by Steve Forbes
A Wall Street Journal online poll found that an astonishing number of Americans, more than 47 percent, believed that the mammoth retailer was “bad for the American economy.”32 Al Norman, one of the chain’s most vocal opponents, crowed in the Huffington Post that between 2007 and 2008, local citizens’ groups were directly responsible for killing some nineteen of sixty-four new locations that had been on the drawing board.33
Norman and others may be patting themselves on the back for helping to protect America’s mom-and-pop businesses from the giant retailer. The problem is that America’s small businesses did not need their “help.”
Andrea M. Dean and Russell S. Sobel of West Virginia University say studies that show WalMart to be a destroyer of small business are “misleading” on many fronts.34 The researchers acknowledge that WalMart has hurt certain small neighboring competitors that compete with the store directly. However, they found that something else is also happening: “the emergence of other small businesses—both in other sectors and in other counties.” For example, a WalMart store might cause a nearby small competitor to close. But another small business, like an antique store or a restaurant, would open in its place.
Dean and Sobel observed this taking place around the country, including in their own hometown:
Morgantown, W.Va., is just one of many cities that have witnessed, firsthand, the process of creative destruction unleashed by WalMart. Shortly after a new WalMart store opened, Morgantown’s popular downtown area was wrought with empty storefronts. However, after only a brief period of time, the once-empty storefronts filled with new small businesses. A former women’s clothing shop transformed into a high-end restaurant. A former electronics store converted into an ice cream parlor. One by one, each of the vacant stores filled with new businesses, such as coffee shops, art galleries, and law firms. This process of creative destruction is able to increase economic efficiency by the reallocation of resources. Downtown retail space, which prior to a WalMart store opening would be extremely competitive and allocated mainly to general merchandise stores, becomes an economically viable location for more elaborate types of small businesses once a WalMart enters the area.35
If anything, Dean and Sobel say, WalMart indirectly has created opportunities for some smaller entrepreneurs “who once could not afford the high rents of the limited downtown retail space” but “are now granted an affordable opportunity to open their own businesses.”
The researchers take issue with a study by WalMart Watch, one of the chain’s most dogged opponents, that claims that the expansion of a single Iowa store in 2005 was responsible the closing of no less than 1,581 small firms, “including 555 grocery stores, 298 hardware stores, 293 building suppliers, 161 variety shops, 158 women’s stores, and 116 pharmacies.”
Sounds bleak, right? But the numbers don’t add up.
The data would imply a failure of 11.3 percent of all businesses in the state of Iowa. If computed as a percentage of only small businesses, WalMart would be responsible for the failure of almost 30 percent of all Iowa small businesses.
If this kind of devastation had occurred, you’d think it would be reflected in national statistics measuring small-business formation. That’s anything but what happened. Dean and Sobel found that during the years of WalMart’s growth the number of self-employed entrepreneurs—mom-and-pop business owners—actually soared:
Over the time period in which the number of WalMart stores dramatically increased from just a few to over 2,500, there was also a continual increase in the rate of self-employment. This overall upward trend in self-employment is just as strong in the 1980s when WalMart was rapidly expanding as it was in the 1970s. … Rather than a dramatic drop, the raw data suggest a nearly 50 percent increase in self-employment during the time frame.
But what about self-employment in areas where there are more WalMart stores? “The lack of statistical significance indicates that the number of WalMart stores has no significant effect on small business activity in a state, measured by either self-employment or small establishments.” In fact, “bankruptcy rates are actually lower in states with more WalMarts.”
Nor are the stores replacing failed WalMart competitors lower-quality businesses. Dean and Sobel found that they “have higher revenue, and are more profitable, than in the past (in real terms).”
The two conclude: “The previous research on WalMart’s effects did not correctly model the welfare-enhancing process of ‘creative destruction.’ ” The chain hurt some small businesses. But it created opportunities for others.
Dean and Sobel conclude that in terms of the overall economy, WalMart is a net gain. The low prices and available goods, not only from WalMart but from other stores like it, “benefits consumers and …frees money and resources that can then give rise to new businesses and further advancements.”
Dean and Sobel are not the only ones to find small-business growth in the shadow of WalMart. A 2004 BusinessWeek story about WalMart’s opening amid the struggling mom-and-pop stores in South Central Los Angeles found that the retailer’s presence turned out to be good for its smaller neighbors:
Now that people can stay in the neighborhood for bargains, something else interesting is happening: They’re stopping at other local stores, too.
“The traffic is definitely there. We’re seeing more folks,” says Harold Llecha, a cashier at Hot Looks, a nearby clothier. The same is happening at other nearby shops, say retailers. They acknowledge that these shoppers don’t always buy from them. On some items, WalMart prices can’t be beat. And a handful of local shops have closed. But the larger picture is that many that were there before the big discounter arrived are still there. There are new jobs now where there were none. And a moribund mall is regaining vitality. In short, WalMart came in—and nothing bad happened.36
The magazine cites 2003 research that confirms Dean and Sobel’s findings: “Emek Basker at the University of Missouri found that five years after the opening of WalMarts in most markets, there is a small net gain in retail employment in counties where they’re located, with a drop of only about 1% in the number of small local businesses.” Not only did the chain bring more jobs, but it helped to lower prices some “5% to 10%” in the neighborhood.
