In one of the Democratic primary debates, Barack Obama slammed Hillary Clinton by saying, “While I was working on those [Chicago] streets, watching those folks see their jobs shift overseas, you were a corporate lawyer sitting on the board of Wal-Mart.”
The accusation played very well with the audience, and was hailed by commentators as a stinging blow. Yet the blow is only stinging, the accusation only biting, if an association with Wal-Mart (NYSE:WMT) is something to be deeply ashamed of.
That Wal-Mart is evil seems like conventional wisdom these days. The message of Wal-Mart’s evil is promoted through documentaries, magazines, books and on numerous websites. In the Democratic party, the view of Wal-Mart as evil has prevailed so significantly that even Mr. Obama, who demonstrated in his book The Audacity of Hope (see my book review) a willingness to admire some Republican policies and who has generally held himself to a tone of polite political discourse, reminded Hillary of her role as a Wal-Mart director with a combination of ferocity, incredulity, disdain and relish (see the debate video).
In contrast, it is a matter of faith that Google (NASDAQ:GOOG), while it may not always be good, at least tries hard to do good. Many political candidates have traveled to Google’s famous campus and expressed their admiration for the company, including Barack Obama, Hillary Clinton, and John McCain (see the candidates at Google). When Mr. Obama was at Google he said (see the video):
It is wonderful to be back [at Google]. … It’s always good to be back in Mountain View. … We know how the first chapters [of the Google story] have turned out, after all all of you have good jobs. … Technology and innovation have reshaped our economy and our lives at breathtaking speeds … Google has helped to show us the way.
Yet perceptions of companies can be really wrong. Warren Buffett, the world’s richest person and arguably its most successful investor, and a skillful observer of corporate and public behavior, pointed out in his 1989 Chairman’s letter that what people think of as evil corporate behavior and what they think is generous can be completely unrelated to reality.
Mr. Buffett writes:
One of the ironies of business is that many relatively unprofitable industries that are plagued by inadequate prices habitually find themselves beat upon by irate customers even while other, hugely profitable industries are spared complaints, no matter how high their prices. Take the breakfast cereal industry, whose return on invested capital is more than double that of the auto insurance industry… The cereal companies regularly impose price increases, few of them related to a significant jump in their costs. Yet not a peep is heard from consumers. But when auto insurers raise prices by amounts that do not even match cost increases, customers are outraged. If you want to be loved, it’s clearly better to sell high-priced corn flakes than low-priced auto insurance.
Let us therefore consider the conventional public perceptions of Wal-Mart and Google with a degree of care. What has caused such different perceptions of Wal-Mart and Google? What makes one company evil and another good? Is it huge profit, market dominance that crushes all competition, or low salaries and benefits? Is it something else altogether?
One criticism that is often made of very successful companies is that they use their dominance to make huge profits that they then use mostly to reward their shareholders. It is undeniable that both Wal-Mart and Google make a lot of profit. Wal-Mart made almost $13 billion in profit in the last twelve months, and its profits grew 13% from the prior year. Google made $4.2 billion in profit in the last twelve months, and its profits grew 37% from the prior year. Google actually makes a lot more profit for its shareholders as a portion of its revenues than Wal-Mart. For every dollar of revenue, after all costs are paid (including employee salaries and benefits), Google makes 25 cents for its shareholders, while Wal-Mart makes 4 cents.
Another criticism of a strong company is that by crushing the competition it is depriving customers of choices. Both Wal-Mart and Google started very small, and admirably grew to dominance despite the presence of much larger, better financed competitors. As the leader in providing low prices, Wal-Mart has made goods vastly more affordable for people at all parts of the economic spectrum. Even if you don’t shop at Wal-Mart, it has forced companies that compete with it to lower the prices they charge you, improve their ambiance and start selling goods that can’t be found at Wal-Mart. Similarly, even if you don’t use Google it has forced other search engine companies to get much better and it has forced the advertising industry to reappraise the value they provide for each advertising dollar. Wal-Mart and Google have both caused some competitors to fail and others to adapt. Google’s dominance crushed Excite, Lycos, and AltaVista, while severely hurting once dominant companies such as AOL (NYSE:TWX) and Yahoo (NASDAQ:YHOO), and posing a long term threat to very dominant companies such as Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL).
