How Capitalism Will Save Us (21 page)
Read How Capitalism Will Save Us Online
Authors: Steve Forbes
T
o many, Wal-Mart is not only America’s leading discount chain. It’s a retailing juggernaut that crushes competitors and symbolizes the brutality of the free market. In a
New York Times
op-ed piece, former Clinton labor secretary Robert Reich, expressing this view, complained that the retailing giant has turned “main streets into ghost towns by sucking business away from small retailers.”
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A
Wall Street Journal
online poll found that an astonishing number of Americans, more than 47 percent, believed that the mammoth retailer was “bad for the American economy.”
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Al Norman, one of the chain’s most vocal opponents, crowed in the
Huffington Post
that between 2007 and 2008, local citizens’ groups were directly responsible for killing some nineteen of sixty-four new locations that had been on the drawing board.
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Norman and others may be patting themselves on the back for helping to protect America’s mom-and-pop businesses from the giant retailer. The problem is that America’s small businesses did not need their “help.”
Andrea M. Dean and Russell S. Sobel of West Virginia University say studies that show Wal-Mart to be a destroyer of small business are “misleading” on many fronts.
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The researchers acknowledge that Wal-Mart has hurt certain small neighboring competitors that compete with the store directly. However, they found that something else is also happening: “the emergence of other small businesses—both in other sectors and in other counties.” For example, a Wal-Mart store might cause a nearby small competitor to close. But another small business, like an antique store or a restaurant, would open in its place.
Dean and Sobel observed this taking place around the country, including in their own hometown:
Morgantown, W.Va., is just one of many cities that have witnessed, first-hand, the process of creative destruction unleashed by Wal-Mart. Shortly after a new Wal-Mart store opened, Morgantown’s popular downtown area was wrought with empty storefronts. However, after only a brief period of time, the once-empty storefronts filled with new small businesses. A former women’s clothing shop transformed into a high-end restaurant. A former electronics store converted into an ice cream parlor. One by one, each of the vacant stores filled with new businesses, such as coffee shops, art galleries, and law firms. This process of creative destruction is able to increase economic efficiency by the reallocation of resources. Downtown retail space, which prior to a Wal-Mart store opening would be extremely competitive and allocated mainly to general merchandise stores, becomes an economically viable location for more elaborate types of small businesses once a Wal-Mart enters the area.
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If anything, Dean and Sobel say, Wal-Mart indirectly has created opportunities for some smaller entrepreneurs “who once could not afford the high rents of the limited downtown retail space” but “are now granted an affordable opportunity to open their own businesses.”
The researchers take issue with a study by Wal-Mart Watch, one of the chain’s most dogged opponents, that claims that the expansion of a single Iowa store in 2005 was responsible the closing of no less than 1,581 small firms, “including 555 grocery stores, 298 hardware stores, 293 building suppliers, 161 variety shops, 158 women’s stores, and 116 pharmacies.”
Sounds bleak, right? But the numbers don’t add up.
The data would imply a failure of 11.3 percent of all businesses in the state of Iowa. If computed as a percentage of only small businesses, Wal-Mart would be responsible for the failure of almost 30 percent of all Iowa small businesses.
If this kind of devastation had occurred, you’d think it would be reflected in national statistics measuring small-business formation. That’s anything but what happened. Dean and Sobel found that during the years of Wal-Mart’s growth the number of self-employed entrepreneurs—mom-and-pop business owners—actually soared:
Over the time period in which the number of Wal-Mart stores dramatically increased from just a few to over 2,500, there was also a continual increase in the rate of self-employment. This overall upward trend in self-employment is just as strong in the 1980s when Wal-Mart was rapidly expanding as it was in the 1970s. … Rather than a dramatic drop, the raw data suggest a nearly 50 percent increase in self-employment during the time frame.
But what about self-employment in areas where there are more Wal-Mart stores? “The lack of statistical significance indicates that the number of Wal-Mart stores has no significant effect on small business activity in a state, measured by either self-employment or small establishments.” In fact,
“bankruptcy rates are actually lower in states with more Wal-Marts.”
Nor are the stores replacing failed Wal-Mart competitors lower-quality businesses. Dean and Sobel found that they “have higher revenue, and are more profitable, than in the past (in real terms).”
The two conclude: “The previous research on Wal-Mart’s effects did not correctly model the welfare-enhancing process of ‘creative destruction.’ ” The chain hurt some small businesses. But it created opportunities for others.
