Do consumers need to have ethics? Greed abounds, getting something for nothing, or selling something for everything are two sirens calling consumers. Robert Reich discusses the logical consequences of our behavior, and the conflicted state consumers find themselves in as we struggle to route all the corruption. -GFS
The Conflicted Consumer
By Robert B. Reich
Alfred A. Knopf
Wednesday 26 September 2007
The following is an excerpt from Robert Reich's new book "Supercapitalism: The Transformation of Business, Democracy, and Everyday Life."
Of Two Minds
In recent years, the cheerleaders of American capitalism - denizens of Wall Street, lobbyists on Washington's K Street, the inhabitants of top executive suites and New York penthouses, most Republicans, many economists, editorial writers for the Wall Street Journal, free-marketeers around the world - have had difficulty containing their enthusiasm about the economy. America's gross national product has virtually tripled since the 1970s! The Dow Jones Industrial Average has risen from 1,000 to over 13,000 today! Behold the wondrous innovations and inventions, and the plethora of new products and services! The cheerleaders disdain what they consider to be constraints on further capitalist exuberance - taxes and regulations, labor unions, "Old Europe's" inefficiencies, anything that retards consumer well-being and investor gain.
But other trends have worried labor leaders, community activists, most Democrats, some economists, many sociologists, editorial writers for the New York Times, trade protectionists, and left-wing populists. Look at all the workers falling behind! The widening inequalities of income and wealth! The instability of jobs! The loss of communities! The destruction of the environment! The trampling of human rights abroad! Conservatives will sometimes join this chorus, especially with regard to the so-called coarsening of American culture and the entertainment industry's seeming obsession with lurid and titillating sex and violence. For these critics, the villains are often greedy CEOs, immoral corporations, and a cabal of wealthy global elites.
The two stories - Oh the wonder of it! Oh the shame of it! - both describe aspects of 21st-century supercapitalism. But considered separately, each is seriously misleading. Each leaves out the other, which is actually its flip side. Each disdains or blames imaginary forces in opposition, when the qualms are actually inside almost every one of us.
The awkward truth is that most of us are two minds: As consumers and investors we want the great deals. As citizens we don't like many of the social consequences that flow from them. The system of democratic capitalism in the Not Quite Golden Age struck a very different balance. Then, as consumers and investors we didn't do nearly as well; as citizens we fared better.
What's the right balance? Are our gains as consumers and investors worth the price we're now paying for them? We have no real way to tell. The old institutions of democratic capitalism, and the negotiations that took place within them, are gone. But no new institutions have emerged to replace them. We have no means of balancing. Our desires as consumers and investors usually win out because our values as citizens have virtually no effective means of expression - other than in heated rhetoric directed against the wrong targets. This is the real crisis of democracy in the age of supercapitalism.
It has become fashionable in progressive circles to bash Wal-Mart. "My problem with Wal-Mart is that I don't see any indication that they care about the fate of middle-class people," shouted Sen. Joe Biden from the rooftop of the State Historical Society of Iowa building in Des Moines. It was a little more than two years before the 2008 presidential election, and Biden was among a number of Democratic hopefuls who wanted to burnish his credentials as someone who cared about what was happening to American jobs and wages. "They talk about paying them $10 an hour ... How can you live a middle-class life on that?"
Wal-Mart has become the poster child for all that's wrong with American capitalism, because it replaced General Motors as the avatar of the economy. Recall that in the 1950s and the 1960s, GM earned more than any company on earth and was America's largest employer. It paid its workers solidly middle-class wages with generous benefits, totaling around $60,000 a year in today's dollars. Today Wal-Mart, America's largest company by revenue and the nation's largest employer, pays it employees about $17,500 a year on average, or just under $10 an hour, and its fringe benefits are skimpy - no guaranteed pension and few if any health benefits. And Wal-Mart does everything in its power to keep wages and benefits low. Internal memos in 2005 suggested hiring more part-time workers to lower the firm's health care enrollment and imposing wage caps on longer-term employees so they wouldn't be eligible for raises. Also, as I said earlier, Wal-Mart is aggressively anti-union.
