March 9, 2009    Volume 16, No. 4

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Obama’s Top Economic Aide Sings The Praises Of The ‘Wal-Mart Economy’


By Richard McCormack
richard@manufacturingnews.com

A top new economic policy advisor to President Obama believes that Wal-Mart and “the Wal-Mart economy” have been very good for American workers, low-income Americans who can’t afford to buy more expensive products made in America, and American taxpayers who pay part of the health care costs of thousands of Wal-Mart employees and their children.

Jason Furman, 38, who was hired to work as deputy director of Obama’s National Economic Council, wrote a paper in Nov. 2005 entitled “Wal-Mart: A Progressive Success Story,” in which he states that “there is little dispute that Wal-Mart’s price reductions have benefited the 120 million American workers employed outside of the retail sector.”

But there is such a “dispute,” especially among executives and owners of domestic manufacturing companies who have long argued that the “Wal-Mart economy” has destroyed the American manufacturing sector -- the wealth creation part of the United States economy -- and has contributed to the demise of the American middle class.

Not in Furman’s eyes. The Harvard Ph.D. notes that Wal-Mart saved American consumers $236 billion in 2004, or $2,239 for the average American household, though, like most Wal-Mart proponents, Furman does not mention the trade deficit in goods for the same year, which totaled $670 billion (or $8,800 for the average American household).

The fact that thousands of Wal-Mart workers have to be subsidized by the federal government does not phase Furman. In fact, “that is where a second progressive success story comes in,” he writes in a paper published November 28, 2005, when he was a visiting scholar at New York University.

The Clinton administration successfully expanded the “social safety net” to American workers not paid enough to afford health care coverage, he explains. Expanding government assistance programs to support Wal-Mart workers who can’t make it on their own is something that should be cheered by “progressives,” he claims. The bulk of the benefits of government social programs go to “workers that receive them, not to the corporations that employ them,” Furman states.

Progressives who have fought the growth of Wal-Mart in the United States have been on the wrong side of the battle, claims the Obama appointee who worked for Treasury Secretary Robert Rubin during the Clinton administration. By blocking the expansion of Wal-Mart into new communities, progressives are not only limiting the benefits of low-priced products to low- and moderate-income customers but they “also limit the job opportunities that Wal-Mart and other retailers provide,” writes Furman. “More puzzling is that some progressives have described Medicaid, food stamps, the Earned Income Tax Credit and public housing assistance as ‘corporate welfare.’ The right response to Wal-Mart is not to scale back these programs but to expand them in order to fulfill the goal of making work pay.” Without these government worker assistance programs, Furman notes later in his paper, more people, especially women, would be on welfare.

In keeping with the Obama administration’s unwillingness to address domestic production as a means of helping the United States escape the current downturn, Furman argues for an expansion of policies that encourage “Everyday Low Prices.” He cites studies describing how much money Americans save by shopping at Wal-Mart over “unionized chains like Kroger and Safeway.” He explains: “Because moderate-income families spend a higher percentage of their incomes on food than upper-income families, these benefits are distributed very progressively.” He notes that the company Global Insight was hired by Wal-Mart to quantify the national benefits of Wal-Mart’s low prices, and highlights the study’s results: a decrease in commodity prices of 4.2 percent between 1985 and 2004 and a 3.1 percent decline in overall consumer prices. A further increase of $118 billion in purchasing power for Americans “is primarily the result of Wal-Mart’s contribution to total factor productivity, but is also due to its ability to bargain for lower prices for imported goods,” he writes, noting in the paper’s first footnote that “the author has never received payment from Wal-Mart of any kind.”

Wal-Mart is also great at creating jobs. “In the spring of 2004, a new Wal-Mart opened up in Glendale, Ariz.,” Furman explains. “The store received 8,000 applications for 525 jobs with wages starting as low as $6.75 per hour. A Harvard applicant has a higher chance of being accepted than a person applying for a job at that Wal-Mart. These anecdotes strongly suggest that jobs at Wal-Mart are better than opportunities these workers would have in the absence of Wal-Mart, either other jobs or unemployment.”

