The Volokh Conspiracy - What Happens to the Walmart Effect

if and when China decides to stop exporting the "glut of global savings"?

The Walmart Effect was the claim (accepted pretty broadly as having a decent empirical basis, even given the disputes) that Walmart, by lowering prices at the downmarket end of things, added significantly to American spending power and standard of living. And particularly to consumers at the lower end of the economic scale. The Walmart Effect was partly Walmart stores themselves, but also the knock-on effects on the competition. Even if one accepted the effect, the size of its contribution to American consumption power was argued. And the extent to which it offset the losses to workers and wages was also hotly debated.

Charles Fishman set out the basic claims in his The Walmart Effect. But in many ways the thesis took on a whole different life when it was partly endorsed by Democratic economist Jason Furman, in a well-known essay. As described by the Washington Post website whorunsgov.com:

[H]e also praised Wal-Mart in a report that liberals still fiercely decry. Furman defended the discount super-store, calling it a "progressive success story" by disputing the notion that its business model hurt the wages of retail workers in the industry.

In a report, Furman basically estimated that Wal-Mart's price reductions saved Americans nearly $263 billion, while disputing the argument that Wal-Mart hurts retail workers' wages. Furman estimated that wage losses for retail workers had decreased by a maximum of about $5 billion a year. He concluded that society is better off as a result of Wal-Mart's business model and said that observers should focus on attacking problems in the larger retail sector as opposed to the mega-store's wages.

Furman downplays the angry outcry in response to his paper. "There's a zero-sum mentality among some segments of the left," he said. "If someone is doing well, then someone else must be doing poorly."

That's a quick sketch of pretty well known policy history; there's much argument even today over true, untrue, extent, etc. That's not what interests me today. Rather, even taking into account the many impressive features of how Walmart runs its business to maximize efficiency and lower prices, it still seems pretty clear, especially in retrospect, that to a considerable extent, Walmart for years has consisted of simply being the retailer of goods whose purchase and consumption by Americans the Chinese government has decided to subsidize - or, much more precisely, as we can see today, finance on credit - and in effect serve as a conveyor belt for Chinese goods but also Chinese savings.

This keys back to the "global glut of savings" hypothesis put out by Alan Greenspan as an explanation for why the Fed under his stewardship would not have been able to prevent the asset bubble of the last few years. However, it is laid out perhaps most persuasively as a general argument by the renowned financial commentator at the Financial Times, Martin Wolf, in a John Hopkins Press book under a series edited by Francis Fukuyama, Fixing Global Finance. The book was published in 2008, but is based upon lectures in 2006 or so, so much of the analysis precedes the immediate crisis; nonetheless, it is exceptionally clear on the arguments over the global savings glut. (Without, so far as I can tell on a first read, however, embracing Greenspan's strongest contention that the Fed could not stop the tsunami of excess savings from flooding American shores, but that's another discussion.)

Assume that something like the global savings glut hypothesis is true, and that it is in large part a glut of savings from China flowing into the US economy especially. Wolf, Greenspan, Peter Mandelson (whose op-ed on this topic I discuss in excruciating detail here), and many others have called for a readjustment to this savings glut. It principally requires an increase in Chinese domestic consumption to absorb its savings rather than shipping the savings abroad.

The macroeconomic argument, I take it, is excellent. What I want to point out, however, is that if and when put into place, one of the casualties might be a large part of the Walmart Effect. As noted, when it was under discussion, back in the bubble period, it was said by Furman to amount to some $263 billion (offsetting some $5 billion in wage effects). This meant several thousands of dollars per US family and, assuming that it was mostly received by lower income households, even bigger consumption gains for the poor. To the extent - which I would suggest although not on any actual evidence, alas - that the Walmart Effect could be renamed the China Credit Facility, then a move to rebalance global savings flows might well hit poorer American families. How much? Well, certainly a large part of it has evaporated as the financing from China has, if not precisely evaporated, shifted from financing private consumption to a much larger portion devoted to financing US government public consumption. So some part is gone or already evaporating at that stage.

But we have yet to see a full policy of rebalancing, and without any basis for putting in numbers, let me suggest that it might be a considerable part of what is left of the original Walmart Effect. Or am I wrong about the basis of the effect - wrong, that is, in asserting that the Walmart Effect is largely a China Credit Facility effect?