Wal-Mart's CEO in 2007 was H. Lee Scott, Jr. Scott was no "Engine Charlie" Wilson, who as GM's top executive in the 1950s saw no difference between the fate of the nation and the fate of his company. Scott has a far less grandiose view of Wal-Mart's role. "Some well-meaning critics believe that Wal-Mart stores today, because of our size, should, in fact, play the role that is believed that General Motors played after World War II. And that is to establish this post-World War middle class that the country is proud of," he opined. "The facts are that retail does not perform that role in this economy." Scott was right. The real problem - not of his making - is that almost nothing performs that role any longer.
The rhetorical debate over Wal-Mart is not nearly as interesting as the debate we might be having in our own heads if we acknowledge what was stake. Millions of us shop at Wal-Mart because we like its low prices. Many of us also own Wal-Mart stock through our pension or mutual funds. Isn't Wal-Mart really being excoriated for our sins? After all, it is not as if Wal-Mart's founder, Sam Walton, and his successors created the world's largest retailer by putting a gun to our heads and forcing us to shop there or to invest any of our retirement savings in the firm.
Wal-Mart could afford to give its employees better pay and benefits, but would it remain competitive if it did? In 2005 its profit margin on sales was around 3.5 percent. This came to about $6,000 per employee. So at least in theory, Wal-Mart has some maneuverability. If it boosted wages and benefits of all full-time employees by $3.50 an hour, the extra cost would still total less than 3 percent of Wal-Mart's sales in the United States. It could absorb that cost by raising its prices a bit or settling for somewhat lower profits. But few of us as Wal-Mart consumers would be happy to pay the higher prices. We might go elsewhere in search of better bargains. Certainly, few of us as Wal-Mart investors would be pleased with lower profits. We might move our money to where it could earn a higher return. In fact, by 2006, Wal-Mart's profits were showing signs of wearing thin. In the second quarter of 2006, the company reported the first drop in profits in a decade. Apparently customers were finding better deals at some of Wal-Mart's competition, and shareholders were finding better investment opportunities elsewhere. Wal-Mart's stock price, which had risen 1,100 percent in the 1990s, dipped in the 2000s.
The issue of Wal-Mart's comparatively low pay and benefits - and our tacit complicity as Wal-Mart consumers or investors - pales in importance beside Wal-Mart's effect on the wages and benefits of tens of millions of other workers across the large economy. Here our complicity is more significant. Recall that Wal-Mart gets great deals for us as consumers by squeezing its suppliers. As the biggest single company in the world, Wal-Mart has huge bargaining power. "We expect our suppliers to drive the costs out of the supply chain," a spokesman for Wal-Mart said. Translated: We demand our suppliers squeeze the wages and benefits of the millions of people who work for them in the United States and abroad. If they don't, we'll buy from competitors who will.
Wal-Mart suppliers could reduce their prices by inventing new products and services that are better than the old, while keeping their payrolls as before. But because payrolls are 70 percent of a typical business' costs, it's almost inevitable that wages and benefits will also be affected. If jobs cost too much here, suppliers will outsource them to China, Southeast Asia, or Mexico; or they'll substitute computers and software for human beings.
How else do you suppose Wal-Mart can sell detergent at a fraction of the price of a box of Tide? Or televisions for $50 and printers for $30? Or a gallon jar of Vlasic dill pickles - twelve pounds, an entire year's supply - for $2.98? Think of Wal-Mart as a giant steamroller moving across the global economy, pushing down the costs of everything in its path - including wages and benefits - as it squeezes the entire production system. It's because of this big squeeze that bargain hunters who throng Wal-Mart save at least $100 billion a year. Some studies put the savings closer to $200 billion. That comes to more than $600 per family - no small change for the typical Wal-Mart shopper with an average family income of $35,000 in 2005.
Wal-Mart is the biggest steamroller, but there are lots of others. Because of our increased power as consumers and investors to choose the best and lowest-cost products from a wide array of alternatives, almost every company has had to become its own steamroller. That's why so many prices are lower in real terms and so many products and services are better than they were several decades ago, and why so many more Americans have access to so much more bounty.