Furman describes the average wage of a Wal-Mart employee compared to others in the retail sector. He says that unionized retail workers make 20 percent to 40 percent more than Wal-Mart workers “a fact that is reflected in a similar magnitude mark-up of prices at unionized grocery stores.” Wal-Mart pays about 70 percent of the cost of health benefits for its workers, though only 48 percent of Wal-Mart’s employees have health insurance -- compared to 46 percent in the retail industry. Five percent of Wal-Mart workers are on Medicaid; 27 percent of Wal-Mart workers’ children are on S-CHIP, the federal health insurance for children. “The fraction of children is relatively large, reflecting the expansion of public health coverage for children in low- and moderate-income families,” Furman writes. “The fact that Wal-Mart employees top the Medicaid rolls in a number of states is simply a reflection of Wal-Mart’s enormous size, not the higher likelihood that its employees will be on Medicaid.”

Why would a Wal-Mart worker go on Medicaid rather than the Wal-Mart-provided health care plan, Furman asks. “Because a family policy costs $1,800 annually for a Wal-Mart worker. A Medicaid-eligible worker has the choice of taking home an additional $1,800 in take-home pay and being insured through Medicaid or taking home less pay and instead getting Wal-Mart’s insurance. The beneficiary of choosing Medicaid is the worker -- who gets to keep an additional $1,800 -- not Wal-Mart. Wal-Mart -- like every other business -- is interested in paying the lowest possible total compensation (wages and benefits) consistent with recruiting, motivating and retaining a qualified workforce. As a corporation, it does not fundamentally care about whether this cost is in the form of wages or benefit.”

None of this should be held against Wal-Mart because President Bill Clinton (from Wal-Mart’s home state of Arkansas) changed the economic dynamic in the United States in the 1990s by expanding the Earned Income Tax Credit. He did this based on the idea, described in the Furman paper by Clinton himself, that “people who work shouldn’t be poor. We need to make work pay by expanding the EITC for the working poor…At the same time, we need to assure all Americans that they’ll have access to health care when the go to work.”

Clinton “radically” shifted social assistance programs in America away from non-working Americans to those who are working, leading to “large increases in the incentives to work,” writes Furman. “The intention of these expansions was two-fold: to get more low-income people, especially mothers, into work and to ensure that even low-paid, unskilled jobs come with a decent wage and benefits. Wal-Mart employees would seem like perfect candidates on both scores. Critics of Wal-Mart, however, have harshly criticized the fact that Wal-Mart employees receive benefits through these programs.”

But taxes paid by both Wal-Mart and by its employees far outweigh the costs to American taxpayers of government spending on Wal-Mart workers. “Together with indirect effects like driving up real estate values, their total tax bill is much larger than the claimed $1.5 billion in federal subsidies for its low-income employees,” states Furman. “Implicit in much of the criticism of Wal-Mart is the belief that the company has enormous resources and could easily pay higher wages or more benefits without making a major sacrifice. After all, Wal-Mart’s mind-boggling $10 billion in profits last year make it appear as if the company could wave a wand and do anything it wants. But Wal-Mart also has a staggering 1.3 million American employees, multiplying the costs of even a modest change in compensation. Overall, it is no easier for Wal-Mart to change compensation than many other companies. This year, Wal-Mart will earn about $6,000 per employee. This is virtually identical to the average for the retail sector and somewhat below the national average of $9,000 in profits per employee in the corporate sector. If Microsoft paid each of its employees an additional $5,000 or expanded its health benefits, its profits would be largely unchanged. If Wal-Mart took the same step -- and did not pass the cost on to consumers -- it would be virtually wiped out….The image of Wal-Mart as all powerful is at least six years out of date.”

Those who are anti-Wal-Mart are doing the country a economic disservice, argues Furman. Higher prices will hurt low-income people. Instead, “a much better strategy would be to recognize that Wal-Mart is a progressive success story,” he writes. “…The Wal-Mart economy is not about an economy in which corporations are squeezing workers. It’s about an economy in which the return to skills is rapidly growing and technological change…is leading to increased inequality. The most fundamental solution to these challenges is to invest in education and training necessary to ensure that all Americans have the skills to be successful in a technologically sophisticated global economy.”



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