This post is about three different topics, Bitcoin and e-Payments, the Minimum Wage, and consumer spending and Wal-Mart (WMT). There has been a lot of discussion about all three and I believe I have an innovative way to attack all three issues that will satisfy most reasonable people and change both the payments and online retail space. The idea is simply to for Wal-Mart (or Target (TGT)) to conduct a de facto minimum wage increase of all of its minimum wage workers' salary by giving them extra salary in e-payments usable only at Wal-Mart and transferable securely via a payment algorithm similar to Bitcoin's.
The Minimum Wage
Here is the issue. During the Great Depression, the United States created a minimum wage law under the Fair Labor Standards Act of 1938. The US Department of Labor chronicles it this way:
On Saturday, June 25, 1938, to avoid pocket vetoes 9 days after Congress had adjourned, President Franklin D. Roosevelt signed 121 bills. Among these bills was a landmark law in the Nation's social and economic development -- Fair Labor Standards Act of 1938 (FLSA). Against a history of judicial opposition, the depression-born FLSA had survived, not unscathed, more than a year of Congressional altercation. In its final form, the act applied to industries whose combined employment represented only about one-fifth of the labor force. In these industries, it banned oppressive child labor and set the minimum hourly wage at 25 cents, and the maximum workweek at 44 hours.
Now, this $0.25 per hour wage was increased steadily over time in both nominal and inflation-adjusted terms until 1968 when it hit $1.60 per hour, which would prove to be the highest level in inflation-adjusted terms at $10.71 per hour in 2013 money. Afterwards, the minimum wage did not keep up with the level of inflation, such that workers earning a minimum wage of $7.25 per hour today can buy 32% less of the standard basket of goods than an equivalent worker could in 1968.
There has been a vocal campaign to raise the minimum wage closer to the 1968 level in real terms. US Senator Tom Harkin and US Congressman George Miller introduced the Fair Minimum Wage Act of 2013, to raise the minimum wage to $10.10 per hour by 2015, with the rate increasing each year to keep pace with the cost of living. This bill never made it through Congress. But the minimum wage remains a critical political issue in the US.
Supply and Demand
The problem with the minimum wage on a micro level is that in terms of supply and demand, a minimum wage raises the cost of supply of labor. Basic economics would dictate that the increase in cost would be met with a lower demand for labor. And so opponents of the minimum wage increase have warned that increasing the minimum wage would cost jobs. Companies, unable to pass through their costs to customers, would reduce US employment in some fashion, perhaps by offshoring workers. Some companies would either cease to exist or never be formed, with the cost of labor being the limiting factor.
The supply and demand framing of the minimum wage makes sense on a micro level. But on a macro level it suffers from a fallacy of composition problem. Clearly, workers earning a minimum wage, by all accounts often living paycheck to paycheck, have a high marginal propensity to spend. And that means that nearly every dollar they earn will be recycled into the US economy as consumer spending. The increased costs for some employers due to the increased wages becomes increased revenues for the retail outlets where these workers spend.
Moreover, higher wages can sometimes be beneficial to productivity by reducing turnover. For example, Henry Ford famously doubled wages at his automobile factory in 1914 to $5 a day under that premise - and had success. The Ford website explains it this way:
After the success of the moving assembly line, Henry Ford had another transformative idea: in January 1914, he startled the world by announcing that Ford Motor Company would pay $5 a day to its workers. The pay increase would also be accompanied by a shorter workday (from nine to eight hours). While this rate didn't automatically apply to every worker, it more than doubled the average autoworker's wage.
While Henry's primary objective was to reduce worker attrition-labor turnover from monotonous assembly line work was high-newspapers from all over the world reported the story as an extraordinary gesture of goodwill.
Thousands of Workers Flock to Detroit
After Ford's announcement, thousands of prospective workers showed up at the Ford Motor Company employment office. People surged toward Detroit from the American South and the nations of Europe. As expected, employee turnover diminished. And, by creating an eight-hour day, Ford could run three shifts instead of two, increasing productivity.
