Monday, March 08, 2010

Monopoly and the Walmart Economy

While taking my children to piano lessons today, I was listening to the Sean Hannity show when a caller attacked Walmart and suggested that US citizens should buy American instead of sending our dollars to China. In response, Sean Hannity attacked the caller, calling him a free-market hating liberal. According to Mr. Hannity, there is nothing wrong with Walmart. Thanks to Walmart and free-market economics, the US consumer pays much less for things. I have been reading Cornered: The New Monopoly Capitalism and the Economics of Destruction by Barry C. Lynn and I am more convinced that our current economic system is threatening the long-term safety and independence of the United States. I am a constitution-loving conservative, but our current just-in-time, distributor-controlled economy is far from what the Founding Fathers had in mind for this nation.

Let me say from the start, that I am not a Walmart hater. Our current state of the economy is not necessarily Walmart's fault alone. What has happened since the Reagan Era is a relaxation of our traditional anti-trust and anti-monopoly laws. It used to be that anti-trust laws were designed to protect the producers over the distributors. The Law did this in two ways. First, the laws said that the producers retained control to determine how much they would sell their products for to a retailer and they could also determine how much their products would be sold for by the retailer. The laws no longer work to protect producers any more.

Walmart and Rubbermaid are a good example of the shift in anti-trust law. Rubbermaid is a top brand in storage and kitchen ware. This is just the kind of brand that a company like Walmart would need to offer. So, intially Walmart and Rubbermaid had a deal worked out. Accordinly, Rubbermaid invested millions in new US production factories. However, after the initial orders, Walmart came back to Rubbermaid demanding an even lower price on future product. Rubbermaid couldn't accept because of rising costs of petroleum. Consequently, Rubbermaid was dropped as a brand entirely. This led to Rubbermaid nearly going bankrupt and being bought out by Newell (35 brand conglomerate) in 1999. As all conglomerates do, nearly all of Rubbermaid's US operations were closed (80 factories and 5000 jobs) and production was outsourced to China.

You can see that if a powerful distributor like Walmart made a deal with a competitor to hurt a particular business, they could simply drop them, place their product on the bottom shelf, or raise the price on their products in comparison to the competition. In addition to allowing the producer to dictate the retail price their product, the second protection of producers is access to raw materials. If company A and B both produce the same product, and company A wants to put company B out of business, they could simply buy up all the companies that produce the raw materials necessary to produce their product. They could then charge company B high prices for those raw materials and put them out of business, or hurt their stock making them vulnerable to being bought out.

Companies have been forced to defend against mega-distributors by becoming monopolies or mega-conglomerates themselves. Companies like Newell, Proctor & Gamble, Kraft, Coke, Pepsi, Unilever and Luxottica own handfuls of companies, bands, and products so that they can protect themselves against the monopolistic distributors. As soon as companies have any cash on hand, they are forced in our current economy to look for the next big merger, acquisition, or hostile take-over. It has become a dog-eat-dog economy.

The power of distributors over producers is not a new problem. This goes back to John D. Rockefeller's Standard Oil Company which was initially divided into Exxon, Mobil, Chevron, Texaco, Gulf, Shell, and Amaco. Together with ConocoPhillips and BP there have been several mergers since. Other distribution-controlled sectors include the Music Industry. Artists have traditionally made very little money when signing over the copyrights for their music to record companies like Universal, Sony, Warner, and EMI who themselves own multiple labels. These companies guarantee that the music will play on their radio stations which they also own and the artist will make their money selling concert tickets.
AOL/Time Warner, Disney, General Electric, News Corporation, Viacom, Vivendi, Sony, Bertelsmann, AT&T and Liberty Media are the parent companies which control nearly all the media distribution in the country.

Dell Computers is another distribution driven company. Dell has been so successful putting computers together, that they have caused big problems for IBM, Hewlett Packard, and Compaq. HP bought out an ailing Compaq, and IBM had to get out of the PC business entirely. The current contract negotiations between NFL players and owners is another producer-distributor debate. NFL owners want salary caps so they say so they won't overspend a team into bankruptcy. The players want to retain the rights and control to as much profits as possible. We will be watching to see how this plays out.

The upside to having mega-conglomerates is the promise of efficiency. The ideal supposedly mirrors US politics. The most efficient markets have 2 major players like the Republican and Democrat party with a couple of minor 3rd parties like the Libertarian and Green parties which are really mostly insignificant except when they can used as pawns to hurt the one of the major parties. Accordingly, 2 major companies in any sector is enough to keep them honest.

The downside to this way of playing is that these big conglomerates destroy jobs and outsource to China. I mean, with all this consolidation, have prices really gone down? Coke used to be 5c a bottle. Now it cost $1.50. And so what if buying American costs more. Lets say you can buy an American-made product for 10$ while the same product made in China is only 5$. In the short run you save 5$. But on the long term, that is 5$ less to pay for an American job, which is 5$ less for healthcare, education, and retirement benefits. Consequently, that same 5$ to China becomes 5$ that the Federal Government has to dole out in Medicare and Social Security funds which it doesn't have money for. Consequently, the Federal Government is forced to raise taxes and then borrow at least 2.50$ back from the Chinese who because of our trade deficit have nothing better to do with all those extra US dollars but buy up our T-Bills. The end result of saving 5$ by sending it to China is that our children will one day end up paying at least 5$ back because of interest. So, I think, is it really worth saving 5$ today, when it will cost my children 5$ tomorrow as well as costing them their jobs?

The other downside to allowing mega-cooperations and conglomerates to buy out handfuls of small companies is that again, it costs jobs. When a large company buys another smaller company, there is a lot of duplication of effort. What really happens is that all the parent company really wants is the rights to the band name and the secret formula. The parent company will usually shut down all US production and outsource it to some 3rd-world country. If a particular brand competes with another of their brands, they may discontinue it completely. It used to be that a business owner dreamed of building up a business that he could leave to his sons. Today, small business owners aspire to be bought out by one of the behemoths. In addition to losing local jobs in small-town America, I think the current system also stifles innovation. Once a mega-corp buys up a brand, they usually are no longer interested in making it better, only making it cheaper. Also, if a company has several products and the mega-corp is interested in just one; they may just abandon all the others which suddenly disappear if they cannot be sold off.

The real danger of our current economy of consolidation is that of self-sufficiency as a nation. Today in America we import most of our petroleum, pharmaceuticals, and textiles. Other basic commodities like grain and food oil are being imported at an increasing rate. Another danger we are already seeing. When there is an outbreak of Salmonella in spinach or the accelerator goes bad on a few cars, because cars and spinach are controlled by only a few producers, there are massive nationwide recalls. More than ever before, our country is becoming increasingly vulnerable to any disruption to the transportation system or by a potential world-wide calamity like a flu pandemic.

Total Imports $2.1 Tril
National Debt Owned by Foreign Governments = 28% = $3.7 Tril

Top US Imports
Crude Oil $342 Bi
Cars $126 Bil
Pharmaceuticals $78 Bil
Automotive Accessories $65 Bil
Household Goods $62 Bil
Computer Accessories $61 Bil
Petroleum Products $52 Bil
Cotton Apparel $50 Bil
Telecommunications $45 Bil
Video Equipment $41 Bil

2006 debt numbers
national debt ($9 trillion),
non-bank corporate debt ($9 trillion)
mortgage debt ($9 trillion)
financial institution debt ($12 trillion)
unfunded Medicare liability ($30 trillion)
unfunded Social Security liability ($12 trillion)
external foreign debt ($3 trillion)
annual trade deficit ($817 billion)

No comments: