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Fighting Wal-Mart

Ross Kaminsky - 5/31/2005

Last week, Governor Robert Ehrlich of Maryland vetoed the Fair Share Health Care Act which said that any employer with over 10,000 employees must spend at least 8% of payroll on health care benefits. It is hardly a surprise that only Wal-Mart happened to meet the size requirement of a bill pushed by unions. [In this article, discussion of the bill in the present tense is because there's a strong chance the Democrat-majority state legislature will try to override the veto to please their union masters.]

Paul Krugman's characterization in the NY Times of Maryland's "Wal-Mart bill" as "pro-worker" turns economics and free markets on their heads. An economist should know better, but Krugman gave up even a pretense of economic understanding (other than mushy Marxism) long ago. Wal-Mart's low price strategy causes it to run a gross operating margin of less than 6%. This means that higher health care spending could only come by lowering workers' salaries and not by taking from the profits of Krugman's constant target: businesses which provide nearly everything American shoppers want. [Wal-Mart claims already to spend close to 7% of payroll on health care. I also note that Wal-Mart stock has done poorly in the past couple of years while their competitors have done well. Wal-mart's successful low-price strategy causes them to run the lowest gross profit margin in its peer group including stores like Target and Sears-Kmart. Although their profit in absolute dollars sounds big to the man in the street, given the size of the company and the value of their sales, it is not wildly profitable and the profit situation does not seem to be improving substantially.]

The bill would force several choices on Wal-Mart, all of them bad for the company, its shareholders, and society as a whole: Fund the higher costs by cutting salaries or by raising prices, leave Maryland entirely, or pay a fine to the state. The common thread is that each choice hurts workers and consumers and helps unions and Wal-Mart's competitors.

This bill is anti-worker. It could cause thousands of Marylanders to lose their jobs. Wal-Mart has demonstrated their unwillingness to be pushed around by simply closing a store in Quebec which voted to unionize. In fact, although there may be politics as well as economics in the timing of the announcment, Wal-Mart said a day before the veto that they were delaying building a distribution center which would provide about 800 jobs in one of the poorest parts of Maryland.

If Wal-Mart decided not to close down following the passage of a law like this, they might reduce workers' salaries to cover these health care costs. Operating margins are simply not high enough to fund the extra burden from profits and still justify tying up substantial capital in the business.

Whether the bill would cause Wal-Mart to lower wages or close down, this would suit the unions well. They would use the lower wages as a reason to encourage unionization in a company that has succesfully avoided it, a key reason they can keep their prices so low. Or they would trumpet a victory for getting Wal-Mart to close. Either way society loses.

This bill is anti-consumer. Wal-Mart is America's leading source of consumer goods at affordable prices. The bill would make it more difficult for Wal-Mart to maintain its low-price leader role, or even to stay open, to the detriment of millions of customers who save money at Wal-Mart and thus are able to spend on other things from their childrens' education to a family holiday. There are tremendous indirect benefits as well, with Wal-Mart's existence causing their competitors to work hard to keep their prices low. Wal-Mart's low prices cause low prices elsewhere.

The bill is anti-free-market. The government has no business telling a company how to structure employment contracts voluntarily entered into by Wal-Mart and workers. People who honestly believe that government-imposed employment conditions bring a net benefit to society do not understand economics…but most people pushing this bill are not honest. Those who support this type of proposal argue the economic equivalent of "If I put a rock in the middle of a river, the water that hits that rock will stop where it is". Of course, water always finds a way around the rock just the same way that markets (almost) always find a way around inefficient rules.

Furthermore, one must always consider how a line might be moved once drawn. When unions get the power to say "any company over 10,000 employees must do this", what is to stop them when there is a more compliant governor from getting the number changed to 1,000?

People must realize that there is no such thing as a free lunch. You can not simply demand that companies reduce their profits to fund benefit programs. Capital has a cost and if the return to capital is not sufficient given the risk in the business, it will make more sense to just close the business, removing choice and beneficial competition from the marketplace. So today you support bashing Wal-Mart and tomorrow your company closes down because a law that was supposed to apply just to "them" now applies to "us".

Of course, it's not only unions that are pushing this legislation; it is also Wal-Mart's competition such as Safeway and Giant supermarket chains. They don't have Wal-Mart's market power to force their suppliers' prices down and they have a unionized work force. The combination makes it impossible for them to compete with Wal-Mart on price and thus Wal-Mart tends to win over most customers whose primary consideration is price.



These competitors are standing behind the cloak of the unions trying their best to do anything to force Wal-Mart to raise prices or leave. Safeway does not love unions but knows that unions are like an extra tax that their customers pay while Wal-Mart customers do not. Rather than try to find a way to remove the tax from their customers, Safeway and Giant find it easier to try to raise the burden on Wal-Mart shoppers. (This is strangely similar to the way Democrats work, isn't it? It's not a coincidence that the bonds between unions and the Democratic party are so strong.)

This cynical bill should have been titled the "Coercion to Unionize" bill. Claims that the bill was pro-worker is simply union propaganda which, luckily for Maryland, did not fool Governor Ehrlich. Let's hope this attempt by unions and other stores to use government to defeat Wal-Mart where they couldn't defeat it through free markets fair competition stays dead and buried. I must say I'm not optimistic that it will.