprise. One of the great economic myths about companies like Walmart is that they are “job creators.” When a new Walmart opens, the company (and local officials) will claim that the new superstore brings with it “250 new jobs.” This is a form of voodoo economics—because studies have shown that as much as 80 percent of these jobs are simply transferred from existing retailers in the same trade area. So the net effect is negligible. In fact, some analyses have shown negative job growth after a Walmart opens.
It is fair to say that there will always be the big bully on the block that attracts the scorn of neighbors. This was true in the 1930s, when farmers and merchants united in an anti-chain store movement against the Atlantic & Pacific Company. Walmart, like any other business, will go through its business cycle, and one day—perhaps in the not too distant future—will become as obsolete as the Sears Catalogue—once the retail center of American merchandising. I have no doubt that the huge superstores of today have already entered their Ice Age, and online shopping will make them as superfluous as horseless carriages made horses.
The point is, capitalism is not “perfectly engineered.” It is perhaps evenly balanced between creation and destruction. In the field or retailing, the nearly 4,000 Walmart stores in American have done little or nothing to lift the economy, and as I have argued for years, have actually precipitated the decline in the value of labor and the sustainability of the middle class. Our economy over the past 50 years would have fared better if Sam Walton had never stumbled onto the concept of discount retailing in small towns.