Henry Ford had reasoned that since it was now possible to build inexpensive cars in volume, more of them could be sold if employees could afford to buy them. The $5 day helped better the lot of all American workers and contributed to the emergence of the American middle class. In the process, Henry Ford had changed manufacturing forever.
This is why research on the minimum wage issue is inconclusive regarding its effect on employment. And, according to the Center for Economic and Policy Research, the minimum wage is one of the most well-researched economic issues in the United States (pdf link here).
From my perspective, I like Henry Ford's concept that an increased salary means greater demand for one's products. It makes good business sense too if you can capture a large percentage of your employees' consumer spending. That's when I hit on Wal-Mart.
Here's a company that has over 10,000 stores and employs over 2 million people. Revenue was $469 billion in fiscal year 2013. If Wal-Mart were a country, it would rank 27th in the world for GDP, behind Argentina and ahead of Austria.
And in a sense, Wal-Mart is like one big closed system. Some towns are dominated by Wal-Mart. There is almost no other employer of significance. Employees can - and unfortunately often must - buy their groceries, their clothes, their toys, their electronics, their Christmas, Halloween and Birthday presidents -literally everything - at the local Wal-Mart. This is why Wal-Mart has become a lightning rod of criticism during the minimum wage debate.
According to OurWalmart, Wal-Mart workers average 8.81 per hour in wages, a figure only slightly above the minimum wage whereas Wal-Mart says an "average full-time hourly associate" makes $12.83 per hour. Either way, the sums are close enough to the $10.71 bogey that the 1968 inflation-adjusted minimum wage set to make Wal-Mart, as the largest private employer in the US, a target for critics.
From a business and public relations perspective, Wal-Mart should want this issue to go away in a way that doesn't cause it to have to raise prices, lose revenue or decrease profitability. This is where my idea comes in.
Two weeks ago, in writing why Bitcoin matters, the Internet icon and venture capitalist Marc Andreessen wrote the following:
Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.
What kinds of digital property might be transferred in this way? Think about digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds … and digital money.
... and - crucially in my idea- Wal-Mart digital money. Let's call it Walbucks.
Walbucks or Targetcoin
Here's how it works.
Wal-Mart (or Target) decides to go on a PR offensive and raise the salary of all its employees with salaries below $10.50 per hour to $10.50 per hour, regardless of whether they are full-time associates temporary or part-time. The key, however, is that Wal-Mart doesn't actually raise the cash portion of each worker's salary. Instead, Wal-Mart gives each employee Walbucks - credit to be used only at Wal-Mart stores or Wal-Mart's website - in an amount equivalent to the difference between the worker's average hourly wage and $10.50.
Walbucks (or Targetcoin) are simply a specific form of digital money, credit usable only in the Wal-Mart universe. And because they are secured with a Bitcoin type of algorithm, Walbucks are freely and securely transferable to anyone outside of the Wal-Mart employee universe. This is the crucial point here. Wal-Mart is essentially creating a local digital scrip, if you will - usable only in the local Wal-Mart universe but freely transferable like cash but, unlike cash, secure in terms of transferability.
From a Wal-Mart (or Target or Wegmans) employee perspective, she has just received a raise to a Wal-Mart-specific minimum wage of $10.50 per hour because she can use the extra money she receives as Walbucks to buy anything at Wal-Mart. And to the degree she doesn't want to buy items at Wal-Mart, she can transfer her Walbucks to someone else and cash out of the Walbucks system and have dollars to spend at another place.
The difference between Walbucks and bitcoin is that while Walbucks uses the bitcoin payment transfer algorithm, the creation of Walbucks are not limited. Walbucks are created by Wal-Mart for use at Wal-Mart. Moreover, this is a centrally-planned environment, meaning that Wal-Mart would be the only Walbucks payment solution provider. Think of Walbucks as PayPal using the bitcoin algorithm to ensure transferability. All cash to Walbucks and Walbucks to cash transactions must clear through Wal-Mart. But Walbucks are freely transferable to anyone in the Walbucks universe. Walbucks are not a currency per se, though you could see them as a digital scrip inside the Wal-Mart universe. Walbucks are more of a digital payments adjunct to existing fiat currencies.