Consumer markets are still far from perfect, of course. Some big companies temporarily preserve monopolies through patents and copyrights, or predatory strategies, to intimidate competitors. Consumers sometimes find it difficult to compare prices or are manipulated into buying things they don't really want - which is why the advertising industry is such a massive part of our economy and why "buyer's remorse" is such a common predicament. Yet, these imperfections notwithstanding, over the last several decades, the market has become more responsive to what consumers want than ever before.
The proof is in the numbers. (To make the following comparisons meaningful, I've used the value of a dollar in the year 2000.) A color television that cost $2,227 when color TVs were first introduced in the late 1950s cost half that by 1967. By 2000, its cost had dropped to just $175, making it affordable to virtually all American families - including over 90 percent of families with incomes under the poverty line.
Microwave ovens have followed the same trajectory. In 1955, you had to pay $1,300 for one. By 1967, a standard microwave cost $495. By 2002, it was $208, putting microwaves within easy reach of almost all American families, including 73 percent of the poor. The price of a VCR has dropped at roughly the same pace, eventually allowing some 78 percent of poor families to own one. The price of transistor radio plunged from $228 in 1962 to $15 by 2000; the price of a refrigerator, from $2,932 to $1,000.
The standard personal computer went from $1,300 in 1998 to $770 in 2003. (Dell Computer, like Wal-Mart, rates each of its suppliers weekly in a cutthroat search for better and cheaper parts.) All the while, PCs have grown more powerful. In 1996, you couldn't do much better than a desktop with a one-gigabyte hard drive. (One gigabyte is roughly the amount of words and data in all the books that can fit into a pickup truck.) Ten years later, one gigabyte could be stored in a portable USB flash drive the size of your index finger. Meanwhile, starting in the 1990s, digital cameras, flat-paneled TVs, external hard drives for backing up data, DVD players, iPods, and wireless routers all emerged and then continued to improve. At each level of quality, they also became cheaper.
A generation ago, the typical American family owned one car. By 2006, that family had two. A third of American families own three cars or more. This is not particularly good news for the environment or the cause of energy conservation, but it is welcomed by members of a household who no longer have to wait to borrow the family car. The average automobile cost less in real-dollar terms in 2006 than it did in 1982, despite being equipped with air bags, CD players, antilock brakes, and other items considered luxury options in the early 1980s. As we have seen, the Big Three have had to compete harder, and consumers have had many other automakers to choose from.
In deregulated industries, consumers have done especially well. Trucking rates dropped to 30 percent in real terms between 1980 and 2000 - a savings that affected almost every item shipped long-distance. The cost of long-distance air travel also sank in real terms, making it possible for millions of Americans to fly who couldn't afford to before. The average cost of every hundred passenger miles flown (still using the value of the dollar in the year 2000 as a comparison point) was about $35 in 1960. By 1980, the price had dropped to about $20; by 2000, under $15. In 2005, the average 1,000-mile, one-way flight cost 20 percent less than it did in 2000. One recent study found that in the year 2000, travelers would have paid $20 billion more in higher airfares and less frequent service if Southwest Airlines didn't exist.
Take a look at your telephone bill and adjust for inflation (still using the dollar's value in 2000). The average monthly base rate for residential phone service remained around $35 through the 1950s and 1960s, but in 1980 was down to $18. In 1983, in the wake of deregulation, MCI charged 37 cents for a one-minute call between St. Louis and Atlanta, while the Bell System was still charging its old rate of 62 cents; Bell's rates dropped to meet the competition. The price of telephone equipment also dropped. After AT&T wrung wage concessions out of Western Electric Co. employees in 1983, the cost of a standard phone fell by nearly a third. Long-distance rates also took a dive. In the 1950s, it cost about $15 to make a ten-minute daytime phone call to someone over 200 miles away. By 2000, that same call cost $8.50. Telecom revenue per minute plummeted from almost $1.50 in 1980 to less than 25 cents in 2003. I now call friends in Europe and Asia over the Internet for free.
