Sebastian Mallaby explains it all for you - including Wal-Mart

I occasionally have disagreements with Mr. Mallaby, but not very often, and I find him one of the most refreshingly sensible newspaper columnists on international economics and development. Here he is in today's Washington Post on the rather silly Wal Mart controversy (this is one of those short articles that I will force my darling 13 year old daughter to read in order to make sure she's absorbing something of basic welfare economics):

(Update, November 28, 2005. Not everyone is convinced. For the contra argument, see this article by columnist Neal Peirce, in the Seattle Times, here.)

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Progressive Wal-Mart. Really.

By Sebastian Mallaby
Washington Post

Monday, November 28, 2005; A21

There's a comic side to the anti-Wal-Mart campaign brewing in Maryland and across the country. Only by summoning up the most naive view of corporate behavior can the critics be shocked -- shocked! -- by the giant retailer's machinations. Wal-Mart is plotting to contain health costs! But isn't that what every company does in the face of medical inflation? Wal-Mart has a war room to defend its image! Well, yeah, it's up against a hostile campaign featuring billboards, newspaper ads and a critical documentary movie. Wal-Mart aims to enrich shareholders and put rivals out of business! Hello? What business doesn't do that?

Wal-Mart's critics allege that the retailer is bad for poor Americans. This claim is backward: As Jason Furman of New York University puts it, Wal-Mart is "a progressive success story." Furman advised John "Benedict Arnold" Kerry in the 2004 campaign and has never received any payment from Wal-Mart; he is no corporate apologist. But he points out that Wal-Mart's discounting on food alone boosts the welfare of American shoppers by at least $50 billion a year. The savings are possibly five times that much if you count all of Wal-Mart's products.

These gains are especially important to poor and moderate-income families. The average Wal-Mart customer earns $35,000 a year, compared with $50,000 at Target and $74,000 at Costco. Moreover, Wal-Mart's "every day low prices" make the biggest difference to the poor, since they spend a higher proportion of income on food and other basics. As a force for poverty relief, Wal-Mart's $200 billion-plus assistance to consumers may rival many federal programs. Those programs are better targeted at the needy, but they are dramatically smaller. Food stamps were worth $33 billion in 2005, and the earned-income tax credit was worth $40 billion.

Set against these savings for consumers, Wal-Mart's alleged suppression of wages appears trivial. Arindrajit Dube of the University of California at Berkeley, a leading Wal-Mart critic, has calculated that the firm has caused a $4.7 billion annual loss of wages for workers in the retail sector. This number is disputed: Wal-Mart's pay and benefits can be made to look good or bad depending on which other firms you compare them to. When Wal-Mart opened a store in Glendale, Ariz., last year, it received 8,000 applications for 525 jobs, suggesting that not everyone believes the pay and benefits are unattractive.

But let's say we accept Dube's calculation that retail workers take home $4.7 billion less per year because Wal-Mart has busted unions and generally been ruthless. That loss to workers would still be dwarfed by the $50 billion-plus that Wal-Mart consumers save on food, never mind the much larger sums that they save altogether. Indeed, Furman points out that the wage suppression is so small that even its "victims" may be better off. Retail workers may take home less pay, but their purchasing power probably still grows thanks to Wal-Mart's low prices.

To be fair, the $4.7 billion of wage suppression in the retail sector excludes Wal-Mart's efforts to drive down wages at its suppliers. "Wal-Mart: The High Cost of Low Price," the new anti-Wal-Mart movie that's circulating among activist groups, has the requisite passage about Chinese workers getting pennies per day, sweating to keep Wal-Mart's shelves stocked with cheap clothing. But no study has shown whether Wal-Mart's tactics actually do suppress wages in China or elsewhere, and suppression seems unlikely in poor countries. The Chinese garment workers are mainly migrants from farms, where earnings are even worse than at Wal-Mart's subcontractors and where the labor is still more grueling.

Wal-Mart's critics also paint the company as a parasite on taxpayers, because 5 percent of its workers are on Medicaid. Actually that's a typical level for large retail firms, and the national average for all firms is 4 percent. Moreover, it's ironic that Wal-Mart's enemies, who are mainly progressives, should even raise this issue. In the 1990s progressives argued loudly for the reform that allowed poor Americans to keep Medicaid benefits even if they had a job. Now that this policy is helping workers at Wal-Mart, progressives shouldn't blame the company. Besides, many progressives favor a national health system. In other words, they attack Wal-Mart for having 5 percent of its workers receive health care courtesy of taxpayers when the policy that they support would increase that share to 100 percent.

Companies like Wal-Mart are not run by saints. They can treat workers and competitors roughly. They may be poor stewards of the environment. When they break the law they must be punished. Wal-Mart is at the center of the globalized, technology-driven economy that's radically increased American inequality, so it's not surprising that it has critics. But globalization and business innovation are nonetheless the engines of progress; and if that sounds too abstract, think of the $200 billion-plus that Wal-Mart consumers gain annually. If critics prevent the firm from opening new branches, they will prevent ordinary families from sharing in those gains. Poor Americans will be chief among the casualties.

mallabys@washpost.com