Dean and Sobel conclude that in terms of the overall economy, Wal-Mart is a net gain. The low prices and available goods, not only from Wal-Mart but from other stores like it, “benefits consumers and …frees money and resources that can then give rise to new businesses and further advancements.”
Dean and Sobel are not the only ones to find small-business growth in the shadow of Wal-Mart. A 2004
BusinessWeek
story about Wal-Mart’s opening amid the struggling mom-and-pop stores in South Central Los Angeles found that the retailer’s presence turned out to be
good
for its smaller neighbors:
Now that people can stay in the neighborhood for bargains, something else interesting is happening: They’re stopping at other local stores, too.
“The traffic is definitely there. We’re seeing more folks,” says Harold Llecha, a cashier at Hot Looks, a nearby clothier. The same is happening at other nearby shops, say retailers. They acknowledge
that these shoppers don’t always buy from them. On some items, Wal-Mart prices can’t be beat. And a handful of local shops have closed. But the larger picture is that many that were there before the big discounter arrived are still there. There are new jobs now where there were none. And a moribund mall is regaining vitality. In short, Wal-Mart came in—and nothing bad happened.
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The magazine cites 2003 research that confirms Dean and Sobel’s findings: “Emek Basker at the University of Missouri found that five years after the opening of Wal-Marts in most markets, there is a small net gain in retail employment in counties where they’re located, with a drop of only about 1% in the number of small local businesses.” Not only did the chain bring more jobs, but it helped to lower prices some “5% to 10%” in the neighborhood.
Another anti–Wal-Mart argument advanced by opponents is that the retailer strong-arms suppliers to produce its products at such low margins that it practically forces them out of business. It’s true that the chain is a tough negotiator. But if doing business with Wal-Mart was so bad for vendors, it’s doubtful that so many tens of thousands would be lining up for the privilege. According to the
Wall Street Journal
, ten thousand companies each year compete to become Wal-Mart suppliers and only about two hundred, or 2 percent, get accepted. Those who do can see their business skyrocket overnight.
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The idea that a retailer that employs 1.4 million people in the United States and helps consumers stretch their earnings could be bad for the economy is an upside-down notion with no grounding in any Real World facts or economic argument. Several years ago, documentary filmmaker Robert Greenwald made a documentary,
Wal-Mart: The High Cost of Low Price
. One of the people he profiled was Don Hunter, owner of H&H Hardware, a Middlefield, Ohio, business supposedly forced out of business by Wal-Mart. The only problem was that, as journalist Byron York reported later, H&H closed before Wal-Mart ever opened. And there’s a surprising ending to the story: “The H&H property has been sold to new owners, who have opened it as …a hardware store.”
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REAL WORLD LESSON
Because markets are spontaneous “ecosystems,” creation and destruction can occur in ways—and in sectors—that people can’t anticipate
.
Q
I
SN’T THE FREE MARKET TOO BRUTAL TO TRUST WITH PEOPLE’S RETIREMENT FUNDS?
AS
INCE THEY WERE INTRODUCED, 401(K)S HAVE CREATED WEALTH FOR MILLIONS OF
A
MERICANS
. P
RIVATE-SECTOR INVESTMENT OF RETIREMENT FUNDS DELIVERS FAR BETTER RETURNS THAN
S
OCIAL
S
ECURITY, WHERE FINANCIAL MISMANAGEMENT HAS RESULTED IN A NEAR-BANKRUPT SYSTEM
.
T
oday’s bear market hasn’t been a good place for anyone’s money. But the financial meltdown has been especially painful for retirees living off equity investments. Between October 2007 and early 2009, the Dow Jones Industrial Average declined by some 50 percent, shrinking the 401(k) retirement accounts of millions of Americans.
This isn’t the only time that 401(k)s have taken a beating. A few years ago, in the early 2000s, Enron’s scandal and subsequent implosion wiped out the 401(k)s of thousands of the company’s employees, who’d invested their savings primarily in company stock.
Thus, politicians and others have expressed misgivings about 401(k) retirement plans, which let people invest their own savings in stocks where they can grow tax deferred. U.S. Representative George Miller, a California Democrat, called them “little more than a high-stakes crap-shoot.” John Bogle, the highly respected founder of the Vanguard group of mutual funds, testified before Congress in 2009 that the nation’s system of retirement security is headed “for a serious train wreck.”
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