Both Wal-Mart and Google have tremendous market share, but in their markets Google is by far more dominant, with Wal-Mart accounting for about 7% share of retail goods and food sold, and Google having more than a 58% share of search advertising. While it is easy to avoid Wal-Mart, most people don’t end up avoiding Google in an average day. It does not seem like Wal-Mart is growing its dominance very much, since people simply prefer other stores to Wal-Mart for many goods, whereas Google’s market is increasing in size even as its market share is increasing. Also, while Wal-Mart is unlikely to push into new industries, Google is bringing its sophisticated technology and advertising methods to what have historically been considered to be completely different industries, potentially threatening newspapers, and radio, television, and telecommunications companies.
But isn’t Wal-Mart stingy with its employees, while Google is generous? Wal-Mart is often criticized with respect to the salary and benefits its employees receive. In contrast, Google is praised for being generous to its employees, with great salaries, stock grants, and a list of perks that excite adulation and envy. Yet when people contrast the evilness of Wal-Mart with the goodness of Google, they overlook that they are comparing workers at far different skill levels, but compare the salary and benefits both provide as if they had employees of the same skill level.
What is the appropriate pay for a worker? An individual or a company employs someone to do a job only if the value they are getting appears to them to exceed the price they are paying. Sometimes the value you get from having a gardener do some landscaping is vastly greater than the market price you pay for the gardener’s services. Sometimes you have enough wealth to easily pay the gardener far more than you do. But there is an understanding between you and the gardener that they will be paid about or a little above the market price for their services. That market price is not based on what you could pay. A market price is based on what their alternative best employment choice is.
Wal-Mart utilizes a small group of well paid managers, some well paid highly skilled workers, and a very large base of low skilled workers who have a wage far below that of the average Google employee, but a reasonable wage compared to Wal-Mart’s primary competitors. Google has a small group of highly paid managers but it also has a broad base of highly skilled workers who have a wage far above that of the average Wal-Mart worker. The truth is that Wal-Mart does employ some web developers that have a skill level similar to those at Google. Interestingly, it pays those workers at a level similar to that of a Google employee. It must do so, for a high level of skill brings a high value to an employer, which must then meet market prices for that skill level.
Is Wal-Mart really paying the market price for the services of its low skill workers? If there were better pay available in the market place for the skill levels of the people Wal-Mart employs, people would presumably be leaving their job at Wal-Mart. Yet when Wal-Mart posts a job opening there is overwhelming demand to fill it. For workers of a certain skill level, a Wal-Mart job is very attractive compared to their alternatives.
Wal-Mart has found a business model that obtains a profit using workers at a low skill level paid at market prices. When politicians admire Google’s cleverness, they interestingly overlook that Google hasn’t figured out a way to profitably employ people at the lower skill levels that Wal-Mart will hire at. While people complain about the market rate salary and benefits Wal-Mart is willing to pay to a worker that has a low skill level, it passes unnoticed that Google offers low skill level employees no salary, no benefits and indeed no job. One rationale is that Google is in an entirely different business that requires a higher skill level from its employees. That is clearly true, but the fact remains that Wal-Mart offers a job to workers at a low skill level and Google simply doesn’t have a profitable way of employing them.
While it is convenient for a politician to attach responsibility to Wal-Mart for the low market price in salary and benefits that a low level of skill gets, it doesn’t set the market price for those skill levels. If the value a low skill level employee was generating were worth a higher salary and higher benefits another employer would lure them away from Wal-Mart with the promise of higher pay then Wal-Mart is willing to give.
Isn’t Wal-Mart diminishing the number of jobs at a low skill level that exist in the economy? One criticism that is made of Wal-Mart is that because it is so successful in the retail industry it has reduced the overall number of low skill jobs in the country. The problem with this criticism is that the number of low skill workers outside of the retail sector dwarfs the number in the retail sector, and even in the retail sector the number of low skill workers outside of Wal-Mart dwarfs those in Wal-Mart. Wal-Mart is likely to influence the market price for low skill level workers, but it doesn’t set the market price.
