The Wal-Mart model

Posted: Jan 02, 2006 9:05 AM

The American economy continues to surge ahead, though you won't read much about it in the mainstream media. Economic growth in the third quarter was 4.1 percent -- despite Hurricane Katrina! -- the 10th consecutive quarter with growth over 3 percent. Unemployment is 5.0 percent -- lower than the average for the 1970s, 1980s or 1990s.

 Since April 2003, the economy has created a net 5.1 million new jobs. Core inflation is only 2.1 percent, and gas prices, which surged above $3 a gallon after Katrina, are now down around $2. Productivity growth for the five-year period of 2000-2005 is 3.4 percent, the highest of any five-year period in 50 years.

  This is a remarkable performance and owes something surely to the Bush tax cuts and to Alan Greenspan's stewardship at the Federal Reserve. But it also tells us something broader about the American economy. Mainstream media coverage about the economy tends to be full of bad news, especially during Republican administrations, and to focus on economic problems. But over the longer term, the story of the American economy is one of success. A quarter century ago, many economic commentators said that the era of low-inflation, high-job-creation economic growth was over. In the ensuing 25 years, it has come to be the norm.

 The negative bias of economic coverage can be seen in stories about the current No. 1 private sector employer in America, Wal-Mart, and the No. 1 private sector employer back in the 1970s, General Motors. The GM story is genuinely grim: The company is laying off thousands of workers and closing plants, and is threatened with bankruptcy. Stories about Wal-Mart tend to focus on allegedly low wages and healthcare benefits, and say less about the company's continual profitability and the low prices that benefit consumers. These companies are not entirely comparable -- they're in different businesses. But some of the differences between them illustrate why the American economy, which seemed to have run out of gas 25 years ago, is now doing so well.

 One big difference is this: General Motors' business model was designed for a static economy; Wal-Mart's is for a dynamic economy. From the 1930s, GM -- as one of only three major automakers -- was able to pass along to consumers the high costs imposed by wages, pensions and health benefits negotiated with the United Auto Workers. When emerging foreign competition started to make life tougher for Detroit executives in the 1970s, they tried to insulate themselves with government tariffs and domestic-content requirements. More recently, they've tried to offload their high healthcare costs onto the government. Wal-Mart, in contrast, started off with many retail competitors and has sought more, by taking on supermarkets. It competes by holding down costs and prices for consumers.

 Wal-Mart has been much more skilled at adapting to market conditions. Its computers keep it instantly apprised of sales, and its distribution system keeps stores stocked with items consumers want. Someone making a 3-ton car cannot adapt so quickly, but even so it still takes GM years to get new models on the market -- and often they're not what consumers turn out to want.

 Then there are employment costs. Yes, Wal-Mart does not pay high wages or provide healthcare benefits to all employees. But not all workers today want full-time jobs (they may want to be home when kids return from school) or health insurance (many are covered by a spouse's policy or Medicare). And Wal-Mart promotes from within: You can work your way up from the store floor to management ranks. GM and the UAW, in contrast, insist on a sharp line between labor and management, with all employees working full-time and getting full benefits. That made sense when almost all workers were men supporting families. But it is a poor fit with a labor market in which many workers are women, teenagers or retirees seeking extra income.

  In retrospect, it's not so surprising that 25 years ago, when GM was deemed the prototypical firm, experts were pessimistic about the American economy. They failed to foresee that more nimble firms like Wal-Mart would rise and supply the amazing resilience that has enabled the American economy to thrive, as Greenspan has observed, even when hit by calamities like Sept. 11 and Katrina.