Posted by Kenneth Anderson:
What Happens to the Walmart Effect
http://volokh.com/archives/archive_2009_06_28-2009_07_04.shtml#1246413012
if and when China decides to stop exporting the "glut of global
savings"?
The Walmart Effect was the claim (accepted pretty broadly as having a
decent empirical basis, even given the disputes) that Walmart, by
lowering prices at the downmarket end of things, added significantly
to American spending power and standard of living. And particularly to
consumers at the lower end of the economic scale. The Walmart Effect
was partly Walmart stores themselves, but also the knock-on effects on
the competition. Even if one accepted the effect, the size of its
contribution to American consumption power was argued. And the extent
to which it offset the losses to workers and wages was also hotly
debated.
Charles Fishman set out the basic claims in his [1]The Walmart Effect.
But in many ways the thesis took on a whole different life when it was
partly endorsed by Democratic economist Jason Furman, in a
[2]well-known essay. As described by the [3]Washington Post website
whorunsgov.com:
[H]e also praised Wal-Mart in a report that liberals still fiercely
decry. Furman defended the discount super-store, calling it a
�progressive success story� by disputing the notion that its
business model hurt the wages of retail workers in the industry.
In a report, Furman basically estimated that Wal-Mart�s price
reductions saved Americans nearly $263 billion, while disputing the
argument that Wal-Mart hurts retail workers� wages. Furman
estimated that wage losses for retail workers had decreased by a
maximum of about $5 billion a year. He concluded that society is
better off as a result of Wal-Mart�s business model and said that
observers should focus on attacking problems in the larger retail
sector as opposed to the mega-store�s wages.
Furman downplays the angry outcry in response to his paper.
�There's a zero-sum mentality among some segments of the left," he
said. �If someone is doing well, then someone else must be doing
poorly."
That's a quick sketch of pretty well known policy history; there's
much argument even today over true, untrue, extent, etc. That's not
what interests me today. Rather, even taking into account the many
impressive features of how Walmart runs its business to maximize
efficiency and lower prices, it still seems pretty clear, especially
in retrospect, that to a considerable extent, Walmart for years has
consisted of simply being the retailer of goods whose purchase and
consumption by Americans the Chinese government has decided to
subsidize - or, much more precisely, as we can see today, finance on
credit - and in effect serve as a conveyor belt for Chinese goods but
also Chinese savings.
This keys back to the "global glut of savings" hypothesis put out by
Alan Greenspan as an explanation for why the Fed under his stewardship
would not have been able to prevent the asset bubble of the last few
years. However, it is laid out perhaps most persuasively as a general
argument by the renowned financial commentator at the Financial Times,
Martin Wolf, in a John Hopkins Press book under a series edited by
Francis Fukuyama, [4]Fixing Global Finance. The book was published in
2008, but is based upon lectures in 2006 or so, so much of the
analysis precedes the immediate crisis; nonetheless, it is
exceptionally clear on the arguments over the global savings glut.
(Without, so far as I can tell on a first read, however, embracing
Greenspan's strongest contention that the Fed could not stop the
tsunami of excess savings from flooding American shores, but that's
another discussion.)
Assume that something like the global savings glut hypothesis is true,
and that it is in large part a glut of savings from China flowing into
the US economy especially. Wolf, Greenspan, Peter Mandelson (whose
op-ed on this topic I discuss in excruciating detail [5]here), and
many others have called for a readjustment to this savings glut. It
principally requires an increase in Chinese domestic consumption to
absorb its savings rather than shipping the savings abroad.
The macroeconomic argument, I take it, is excellent. What I want to
point out, however, is that if and when put into place, one of the
casualties might be a large part of the Walmart Effect. As noted, when
it was under discussion, back in the bubble period, it was said by
Furman to amount to some $263 billion (offsetting some $5 billion in
wage effects). This meant several thousands of dollars per US family
and, assuming that it was mostly received by lower income households,
even bigger consumption gains for the poor. To the extent - which I
would suggest although not on any actual evidence, alas - that the
Walmart Effect could be renamed the China Credit Facility, then a move
to rebalance global savings flows might well hit poorer American
families. How much? Well, certainly a large part of it has evaporated
as the financing from China has, if not precisely evaporated, shifted
from financing private consumption to a much larger portion devoted to
financing US government public consumption. So some part is gone or
already evaporating at that stage.
But we have yet to see a full policy of rebalancing, and without any
basis for putting in numbers, let me suggest that it might be a
considerable part of what is left of the original Walmart Effect. Or
am I wrong about the basis of the effect - wrong, that is, in
asserting that the Walmart Effect is largely a China Credit Facility
effect?
References
1.
http://www.amazon.com/Wal-Mart-Effect-Powerful-Works-Transforming/dp/0143038788/ref=sr_1_1?ie=UTF8&s=books&qid=1246410967&sr=1-1
2. http://www.americanprogress.org/kf/walmart_progressive.pdf
3. http://www.whorunsgov.com/Profiles/Jason_Furman
4.
http://www.amazon.com/Fixing-Global-Finance-Martin-Wolf/dp/0300142773/ref=sr_1_1?ie=UTF8&s=books&qid=1246411866&sr=1-1
5. http://volokh.com/posts/1245464850.shtml
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