The Case for Breaking Up Walmart

After the Soviet Union collapsed in 1991, Americans were quick to give much of the credit to the economic system of the West. The centralization and monopolization of the Soviet regime, so the thinking went, had stifled enterprise, choked creativity, and stripped wealth from vital systems. The magic formula? Democracy combined with open and competitive markets. It may seem strange then that an array of American thinkers have in recent years come to the defense of perhaps the most awesome manifestation of command-and-control economics in the two decades since Boris Yeltsin climbed atop that tank — the giant retailer Walmart. And that what they most admire about Walmart is precisely the ruthless ways in which this goliath wields its power.

The technical term for the sort of power Walmart exercises is monopsony. This power is created when one company captures enough control over an entire market to dictate terms to its suppliers. The basic argument of these thinkers — which include columnist Thomas Friedman and the economist Jason Furman — is that Walmart’s immense "buying power" enables the company to drive down prices and impose efficiencies on the economy. Furman, now the Obama administration’s deputy director of the National Economic Council, once wrote that the benefits of Walmart’s power were "enormous."

In his column for Foreign Policy ("Give Sam Walton the Nobel Prize," May/June 2013), Charles Kenny not only joins this club, he does his comrades one better. According to Kenny, Walmart’s dictatorship over suppliers yields such grand benefits for the poor that we should export the company’s autocratic ways to the developing nations of the world. Kenny wraps his argument in lightness and cheek, even suggesting that Sam Walton, Walmart’s long dead founder, deserves a Nobel Prize. But given Walmart’s real and growing political sway in America and around the world, Kenny’s essay raises two interlinked questions that are deadly serious: Is such a radical departure from traditional market structures and market-based competition really the best way to develop the economies of poorer nations? And is such a model still the best way — if it ever was a good way — to run and develop the American economy? And, for that matter, our American democracy?

The first question is all but impossible to answer, at least here in Washington where Kenny and I both work. Although Kenny himself is entirely willing to assume the Leopoldian burden of prescribing what’s best for the peoples of Ouagadougou and Chichicastenango, we have no way to tell for sure whether the citizens of the world’s less-well-off nations would in fact decide that Walmart’s command-and-control model is right for them.

What we do have are pretty strong indications that at least some people do not in fact view Walmart’s power as an unalloyed good.

Take India, one of Walmart’s main targets for expansion. Governments at both the central and state level have long resisted the company’s efforts to set up giant retail centers, due mainly to fears that Walmart will drive legions of smaller retailers and suppliers into bankruptcy. Many Indians even see Walmart as a danger to the country’s sovereignty; the activist Kisan Baburao Hazare has said that Walmart will "enslave" India in much the same way as the British East India Company did. Some Indians were also upset that Hillary Clinton lobbied for the company on a trip to India in 2012, and early this year officials in New Delhi opened an investigation into what they say is illegal lobbying by the company.

The story is much the same in South Africa. When Walmart made a play to buy a local retailer, the South African government worked hard to keep the goliath out, fearing the company would drive down wages and replace local products with goods sourced from Chinese suppliers. South African authorities stopped only after Walmart threatened to call for backup from the World Trade Organization and, by implication, the Obama administration.

The second question is easier. America is home to some 4,500 Walmart stores, located in every state in the union. The company sells upwards of 40 percent of many individual consumer items in America, and in more than 30 metropolitan areas in America it controls half or more of the grocery business. As a nation this gives us ample experience to assess whether Walmart’s use of monopsony power really has benefited the poor and middle class, especially in the decades since the company grew to be a true national power.

The evidence is damning.

Take Walmart’s effects on jobs and wages. Just as the company’s massive scale allows it to dictate prices for some goods, the fact that the company employs upwards of 1.4 million people gives it the power to drive down wages — through the same power of monopsony — in at least some of America’s local labor markets. Worse is the company’s ability to distort how its suppliers treat their workers. As groups like the United Food and Commercial Workers have shown, when Walmart applies pressure on its suppliers to lower margins, it also takes money from the people who work for those suppliers.

Another problem with Walmart’s use of monopsony power to extract wealth from suppliers is that over time the almost inevitable result of such a practice is to force those suppliers to degrade the products they make, even if this results in lower prices. Charles Fishman in his 2006 book, The Wal-Mart Effect, detailed how Walmart had the power to compel even companies as big as Philips to reduce the quality of their manufactures, in this case its televisions. Or consider the declining quality of Levi’s jeans, which as the journalist Stacy Mitchell illustrated, can be tied to Walmart.

Perhaps the most dramatic evidence of the dangers of the Walmart model is that, over time, the way the company uses its power tends to drive economic consolidation in those sectors of the economy under its sway. Economies are not static systems. Suppliers, under the sort of sustained economic pressure that a monopsonist tends to apply, will eventually move to relieve that pressure. Often they do so by merging operations with other suppliers until they consolidate sufficient power to resist the predations of the monopsonist.

A generation ago, power over America’s consumer economy was divided among thousands of midsize and small manufacturers and retailers. A few giant manufacturers — such as Procter & Gamble and Gillette — enjoyed some pricing power. But most firms faced competition from all sides, and the markets for both retail services and production were largely open to all comers. Then in the late 1970s and early 1980s, Congress and the Reagan administration put into place the legal foundations of the political economy that gave rise to today’s Walmart, by radically altering many of our fundamental antitrust and pricing laws.

Today we see extreme concentration of ownership and control in retail — as evidenced not merely by Walmart but by the rise of a few other
giants, including Target and Home Depot. Increasingly, we also see a radical concentration of ownership and control among the companies that manufacture the consumer products that Walmart sells. This includes Kraft, Unilever, and P&G (which bought Gillette in 2005). Indeed, where once there were dozens of suppliers of foods and consumer goods, there are now only a few ever more dominant players.

The result? In a widening swath of the American economy — including in such basic goods as pork, grains, milk, beer, and detergent — we increasingly see manufacturers who have concentrated sufficient power to raise prices no matter what Walmart may say. In other words, even if the Walmart effect was ever good for Americans, that effect appears to be fading fast.

This is not to say that Walmart is becoming any less powerful — economically or politically — vis-à-vis the individual citizen. Rather, it is that a few other companies have become far more powerful. When it comes to private, corporate-run, command-and-control systems, the Walmart way is fast becoming the American way.

The fundamentally ramshackle and contradictory quality of Kenny’s argument becomes most evident about halfway through his piece. It is here that Kenny makes an important point: that the material wellbeing of many of the world’s poorest people is improving. In much of the developing world, he writes, people are "living better and longer, with more material possessions to their name." They enjoy more access to better machines, pharmaceuticals, and sources of information.

This is absolutely correct. The problem with this section is that not a single one of the advances Kenny lists can be attributed, even remotely, to the concentration of power he so admires. He provides no proof that Walmart’s command-and-control system has performed better, in any respect, than a more open and competitive marketplace.

If we keep in mind that these material advances are all due to the work of some individual scientist or engineer, or some coder, entrepreneur, activist, or legislator, then we begin to understand the real structure of today’s economy. In many cases if not most, these individuals made these advances despite the power concentrated in Walmart and the other increasingly powerful, increasingly manipulative, and increasingly extractive goliaths that prowl our world.

So is there any reason whatsoever for the optimism Kenny so dearly wants us to feel? Absolutely, right in the fact that these individual people — working in the interstices of power — are still able to figure out how to share their better ideas with the rest of us. The true path to a better future? Protect all of our fellow citizens from Walmart and other such private autocracies. And do it now.