Another anti–WalMart argument advanced by opponents is that the retailer strong-arms suppliers to produce its products at such low margins that it practically forces them out of business. It’s true that the chain is a tough negotiator. But if doing business with WalMart was so bad for vendors, it’s doubtful that so many tens of thousands would be lining up for the privilege. According to the Wall Street Journal, ten thousand companies each year compete to become WalMart suppliers and only about two hundred, or 2 percent, get accepted. Those who do can see their business skyrocket overnight.37
The idea that a retailer that employs 1.4 million people in the United States and helps consumers stretch their earnings could be bad for the economy is an upside-down notion with no grounding in any Real World facts or economic argument. Several years ago, documentary filmmaker Robert Greenwald made a documentary, WalMart: The High Cost of Low Price. One of the people he profiled was Don Hunter, owner of H&H Hardware, a Middlefield, Ohio, business supposedly forced out of business by WalMart. The only problem was that, as journalist Byron York reported later, H&H closed before WalMart ever opened. And there’s a surprising ending to the story: “The H&H property has been sold to new owners, who have opened it as …a hardware store.”38
REAL WORLD LESSON
Because markets are spontaneous “ecosystems,” creation and destruction can occur in ways—and in sectors—that people can’t anticipate.
Q ISN’T THE FREE MARKET TOO BRUTAL TO TRUST WITH PEOPLE’S RETIREMENT FUNDS?
A SINCE THEY WERE INTRODUCED, 401(K)S HAVE CREATED WEALTH FOR MILLIONS OF AMERICANS. PRIVATE-SECTOR INVESTMENT OF RETIREMENT FUNDS DELIVERS FAR BETTER RETURNS THAN SOCIAL SECURITY, WHERE FINANCIAL MISMANAGEMENT HAS RESULTED IN A NEAR-BANKRUPT SYSTEM.
Today’s bear market hasn’t been a good place for anyone’s money. But the financial meltdown has been especially painful for retirees living off equity investments. Between October 2007 and early 2009, the Dow Jones Industrial Average declined by some 50 percent, shrinking the 401(k) retirement accounts of millions of Americans.
This isn’t the only time that 401(k)s have taken a beating. A few years ago, in the early 2000s, Enron’s scandal and subsequent implosion wiped out the 401(k)s of thousands of the company’s employees, who’d invested their savings primarily in company stock.
Thus, politicians and others have expressed misgivings about 401(k) retirement plans, which let people invest their own savings in stocks where they can grow tax deferred. U.S. Representative George Miller, a California Democrat, called them “little more than a high-stakes crap-shoot.” John Bogle, the highly respected founder of the Vanguard group of mutual funds, testified before Congress in 2009 that the nation’s system of retirement security is headed “for a serious train wreck.”39
Some critics believe that we’re better off with lower-risk programs, such as government-run retirement accounts composed only of government bonds. One alternative to 401(k)s that received considerable attention was proposed by Teresa Ghilarducci, professor of economic policy analysis at the New School for Social Research. Ghilarducci has proposed replacing 401(k)s with a guaranteed retirement account administered by the Social Security Administration. Workers would get a six-hundred-dollar annual inflation-adjusted subsidy from the U.S. government and would have to invest 5 percent of their pay into the account. That money in turn would be invested in special government bonds that would pay about 3 percent a year.
Such a plan may sound appealing in today’s environment. But in the Real World it’s a bad idea for a variety of reasons. Foremost among them: do we really want to entrust our retirement savings to government policy makers or, for that matter, to the Social Security program—which does not exactly have the best track record for sound financial management?
The Social Security Trust Fund was founded to provide a safety net to workers in retirement. You would put money in during your working life and draw on it when you retired, much like an annuity. It was supposed to be an insurance system—hence the term trust fund. But if a private-sector company were run like Social Security, its executives would probably get jail time.
You’ve paid countless thousands of dollars into Social Security over your lifetime. But unlike the funds in your 401(k), the money isn’t being held in a dedicated account that’s yours and guaranteed to be there at your retirement. Unlike a traditional annuity, no reserves are set aside to meet future obligations. Thus, as baby boomers draw on their benefits, the system faces insolvency.
In 2008, a Heritage Foundation report stated that “in net present value terms, Social Security owes $6.5 trillion more in benefits than it will receive in taxes.” Many doubt the government will have the funds to make good on those IOUs when baby boomers start retiring in greater numbers.40
Since government is not a business, it has little if any understanding of how to preserve, much less to grow, capital. Its domestic core competency is what it does most often—spend taxpayer money. That’s the reason Social Security dollars aren’t there. As the Cato Institute’s Michael Tanner has explained:
Congress treats that money like its own: free to spend on whatever the members choose. And spend it they do, on everything from the war in Iraq to the International Fertilizer Development Center. In return, the Social Security Trust Fund is given a bond, essentially an IOU, which will eventually have to be repaid out of future taxes…. This has been going on for more than 20 years, under both Democratic and Republican administrations.41
Not only that, Social Security’s rate of return has, in the words of the Heritage Foundation, “decreased steadily and dramatically.” According to its report, “a worker born around 1920 could expect a rate of return from Social Security taxes of about 7 percent after inflation. A worker born in the mid-1980s, however, could expect a return of less than 2 percent.”42
Even when retirement funds are managed for the government by an independent system, investment decisions are not always about what’s good for investors, but are about the priorities of politicians. Around the country, staterun pension systems have been criticized for politically motivated investments—for example, deciding to invest in struggling companies to save union jobs or, alternatively, declining to invest in companies that have done business in politically sensitive countries.
