Wal-Mart and Middle-Class America

by Don Boudreaux on August 27, 2006

in Myths and Fallacies, Wal-Mart

Richard Vedder, one of the outstanding economists at Ohio University and now visiting at the American Enterprise Institute, is co-author (with Bryan O’Keefe) of this op-ed in today’s Washington Times.  Vedder and O’Keefe argue, sensibly, that Wal-Mart is no enemy of middle-class America; they point out that

there is enormous economic evidence that Wal-Mart’s has helped poor and
middle class consumers — in fact, more than anybody else. Our own data
analysis shows Wal-Mart is concentrated primarily in smaller, rural
counties with a per capita income far lower than other retailers, like
Costco. And, unlike the picture painted by labor activists, when the
Wal-Mart moves in, good things happen. Looking at 25 small towns where
Wal-Mart opened stores in 2002, we found employment growth was much
stronger in "Wal-Mart communities" than in other areas.

Other academics have reached similar conclusions about
Wal-Mart’s positive effects for the poor and middle class. University
of Missouri economist Emek Basker shows Wal-Mart’s presence tends to
lower prices by varying amounts, perhaps nearly 10 percent in the long
run.

Respected Massachusetts Institute of Technology economist
Jerry Hausman argues that consumer welfare gains are even larger than
those estimated by Mr. Basker, probably in excess of 20 percent of
sales. Jason Furman, former director of economic policy for John
Kerry’s presidential campaign, claims Wal-Mart’s discounting on food
alone boosts the welfare of American shoppers by at least $50 billion a
year. These savings help poor and middle-class consumers
disproportionately since they spend a greater percentage of their
disposable income on food products. Wal-Mart’s ability to help poor and
middle-class consumers led Mr. Furman to dub the retailer a
"progressive success story."

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{ 13 comments }

happyjuggler0 August 27, 2006 at 10:19 am

Facts be damned, I want to hate WalMart because it is the hip thing to do these days.

Thomas Sowell wrote a column recently about how black leaders slam small variety stores owned by Koreans and others in inner cities because they charge outrageously high prices. It is cheaper to travel to a white neighborhood and buy from a big box retailer. This is supposed to be discrimination against blacks.

He then went on to explain that it was about both economy of scale and also that costs were higher in inner cities because of crime etc.

The irony in all this complaining about Koreans etc. is that big box retailers want to open up shop in these neighborhoods in Chicago and the city just recently passed a law saying these big box retailers are evil for trying to create local jobs and give the locals a ton of low priced goods easily accessed in their neighborhood.

Sometimes you just can't win.

KipEsquire August 27, 2006 at 10:56 am

Another Wal-Mart phenomenon that is conveniently ignored by its critics is how it helps small businesses, especially through its "Sam's Club" unit.

Yes, Wal-Mart may drive out less competitive local "Mom & Pop" retailers, but it also reduces costs for restaurants, tradespeople, self-employed "SOHO" professionals and others — almost all of whom are decidedly "middle class."

Phil August 27, 2006 at 11:26 am

More on Kip's point: the owners of my kids' daycare regularly shop at Sam's Club for the stuff they use at their business. I've also seen the owner of one of the local ice cream shops buying stuff (plastic spoons, cups, and whatnot) for his business at Sam's Club. And when I used to work for a large drug chain back in the late 80's and early 90's, I'd sometimes be sent to shop at Wal Marts to buy stuff that my store had on sale but which we ran out of.

Harold August 27, 2006 at 1:36 pm

Not all the academic studies go that way. I blogged http://blogs.chicagoreader.com/daily-harold/2006/07/19/think-twice-throwing-money-wal-mart/
about one published recently in Social Science Quarterly by Goetz and Swamanithan. They found the "spread of Wal-Mart stores during the 1990s was associated with higher usage of food stamps per capita, or with smaller reductions in this variable, holding other factors constant."

They did not make hyperbolic claims, acknowledging that they were not able to factor in the effects of lower prices or the costs of local government subsidies. They didn't claim to have provided a full balance sheet on Wal-Marts.