Imagine for a moment that an inventor in Silicon Valley suddenly started selling for a very low price a box that could instantly transport goods from one place to another. That kind of technology would be heralded as a great innovation. It would save so much money in terms of distribution costs it would inevitably make the economy far more efficient.
Yet it would also change what kind of businesses exist. It would displace the postal service and numerous retail establishments, possibly including Wal-Mart’s large stores. On the whole that box would be good for society but it would cause considerable readjustments in what kinds of companies investors have faith in, what kind of profits can be obtained, and what kind of work workers end up doing. When it comes to a technology displacing the low skilled workers that worked in retail, it is easy to see that the efficiency the technology brings doesn’t kill alternative careers for those low skilled workers because there are still very useful jobs they can do.
When a new business model such as Wal-Mart comes along, people don’t view it the same way they would view a gee whiz technology that has a similar economic effect. Wal-Mart is a more efficient distribution box than what existed before it. While a low skill worker may lose a job at a Wal-Mart competitor that does not adapt, they may gain one at a competitor that does adapt, or at a service business that takes advantage of the extra cash a Wal-Mart customer has to spend because of Wal-Mart’s existence.
Even if Wal-Mart is paying their employees at the market price for that skill level, shouldn’t Wal-Mart at least provide its employees better healthcare? In a just society, everyone clearly should have a certain amount of basic services, including healthcare. Politicians like to speak about universal coverage but they aren’t very specific about who gets to decide the level of coverage or who pays for it. The way the American healthcare system currently works is that if you obtain health insurance for yourself you receive no tax benefit in obtaining that coverage. If your employer pays for your healthcare, they receive a reduction of their taxes. This has led most companies to provide some form of healthcare coverage for their employees. This coupling of employment and healthcare creates some perverse incentives in the healthcare system. It has created a feeling of paternalism, like companies are our fathers or families, wrapping us in their warm embrace. We all expect every effort will be made to protect our health, and we would like our companies to pay for all of it.
Companies themselves often buy into this view. After all, it is easier to create a team ethic if everyone feels they are a family, working towards a common goal. Yet companies aren’t really families. If the healthcare and salary received by an employee exceeds the value they bring to an employer, they won’t get hired and will be without both healthcare and salary. Since a low skill worker is not of much economic value to Google (except as another eye to put advertising in front of), low skilled workers have no opportunity to earn a salary or receive healthcare benefits from Google. Wal-Mart does derive economic value from low skilled workers, but it seeks to pay salary and healthcare benefits that are at the market price for such workers. Before governments mandate an employer provide certain levels of healthcare to its employees it is therefore worth asking whether this will cause certain workers to be without a job and what role employers or governments should have in organizing healthcare coverage at all.
Whatever organization is paying for healthcare, whether it is Wal-Mart, Google or the government, must obtain the resources to pay for the healthcare from somewhere and must then decide how those funds will be spent. Organizations do this by reducing the salary their employees would otherwise receive and then deciding to offer their employees a limited set of healthcare plans.
This creates three problems for the employee. The first is that individual employees, who often know their own health needs far better than an organization, have a limited ability to decide whether to receive extra salary versus extra health coverage. The choice to trade one for the other is taken away by the organization that arranges their healthcare.
The second problem is that to a large extent employees have no real control over the type of coverage they obtain. If they prefer a health plan with alternative medicine coverage, they only have the ability to obtain it if enough other employees agree and lobby the human resources department of their employer successfully.
Finally, to the healthcare insurer the employer to a significant extent becomes the customer they have to please, rather than the employee. This takes away some of the accountability in the system, and makes the employer far more important in the employee’s healthcare decisions than they have the right to be. This has translated into a difficulty of carrying insurance coverage to a new employer when you leave your prior employer. A complex system becomes difficult to manage.