	[Kenneth Anderson, June 30, 2009 at 9:50pm] Trackbacks What Happens to the Walmart Effect if and when China decides to stop exporting the "glut of global savings"? The Walmart Effect was the claim (accepted pretty broadly as having a decent empirical basis, even given the disputes) that Walmart, by lowering prices at the downmarket end of things, added significantly to American spending power and standard of living. And particularly to consumers at the lower end of the economic scale. The Walmart Effect was partly Walmart stores themselves, but also the knock-on effects on the competition. Even if one accepted the effect, the size of its contribution to American consumption power was argued. And the extent to which it offset the losses to workers and wages was also hotly debated. Charles Fishman set out the basic claims in his The Walmart Effect. But in many ways the thesis took on a whole different life when it was partly endorsed by Democratic economist Jason Furman, in a well-known essay. As described by the Washington Post website whorunsgov.com: [H]e also praised Wal-Mart in a report that liberals still fiercely decry. Furman defended the discount super-store, calling it a "progressive success story" by disputing the notion that its business model hurt the wages of retail workers in the industry. In a report, Furman basically estimated that Wal-Mart's price reductions saved Americans nearly $263 billion, while disputing the argument that Wal-Mart hurts retail workers' wages. Furman estimated that wage losses for retail workers had decreased by a maximum of about $5 billion a year. He concluded that society is better off as a result of Wal-Mart's business model and said that observers should focus on attacking problems in the larger retail sector as opposed to the mega-store's wages. Furman downplays the angry outcry in response to his paper. "There's a zero-sum mentality among some segments of the left," he said. "If someone is doing well, then someone else must be doing poorly." That's a quick sketch of pretty well known policy history; there's much argument even today over true, untrue, extent, etc. That's not what interests me today. Rather, even taking into account the many impressive features of how Walmart runs its business to maximize efficiency and lower prices, it still seems pretty clear, especially in retrospect, that to a considerable extent, Walmart for years has consisted of simply being the retailer of goods whose purchase and consumption by Americans the Chinese government has decided to subsidize - or, much more precisely, as we can see today, finance on credit - and in effect serve as a conveyor belt for Chinese goods but also Chinese savings. This keys back to the "global glut of savings" hypothesis put out by Alan Greenspan as an explanation for why the Fed under his stewardship would not have been able to prevent the asset bubble of the last few years. However, it is laid out perhaps most persuasively as a general argument by the renowned financial commentator at the Financial Times, Martin Wolf, in a John Hopkins Press book under a series edited by Francis Fukuyama, Fixing Global Finance. The book was published in 2008, but is based upon lectures in 2006 or so, so much of the analysis precedes the immediate crisis; nonetheless, it is exceptionally clear on the arguments over the global savings glut. (Without, so far as I can tell on a first read, however, embracing Greenspan's strongest contention that the Fed could not stop the tsunami of excess savings from flooding American shores, but that's another discussion.) Assume that something like the global savings glut hypothesis is true, and that it is in large part a glut of savings from China flowing into the US economy especially. Wolf, Greenspan, Peter Mandelson (whose op-ed on this topic I discuss in excruciating detail here), and many others have called for a readjustment to this savings glut. It principally requires an increase in Chinese domestic consumption to absorb its savings rather than shipping the savings abroad. The macroeconomic argument, I take it, is excellent. What I want to point out, however, is that if and when put into place, one of the casualties might be a large part of the Walmart Effect. As noted, when it was under discussion, back in the bubble period, it was said by Furman to amount to some $263 billion (offsetting some $5 billion in wage effects). This meant several thousands of dollars per US family and, assuming that it was mostly received by lower income households, even bigger consumption gains for the poor. To the extent - which I would suggest although not on any actual evidence, alas - that the Walmart Effect could be renamed the China Credit Facility, then a move to rebalance global savings flows might well hit poorer American families. How much? Well, certainly a large part of it has evaporated as the financing from China has, if not precisely evaporated, shifted from financing private consumption to a much larger portion devoted to financing US government public consumption. So some part is gone or already evaporating at that stage. But we have yet to see a full policy of rebalancing, and without any basis for putting in numbers, let me suggest that it might be a considerable part of what is left of the original Walmart Effect. Or am I wrong about the basis of the effect - wrong, that is, in asserting that the Walmart Effect is largely a China Credit Facility effect?