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Pundit’s Mailbag —
Is Wal-Mart To Blame
For The Decline Of The Middle Class?

We ran a piece that both recognized the enthusiasm Wegmans elicits in media reports and pointed out that Wal-Mart just doesn’t get the credit it deserves:

…all this talk about customers who have “exuberantly danced” into the store, who “squeal with delight” and who “swoon” over the produce tells us less about the quality of Wegmans than about the cultural predisposition of the media.

They have no interest in doing a story on how the arrival of a Wal-Mart supercenter lowers the prices in a community so that a poor family can buy new shoes for school this year. They don’t know or care what it means for a 15-year-old boy whose mom squeezes out only enough to buy some decent athletic shoes at Wal-Mart. They don’t have interest in a story about how much better a poor kid can feel about going to school because he has an extra change of clothes and doesn’t get made fun of for wearing the same things every day.

That piece brought a searching letter from another retailer:

I read your piece, Wegmans, Wal-Mart And Media Bias. I do understand your thought regarding Wal-Mart helping poor families afford school supplies and clothing, etc…

I am working on articulating and backing up a different statement I think is accurate regarding Wal-Mart, but I am not ready to prove it yet. I’ll go ahead and try it out on you.

My belief is: “Wal-Mart is one of the largest contemporary contributors to the decline of the middle class”. The “have nots” work there and shop there as other similar jobs in the communities they’re in, go away. In a sense they create their own customer base. (?)

You’re thoughts?

— Mark Boe
St. Cloud, Minnesota

We appreciate Mark’s letter as it gives us a chance to clarify precisely what has been happening with the American economy. Yes, the middle class has been declining, but the implications aren’t as ominous as it might seem.

Pulitzer Prize-winning columnist George Will dealt with the issue in a recent column:

Economist Stephen Rose, defining the middle class as households with annual incomes between $30,000 and $100,000, says a smaller percentage of Americans are in that category than in 1979 — because the percentage of Americans earning more than $100,000 has doubled from 12 to 24, while the percentage earning less than $30,000 is unchanged. “So,” Rose says, “the entire ‘decline’ of the middle class came from people moving up the income ladder.”

This is one reason why Wegmans, Whole Foods, Costco, etc., are doing well while Wal-Mart has been struggling.

Wal-Mart has around 1.2 million associates in the U.S. and around 100 million shoppers every week in the U.S., so it is self-evident that Wal-Mart did not “create their own customer base” except infinitesimally.

Some have theorized that, in retail, the opening of big box stores such as Wal-Mart led to the closing of “main street” stores.

We are sure that has happened. But first of all, it happened because Wal-Mart — and lots of other chains such as Home Depot and Barnes & Noble — provided superior products and services at better prices in more convenient shopping venues. So it was a plus for the shoppers — that is why they switched.

Second, these independent stores were not particularly high paying venues either. Yes, there was the unionized supermarket that paid higher wages than Wal-Mart, but it is not clear that people who worked at independent book stores, clothing stores or hardware stores were so highly paid. Certainly the possibilities for advancement were a lot less.

Third, it is unlikely that very many of the entrepreneurs who owned those stores wound up permanently working as clerks at Wal-Mart. As people with education and experience, they doubtless found other, more lucrative, ways to make a living.

It is easy to misunderstand the process of “creative destruction” that drives capitalism. We discussed this process a bit in a piece we wrote about U.S. growers setting up shop in Mexico. There we pointed out that change is unsettling, though not necessarily bad:

On food safety, American growers moving into countries seems encouraging, raising standards and, in a sense, creating islands of U.S. technology and techniques that U.S. processors can access.

Still there is something a little unsettling about it, as there is with all Schumpeterian change.

Joseph Schumpeter was perhaps the most incisive thinker on entrepreneurs and capitalism to ever write. He is most famous for coining the term, “creative destruction,” to define how capitalism works by constantly destroying old ways of doing things to free up resources to do new things.

As he put it, all businesses must, at all times struggle “…to keep on their feet, on ground that is slipping away from under them.”

After we ran that piece, we received another note, this one from an important industry leader in the Pacific Northwest, advising of a new book about Schumpeter:

Your readers may want to learn more about Dr. Schumpeter. A great biography on this noted economist is out this year, entitled: “Prophet of Innovation: Joseph Schumpeter and Creative Destruction” by Thomas K. McCraw.

— Christian Schlect
Northwest Horticultural Council
Yakima, Washington

Many thanks to Chris Schlect for sending this along. It is a great book and its author, an Emeritus Professor at Harvard Business School, gave an insightful interview on Schumpeter, which you can read here. Here is an excerpt:

Q: Today, what would Schumpeter tell us about the evolution of capitalism in the 21st century?

A: Several economists, including Larry Summers and Brad DeLong, have said that the 21st century is going to be “the century of Schumpeter,” and I agree. The reason is that innovation and entrepreneurship are flowering all over the world in unprecedented fashion — not only in the well-publicized cases of China and India, but everywhere except those areas that foolishly continue to reject capitalism.

The word “globalization” is accurate enough, but if anything it understates the case, in part because of the information revolution wrought by the Internet. This situation makes management harder and more challenging than it’s ever been before. As a historian, I don’t say that lightly.

Read the interview. Even better, buy the book right here.

Most important, though, is to understand that what looks simple, say a supercenter opens and supermarket closes, is only part of the story.

When that supermarket closes, resources — real estate, human beings, capital, etc. — are freed up for other uses. The obvious occurrences are what get the media attention, but they are not a full understanding of the situation.

We thank both Mark Boe and Chris Schlect for helping us think about these issues.

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