The Economy

Every one, including me, seems to have ideas about why the economy is not where it should be. There are plenty of things that have gone wrong, the housing crash, subprime mortgage mess, manufacturing jobs lost, the Affordable Care Act, congressional gridlock, high taxes, low income, too many on government assistance, not enough infrastructure investment, and who knows how many other things. I'm going to address a few.

If you have been a regular reader you know I am not a big fan of WalMart. I don't like the way the stores are run and I don't like what WalMart does to small businesses when they invade a city. WalMart recently reported sales and income. Overall sales rose but during the same quarter same store sales fell 0.3% from the previous year. When a large retailer measures success they do so by comparing sales at an established store with how that store did the year before. It tells them how their core business is doing. Same store sales can fall for a variety of reasons. During a recession when retail sales are broadly falling you would expect same store sales to be down. That is not the case here. During the same period retail sales overall in the economy were up 5.2% from a comparable period a year ago. Consumers are buying more, just not at WalMart. In a typical WalMart store that has been open for over one year consumers are actually shopping less. There are several possible explanations for this. They could be hampered by the increased payroll tax. They could be shopping elsewhere.

If you go with the simplest solution is usually correct then this may be the issue. WalMart is a large employer. WalMart, by paying low wages, is limiting the ability of a large portion of the American workforce to consume. People tend to shop with the wages they earn. The typical consumer at the low end of the income ladder, spending is a function of income. When they earn less, they spend less. The biggest problem with the economy at this time is the refusal of companies, many of whom are making record profits, to boost wages. The Bureau of Labor Statistics indicates average hourly earnings for private sector workers has risen by only 1.9% in the past 12 months. Quarter after quarter companies are racking up high profits, buying back stock, paying dividends and rewarding executives while freezing wages. Executives at stores like WalMart that cater to the lower half of the income ladder wonder why no one shows up to shop. Where is the consumer spending. WalMart is the largest private sector employer in the United States and accounts for 10%  of employment in the retail sector. WalMart claims to pay an average hourly wage of $12.78 in the United States. Critics say those numbers are inflated because they take into account higher paid managers. Many of WalMart's rank and file make less than $10.00 per hour. If you annualize $10.00 per hour it is less than $25,000 per year.

This isn't complicated by any means. By paying low wages WalMart is limiting the ability of a large number of American workers to consume. By setting this low wage benchmark WalMart encourages other businesses to do the same. The people who work at WalMart are the same group of people who shop at WalMart. They don't spend more at WalMart because they don't have more to spend. They are living hand to mouth, paycheck to paycheck hoping that nothing goes wrong, no one gets sick, the car doesn't break down or any other small economic disaster.

It really is this simple. Studies indicate that if WalMart paid employees, not including managers, just regular floor associates $12.00 per hour the result would be an increase in prices of 1%. Henry Ford was a visionary not just with the assembly line production of cars but also in the payment of his employees. He paid employees more than the other car companies did. It was not because he was a nice guy. He wanted them to have enough money to be able to buy a car. They would take more pride in their work if they knew they could someday own one and his sales would increase. WalMart could take a page out of his book. If they raise wages consumption will increase. Sales will increase. Profits will increase. WalMart, by holding wages down, is effectively harming its own bottom line.

This is not a solution to all of our economic ills, it is a first baby step. There are others that need to be taken and the sooner we get started the sooner we will be back where we belong.