Since they were introduced in 1978, 401(k)s have helped to create the most affluent generation of retirees in U.S. history. According to the Federal Reserve’s Survey of Consumer Finances, in 1983, the average retiree (aged sixty-five to seventy-four) had a median income of $16,100 and median assets of $76,300. Stocks made up 26 percent of these financial assets. Over twenty years later, in 2004, the average sixty-five- to seventy-four-year-old had a median income of $33,300 and median assets of $190,100. Stocks made up 51.5 percent of these financial assets.
Investing always involves risks. As individuals, and as a society, we’re better off learning to manage those risks ourselves rather than letting the government take over our savings and getting a miserable return on our money.
The fact that equity markets can go up and down does not mean people would be better off handing their retirement savings over to government bureaucrats. It means that people need to learn the basic principles of prudent investing. The first thing you’re taught in any finance course is diversification—that it’s essential to spread your investments among different companies and sectors—as well as the importance of making age-appropriate investments.
Young people can invest their 401(k)s entirely in equities because they have time after a down market to wait for their portfolios to recover. As you get older, more of your money should be invested in less volatile, short-term instruments like bonds and certificates of deposit. Retired mutual fund visionary John Bogle of Vanguard says that the portion of your 401(k) invested in such fixed-income securities should match your age. For example, if you’re sixty years of age, 60 percent of your nest egg should be in short-term bonds. Thus, if the market crashes, your losses are minimized. If you decide to retire, you can draw down on your fixed-income side while letting time heal your equity side.
Critics of 401(k)s don’t realize that some of the current pain has been created not by the market slide but by government rules forcing 401(k) owners and IRA owners to make withdrawals every year after the age of seventy and a half. (How Washington came up with seventy and a half is anyone’s guess.) When the market crashed in 2008, many beneficiaries wanted to not withdraw from their retirement funds, feeling that they would forego current income to let their capital build up again. But Washington forces them to withdraw assets that have been depressed in value. Why? So the government can tax their money, of course.
Even with market swings like the crash of 2008, studies have shown that stocks are the best long-term investment. Wharton School finance professor Jeremy Siegel has studied the hypothetical performance of stock and bond investments going back to the 1800s: “Over twelve-month periods, stocks outperform bonds only about 60 percent of the time. But as the holding period becomes greater, the frequency of stock outperformance becomes very large. Over twenty-year periods, stocks outperform bonds about 95 percent of the time.”43
How many Americans, even today, would eagerly embrace the feeble 3 percent returns of a mandatory government program like that outlined by Teresa Ghilarducci? One can understand apprehensions about investing in a sometimes volatile stock market—especially among those nearing retirement. But stocks are not the only private-sector option for retiree investments. In the early 1980s, the county government of Galveston, Texas, and two other Texas counties pulled out of the federal Social Security program. Fearful of stock market fluctuations, the counties invested its employee money in annuities, guaranteed-interest contracts from sound insurance
companies.
Former judge Ray Holbrook, who oversaw the creation of the program, wrote that twenty-five years later, “our results have been impressive: We’ve averaged an annual rate of return of about 6.5% over 24 years. And we’ve provided substantially better benefits in all three Social Security categories: retirement, survivorship, disability.” Depending on their salaries, county workers get returns that are anywhere from 50 percent more than to three times the amount they would have gotten under Social Security. The judge recounts,
We sought a secure, risk-free alternative to the Social Security system, and it has worked very well for nearly a quarter-century. Our retirees have prospered, and our working people have had the security of generous disability and accidental death benefits. Most important, we didn’t force our children and grandchildren to be unduly taxed and burdened for our retirement care while these fine young people are struggling to raise and provide for their own families.44
REAL WORLD LESSON
The federal government, which allocates resources based on political interests, provides less effective protection for retirement funds than private-sector solutions dedicated to safeguarding and growing capital.
Q DON’T NORDIC COUNTRIES DEMONSTRATE THAT FREE MARKETS CAN COEXIST WITH PROTECTIONS AGAINST “UNFETTERED CAPITALISM”?
A CITIZENS OF NORDIC COUNTRIES, LIKE THOSE IN OTHER EUROPEAN NATIONS, PAY A HIGH PRICE AND HAVE A LOWER STANDARD OF LIVING THAN MOST AMERICANS.
Scandinavian nations—Sweden, Norway, Denmark, and Finland—are often held up as proof that a social welfare state can be economically successful. Writing in Scientific American magazine, Columbia University economist Jeffrey Sachs voiced the view, held by many freemarket skeptics, that these countries show you can have high taxes and regulation and still be prosperous.45