Not everything has become cheaper in real terms, of course. The price of health care has skyrocketed. But that's partly because competition for consumer and investor dollars has unleashed a wave of medical devices and new drugs. The result is better health for most people. When I was born in 1946, the typical American was expected to live 66.7 years. (Hence, Social Security, which kicked in at sixty-five, was not such a great deal.) Someone born in 2006 can expect to live eighty years. Old age is not what it used to be, either. Forty years ago, people in their sixties spent their days in rocking chairs and at card tables. Today many people in their seventies and eighties travel, enjoy an active sex life, and play sports. My father, at the age of ninety-three, plays golf three times a week.
Surgery has become easier and more successful. Twenty years ago I could hardly walk; then I had both hips replaced, and now walking is a cinch. The incidence of heart disease leading to death is 60 percent lower than it was in 1950 (adjusted for the increasing size of the population). Cancer mortality is also down. Infant mortality has dropped 44 percent since 1980, according to the Centers for Disease Control. Through new drugs, millions of people who suffered from chronic pain have found relief, millions more have been lifted out of depression, people with AIDS have been given their lives back.
The health care system still has problems, of course. It is wildly inefficient. Our bad eating habits have created an epidemic of obesity. Forty-seven million Americans have no health insurance and have to use hospital emergency rooms when something goes seriously wrong. Nonetheless, most of us are still far healthier than we were four decades ago.
Homes are more expensive, too, but generally larger and better equipped. Air-conditioning is standard in warm climates; central heating, in cool ones. The cost of a college education is sharply up, but I cannot justify the increase, although I have taught in several fine institutions of higher learning. Higher education is a uniquely hidebound industry whose economics largely defy rational explanation.
Capital markets - including stock exchanges, banks, and other financial institutions, and money market funds - are far more efficient than they were decades ago, though still far from perfect. Stock prices reflect anticipated earnings rather than present ones, and investors sometimes make large collective mistakes - as many of us did at the end of the 1990s by investing in the Internet bubble and then suffering the consequences when it burst in 2000. Companies can mask problems through fancy accounting, at least for a time, as did the executives of Enron. The mutual funds and pension funds we entrust our money to don't always represent our best interests, especially if they have lucrative relationships with the same companies they invest in on our behalf. And Wall Street takes a famously myopic view of the future, looking at quarter-to-quarter results rather than longer-term performance.
Yet for all of this, investors have triumphed, just as consumers have. Capital markets are the most sensitive barometers available for gauging how well executives are squeezing value out of what they control in order to reward us as investors. Again, the proof is in the numbers. As the old oligopolistic system gave way to competition - allowing financial entrepreneurs to squeeze companies for higher profits - share values took off. The Dow Jones Industrial Average reached 1,000 on November 14, 1972. On January 8, 1987, it reached 2,000. On April 17, 1991, it broke 3,000. It hit 4,000 on February 23, 1995; 8,000 on July 16, 1997; 11,000 on May 3, 1999. It dropped when the Internet bubble burst but then bounced back and reached 12,000 on October 19, 2006, then 13,000 on April 25, 2007. Even though each milestone became progressively easier to reach and even though some investment proved to be speculative, investors nonetheless have become far wealthier.
This colossal increase in wealth was not the result of Ronald Reagan' supply-side tax cuts, as some conservative economists continue to believe. The Dow accelerated after the first George Bush and Bill Clinton both raised taxes. It has mostly reflected the increased capacities of companies to generate profits, as they have moved along the road to supercapitalism. Top executives have had strong incentives to be more efficient: We as consumers have threatened to take our business elsewhere unless they do things as efficiently as possible, and we as investors have threatened to take our money elsewhere unless they show a good return on our investments. The pressure we have applied - through consumer intermediaries like Wal-Mart or investor intermediaries on Wall Street - has resulted in remarkable wealth for successful CEOs and financial entrepreneurs, as we shall examine, or sudden job loss for the unsuccessful, as we have already seen.
By the late 1990s, most American households had become shareholders, putting retirement savings into the stock market or within 401(k) plans or other pension savings plans. The typical shareholder only owns roughly $5,000 worth, but that is enough to get hr to pay exquisite attention to whether the Dow is trending up or down. The financial pages, which used to be read exclusively by the very rich, now rival the sports pages in provoking general interest.