It is ironic that the Democrats, who have a tendency to express a dislike of corporate power, are strongly in favor of expanding corporate responsibility for healthcare. A better solution is for the government to make sure (through direct grants or via a tax credit) that every citizen receives a certain dollar value of healthcare coverage, but give citizens the freedom to buy healthcare coverage of an amount and a type that the individuals choose. This would make individuals the customer for the healthcare system, without forcing them to adopt health plans chosen by a paternalistic employer or government. To his credit, John McCain has proposed reforming the tax code to eliminate the bias to employer sponsored health insurance and provide all individuals with a significant tax credit to increase individual insurance coverage (see Mr. McCain’s health policy). This could cause a radical restructuring of how healthcare coverage is obtained in America, with workers being paid a larger salary and companies stepping out of the business of providing healthcare coverage. If low skilled workers are falling below the minimum level of health coverage American society thinks is necessary for all of its citizens, the answer is not to saddle their potential employers with costs that might deprive those low skilled workers of jobs, it is to provide a base level of funding through the tax system to make sure every American has the ability to find suitable health coverage while ensuring they have the freedom to obtain such coverage in the way and from the providers that they prefer.
What is really to blame for the rage that Wal-Mart is receiving? It is a good thing to care for people, and to be concerned that they are not earning enough. It is terribly unfortunate that the market price for low skill workers is so low. When a politician condemns Wal-Mart for its evil ways, let us realize that the market price for a low skill worker is not set by Wal-Mart. It is set by the value of that worker’s skills, as that worker can realize that value through the alternatives they have. There are alternatives to working at Wal-Mart for a low skilled worker but they just aren’t that good, and they certainly aren’t offered by employers politicians praise like Google.
Companies exist to solve problems for their customers, and in doing so increase the value provided to our society at the lowest cost to our society. If Google finds that low skilled workers can’t perform a job Google needs done, Google shouldn’t be required to hire them, but comparing Google to Wal-Mart does illustrate that Wal-Mart must be paying at or above the going market price for low skilled workers, Google pays no price for low skilled workers, and that this is because Wal-Mart’s business model is better at making those low skilled workers useful than Google is.
The true solution for improving the lives of people with low skill levels is to increase their levels of skill. Even if not everyone is capable of increasing their skill level, if some are able to make the transition there will be a smaller overall number of low skilled workers in society, which will diminish the supply of low skilled workers and thus increase the market price they receive for their services. Why is this not being done already?
The real fault for the low level of skill these workers have lies in a system of education that lacks sufficient competition, accountability and resources to elevate those with low skill levels to higher levels of skill. Who controls the education system that most of these low skill workers suffer under? For most of the low skilled workers that are the subject of political scorn of Wal-Mart, it is the public elementary and middle schools. These schools often face a challenging environment, because they are required to teach students who are sometimes not equipped for success, using teachers with inadequate training, the wrong skills or insufficient time, all while being deprived of resources.
To their credit, politicians of all political stripes recognize this is a problem. The most powerful solution, increasing competition, is resisted by well intentioned members of the public that fear a voucher system or privatizing elementary and middle schools. Parents who feel strongly that public schools are underperforming simply pull their children out of public schools, if they have the means. Greater accountability is resisted by many powerful teacher’s unions, who dislike merit based pay, the freedom to fire the underperforming and broader testing with better tests. Greater resources are resisted by the segment of the public that has already given up on the public schools as highly inefficient, by the many parents who have used the free market to route around the inadequacies of public schools by putting their children into private schools.
Happily America is a place where even in the face of strong political opposition new ideas do get tried. Barack Obama, to his credit, has stated in his book The Audacity of Hope that teacher’s unions are sometimes part of the problem and that they must come to accept merit pay and firing the underperforming. John McCain has suggested that public education should be defined as one in which the public funds for a child’s education should flow to whatever school a parent chooses (see Mr. McCain’s education policy). Although there are significant differences between these policy positions, both are an improvement over where we are at today. Just as importantly, numerous entrepreneurs are figuring out ways to cost effectively deliver education, inside or outside the four walls of a school. Examples include edu20.org (a web based learning management system that also allows the sharing of teaching materials and pooling of resources), ck12.org (a website allowing the easy creation and dissemination of textbooks with modular components), edufire.com (a website that makes it easy to find and connect with a paid tutor through web video) and the Equity Project (a New York City charter school that plans to pay its teachers $125,000 plus a bonus based on performance but that also demands they perform; see NY Times article).
Perhaps it is no accident that Wal-Mart, which at $290 million a year is the second largest corporate donor in America, has decided to revise how it makes donations to focus on three areas only: healthcare, environmental sustainability, and education and training for 12 to 30 year olds (see article in the Financial Times).