Is Wal-Mart Good for the American Working Class?

Don't Fix Wal-Mart; Fix the Government
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June 28 2006 12:57 PM

Is Wal-Mart Good for the American Working Class?

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Barbara,

I'm developing a better understanding of where and why we differ. We both believe in what you described as "a moral principle, that anyone who works (full-time, year-round) should be paid enough to live on." But we locate the responsibility in different places: You believe it is possible and desirable to make this the responsibility of companies like Wal-Mart whereas I put most of the onus on the government.

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I believe that the free-market economy, together with government investments in basic research, education, and a short litany I won't bore you with, is the best way to generate productivity growth—the prerequisite for sustained increases in living standards. But this free market economy should be combined with what economists antiseptically term tax, transfer, and social insurance programs to ensure that the benefits are shared by everyone.

We have something like this compact today and it works decently well, delivering rising living standards and lifting tens of millions of people out of poverty. We can and should do a whole lot better, and elsewhere I've discussed three of the highest priorities: ensuring health insurance for all Americans, strengthening Social Security, and expanding the Earned Income Tax Credit.

You described your approach as "class war." Some Republicans have wrongly used that label to describe mine as well. In fact, political support for the free-market economy they cherish so much, and maybe even its ability to exist in the first place, is contingent on policies to ensure that its gains are shared.

To appreciate the extent of our progressive policies you need look no further than Wal-Mart. A single mother with two children making $18,000 a year at Wal-Mart gets $4,869 back from the EITC and refundable child tax credits. Her children are probably eligible for Medicaid, either instead of Wal-Mart's insurance or as a wraparound to pick up the tab for some of her co-payments. In addition, she might get food stamps and housing vouchers, and can send her children to a public school that gets additional funding under Title I.

The anti-Wal-Mart coalition objects to this. Here's Wal-Mart Watch on the issue:

Wal-Mart is one of the biggest recipients of corporate welfare in the world. Year after year, Wal-Mart's low pay and insufficient employee benefits programs leave hundreds of thousands of Wal-Mart workers to rely on Medicaid, food stamps, and public housing assistance to make ends meet. Call it the "Wal-Mart Tax." It costs American taxpayers at least $1.5 billion in federal tax dollars every year, and hundreds of millions more in state and local subsidy costs.

The other leading anti-Wal-mart group, Wakeup Wal-Mart, has a clock on its home page showing how much of "your money" has gone to Wal-Mart this year.

As far as I can tell, these are cynical attempts to expand the appeal of the case against Wal-Mart, moving it beyond an appeal to the atavistic anti-corporate instincts of some progressives by playing on the atavistic anti-welfare, anti-government, anti-tax instincts of some conservatives.

Does anyone really think that food stamps, Medicaid, and housing vouchers allow Wal-Mart to line its pockets by paying its workers less? Why don't you tell me which of the following two thought experiments make the most sense to you:

  • Wal-Mart is a nice, caring company. It wants its workers to have enough money to afford food, rent, and medical care, so it pays them $20,000 annually. Now along comes the government to give the workers $5,000 in food stamps, housing vouchers, and Medicaid, so now Wal-Mart only needs to chip in $15,000 to ensure its workers can live half decently.
  • Wal-Mart is an amoral company that wants to pay its workers as little as it possibly can while still attracting, retaining, and motivating enough workers to operate the business and make a profit. If the government makes food stamps and housing vouchers available, workers will take more time to find a high-paying job and greater leverage to press for higher wages. Wal-Mart will need to pay higher wages to attract the smaller pool of applicants and motivate them more now that the threat of firing someone carries somewhat less weight. (Economics aficionados should note that the EITC, which is only available to people who work, is a somewhat different story.)

So, hopefully you agree with me that Wal-Mart's workers are getting the direct benefits of these public programs and indirectly are probably getting higher wages as well.

But there's more good news for you: Most of the tab is being picked up by the wealthy, since the top 1 percent of Americans pay 39 percent of federal income taxes.

Let's compare this to imposing a living wage. For the sake of argument, ignore efficiency and the impact on employment (not a bad assumption at Kennedy's proposed $7.25 an hour, but to benefit any Wal-Mart workers you would need to support $10 or $15 an hour, at which point it would be a terrible assumption).

Where do you think this living wage would come from? It's too late to get the money from the Walton fortune, which in any event would only be enough to raise wages by $1 an hour (annualized). We could eliminate Lee Scott's salary and use the money to pay an extra 1 cent per hour to Wal-Mart's employees. You would have no way to legislate that Wal-Mart takes this money out of its profits, even if you thought these profits were sufficient. (And it's far from obvious that they are: Wal-Mart's profits per employee are lower than the economy-wide average. For example, Slate's owner, the Washington Post Company, makes $19,000 from each employee. Wal-Mart only makes $6,000 from each employee.)

You shouldn't have any problem believing that what you think is an immoral corporation will pass most of the costs on to its consumers. Now, you might say it's only a 2 percent increase in prices. Given Wal-Mart's $250 billion in annual sales, this works out to $5 billion of "your money" (and more if you add more companies to your list). And "your money" is a more apt term in this case because the top 1 percent of Americans is not picking up 39 percent of this tab.

(As an aside, since I don't have the political power to design my ideal system of taxes and subsidies, I support raising the minimum wage and giving the bottom 10 percent of wage earners a pay hike. But when we're talking about workers at the 30th or 40th percentile, spreading the cost of higher wages across consumers more broadly becomes a less attractive proposition.)

Finally, if this was just about making Wal-Mart pay higher wages, I wouldn't mind. But it's not. The top of Wal-Mart Watch's Web site prominently features instructions on "How to keep Wal-Mart out of your hometown." If I heard that Wal-Mart was coming to my neighborhood, New York's West Village, I might rush for my mouse. But I wouldn't kid myself into thinking that my opposition had anything to do with helping the poor. If anything, I would feel guilty that I was preventing moderate-income New Yorkers from enjoying the huge benefits that much of the rest of the country already knows so well.

As this is my final entry, you get the last word.

Best,
Jason

Jason Furman is a senior fellow and director of the Hamilton Project at the Brookings Institution.