Intensifying competition for us as consumers and investors has made the entire economy more productive. In order to be successful, CEOs and financiers have had to move money, machinery, factories, and other assets to where they can be most valuable. They've also had to invest in better products and services, and cheaper ways of making or delivering them. And of course they have moved, demoted or promoted, or laid off millions of people. As a result of all this, between 1973 and 2006, the gross domestic product of the United States tripled in size, adjusted for inflation. Economists calculate that, during these years. productivity increased by roughly 80 percent. In 2006, American workers were producing over 30 percent more every hour than they did only a decade before.
As economic power has shifted to consumers and investors, and away from large corporations and unionized workers, inflation has become far tamer. In the Not Quite Golden Age, big business and big labor negotiated pay packages that set prevailing wages throughout much of the economy. Now, hourly workers have little power to demand and get more pay, and most companies likewise have little power to raise prices. That means the entire economy can run faster and at a lower level of unemployment, without much risk that wages and prices will spiral out of control. The overall economy is sufficiently productive and flexible so that there's less risk of inflation when demand picks up. Alan Greenspan, as has been noted, understood this reality earlier than most.
But most of us are not just consumers and investors. We also work for a living. If our wages and benefits are not growing at the same rate the economy is growing overall, we are likely to feel we're not making progress.
Unless we are committed narcissists, our concerns are not limited to our own jobs, wages, and benefits. Many of our parents work or our children work, as do our siblings and their children, our friends and colleagues and their parents or children. Economics, as a discipline, focuses on a domain of personal concern strictly bounded by what analysts in government statistical agencies define as one's "family" or "household." But such categories are arbitrary. The capacity of human beings to empathize - to feel responsibility, loyalty, and simple human connection - extends far beyond them.
We're also members of communities, participants in the life our neighborhoods, members of a democracy, patriots. Some of us would willingly die for our country. Standard economic models have little to say about any of these altruistic sentiments. Yet as citizens, we may care a great deal if most people's jobs are insecure and wages are stagnant, and if a relatively small number of people have cornered most of the nation's wealth. We may also worry that our Main Streets are disappearing because small retailers can no longer compete with big-box retailers. We may be upset that companies are spewing gunk that causes global warming, or trampling human rights abroad, or pandering to our basest instincts for sexual titillation and violent thrill, or trying to fill our children's stomachs (and perhaps our own) with junk food.
Here, too, the boundary between enlightened self-interest and broad empathy is blurry. For example, I want to see poor people educated and part of the work force - if they are not, crime will rise and more likely threaten my loved ones; one of my grown children or I could be mugged by a poor kid who thinks he has no future in the legitimate economy. Similarly, I'm concerned about the loss of Main Street not only because I care about small retailers, but because I used to enjoy strolling along it. Global warming not only threatens the planet, but it also threatens to erode the beaches I love to walk on. I don't want the Internet to carry so much easily accessible pornography because I don't want my grandchildren watching it.
These issues of economic security, social equity, community, our shared environment, and common decency were central to democratic capitalism as we knew it in the Not Quite Golden Age. They were - and still are - concerns to us in our capacity as citizens. But as power has shifted to us as consumers and investors, these issues have been eclipsed. We've entered into a Faustian bargain. Today's economy can give us great deals largely because it punishes us in other ways. We can blame big corporations, but we've mostly made this bargain with ourselves.
After all, where do we suppose the great deals come from? In part they come from lower payrolls - from workers who have to settle for lower wages and benefits, or have to get new jobs that often pay less. They also come from big-box retailers that kill off Main Streets because they undercut prices charged by independent retailers there. They come from companies that shed their loyalties to particular communities and morph into global supply chains paying pennies to twelve-year-olds in Indonesia. They come from CEOs who are paid exorbitantly; from companies all over the world who wreak havoc on the environment; and, in some instances, from companies that pump out violence or porn or nutritionless foods and beverages.
You and I are complicit. As consumers and investors, we make the whole world run. Markets have become extraordinarily responsive to our wishes - more so all the time. Yet most of us are of two minds, and it is the citizens in us that has become relatively powerless. Supercapitalism is triumphant. Democratic capitalism is not.
Robert Reich is professor of public policy at the Richard and Rhoda Goldman School of Public Policy at the University of California, Berkeley. He was secretary of labor in the Clinton administration.
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