I'm pretty sure that an honest academic balance sheet will mention contrary evidence, if only in order to refute or explain it away. Has anyone seen such a thing, as opposed to cheerleading for one "side" or the other?

Allen August 27, 2006 at 4:34 pm

It's interesting to this things like this in light of all the claims made about Wal-mart. I rarely shop there. I've found their prices to be higher on some items than other stores. I don't like how cluttered and messy the store is. But I'd never protest one coming to the neighborhood. This one shows why.

The study of poverty rates is flawed. The problem is the type of counties that would initially have had wal-mart stores in 1987 and the type that would add them even in 1998 were not as the whole the type of counties that would've benefited most from the economic boom in the late 1990s. If I understand right, they observed the changes over time in relation to other counties. At best they've shown a correlation. They haven't shown Wal-mart to be the cause.

Joe Roberts August 27, 2006 at 8:30 pm

I would like to comment on another "side effect" of Walmart entering the competitive landscape of a community. In our town the local Safeway had become a bit tattered in its physical plant and its product selection and presentation had slipped also—but they were about the only game in town. Walmart came to town and really started to eat Safeway's lunch. What happened? After about a year Safeway came in with a major upgrade to its physical plant complete with taupe paint,inset lighting instead of the flourescents, and new tiling in much of the floor space; then they went through their products and enriched and upgraded the selections offering non-commodity items that Walmart doesn't sell; they also emphasized certain sectors such as their meat department, floral department and Starbucks coffee—all areas where they are clearly superior to Walmart.
On the occasions when I do shop at Safeway (I shop at both) and I see my smug liberal friends shopping there—the ones who would never be caught dead at Walmart— I have to smile to think that the only reason they are getting the benefits of the shopping experience at Safeway is because of the competitive pressure supplied by—horror of horrors—Walmart.
Without Walmart there would certainly have been no desire on Safeway's part to make the major capital investments of an upgraded facility.

happyjuggler0 August 27, 2006 at 11:15 pm

Allen,

Nice insight.

happyjuggler0 August 27, 2006 at 11:20 pm

Joe Roberts,

Your "Safeway-Walmart effect" reminds me of the "buy American" campaigns that beenfit from the imports they seem to hate. The price for the domestically sourced goods (or services) is surely lower as a result of imports than it would have been if not for competition from those very imports.

The "buy American" types can then claim that the cost of buying American is negligable relative to imports.

matt August 28, 2006 at 10:49 am

William's Shaving Soap at Safeway: $0.94. Wal-Mart: $0.97. Other than that, I just can't say anything bad about Wal-Mart. Yay Wal-Mart!

Randy August 28, 2006 at 4:46 pm

Walmart is too crowded these days. I avoid it because I hate fighting crowds and its worth paying a bit more to avoid them. But what better thing can one possibly say about a business than that it is crowded? Revealed preference.

john g August 28, 2006 at 9:59 pm

Walmart has eliminated billions and billions of dollars of waste from the economy. Virtually everyone is eating out more often, wearing nicer clothes, driving nicer cars and so on because of this. I am amazed that people argue in favor of waste and inefficiency.

Justin R August 29, 2006 at 12:24 pm

For the sake of academic honesty, I am going to have to second Harold's comment – atleast until I see the details of the studies and they prove otherwise.

Wal-Mart does not randomnly select communities in which to build stores. Its preference would be for towns, cities, and neighborhoods where incomes are growing. Unless the authors of the studies factored this into their models, making the claims they did might be a bit hasty.

The findings of the studies do make logical, economic sense. I would just like to more details about how the studies were conducted.

To that end, is Vedder's data and analysis available to the public?

Kevin August 29, 2006 at 11:00 pm

Here's a typical true-life Wal-Mart small town "tragedy". In my small hometown in Arkansas, Wal-Mart recently upgraded to a supercenter, anchoring a new shopping center containing a dozen retail spaces, with a dozen more newly built across the street or next to Wal-Mart.

The result is that there are more restaurants and retail operations in just that block — newly built just to feed off the Wal-Mart traffic — than previously existed all together in the history of my town.

Few, perhaps none, of them would be in my town, employing people and serving customers, had Wal-Mart not decided to build that supercenter.

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