What are the benefits of Walbucks to Wal-Mart - Or Targetcoin to Target?
- First, it solves the minimum wage issue. Instantly the Wal-Mart minimum wage is $10.50.
- Second, Wal-Mart can raise its cost basis without it having an adverse impact on revenue or net income. It proves the fallacy of composition in assuming a wage hike will mean fewer jobs. By keeping the money within the Wal-Mart Universe, Walbucks assures Wal-Mart of more revenue and that revenue will fall to the bottom line after costs as increased net income. There will be some cannibalization of revenue from employees that would have been made outside the Walbucks system but since all revenue must be used at Wal-Mart, sales must increase.
- Third, by instituting a more secure payments system than credit cards, Wal-Mart is decreasing payments charges while simultaneously decreasing payments fraud. Every transaction that occurs via Walbucks is a secure and fee-less transaction that decreases costs for Wal-Mart, increasing net income. If you think of this idea as being implemented by Target, then the huge security breach that affected 70 million customers goes away with 'Targetcoin.'
- Fourth, Walbucks will make Wal-Mart an instant player in the e-payments system. Because Wal-Mart is so big and indispensable for many, Walbucks has instant value as a payments platform for other payments outside of the Wal-Mart world. To the degree Wal-Mart wants to extend the platform on a dollar-for dollar-basis as non-employees pay into the system it can do so without losing revenue. Moreover, Wal-Mart could charge fees for using Walbucks in other venues - increasing revenue.
- Fifth, for the unbanked at Wal-Mart, this solves a payments problem. Rather than cashing checks for high fees atcheck cashiers, Wal-Mart employees could ostensibly receive their entire income in Walbucks and cash out of the system at no cost.
I am a believer in bitcoin's algorithm as a breakthrough in digital payments that will reduce fees and enhance internet security. By marrying bitcoin-style e-payments with an increased minimum wage, Wal-Mart - or any retailer -has the opportunity to change the retail landscape forever.
Some additional thoughts: Any large retailer could implement this idea and have success. Some potential companies include Costco (COST), Wegmans, Target, and CVS. I believe the size of the employee base and the variety of merchandise makes the digital money more cash-like because it has a wider utility for a wider audience of users. But even an online retailer like Amazon could benefit here.
Who should feel threatened by this. Banks, first and foremost. I wrote an article about Bitcoin as a deflationary force for bank fees and I think that thinking holds here. Why should I even have a bank account? Seriously, think about the unbanked in developed economies or in developing economies. In developed economies, banks are racking up transaction fees and overdraft fees, and late fees. You even have to pay a fee in order to have a bank account unless you meet minimum account requirements. All of that goes away if you use an online payments system for most of your transactions. And all you need then is a ubiquity of payment like you see with Visa (V), MasterCard (MA) and American Express (AXP).
Thus, the next group that feels threatened are the existing payments vendors like Visa, MasterCard and American Express, but also Google (GOOG) and PayPal. Where I see bitcoin is heading toward an online payments system that people use as an adjunct to state money in much the same way you would use PayPal or Google Wallet today. There are likely to be network effects as a result, meaning that a network with lots of users will benefit from the size of the network, with that size acting as a barrier to competition. But there will be plenty of room for multiple payments systems based on the Bitcoin cryptocurrency technology. A company like Target or Wal-Mart or CVS can be a huge beneficiary of these network effects.
The end result then will be a number of payments systems based on Bitcoin's platform or a platform very similar to Bitcoin. And these systems will be cheap, global and instantaneous.
Even if banks or existing payments vendors come up with a way to supplant cryptocurrency technology, they will do so at a much lower fee base structure than exists today. The internet finally has the ability to bring price rationalization to the market for money and it can't happen soon enough.
Here is a video in which I discuss this idea on air on RT's Boom Bust program. My bit comes at the 22:20 mark. Also see Mike Shedlock's comments on the minimum wage earlier in the show. Constructive feedback appreciated.