A distorted lens on Wal-Mart

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Last Tuesday, the Public Broadcasting Service's "Frontline" series ran a scathing attack on Wal-Mart, the world's largest retailer. The program was titled, "Is Wal-Mart good for America?" Though never stated explicitly, it is clear from the overwhelmingly negative portrayal the answer clearly is "no."

I watched with special interest. In fact, it was the first PBS program I had seen in some time. I had stopped watching shows like "Frontline" long ago because of their heavy liberal bias. But I thought perhaps this one would be different because I had been extensively interviewed for it.

Over several hours at my house, I patiently explained to Hedrick Smith, the program's chief correspondent and producer, that the main beneficiaries of Wal-Mart's low prices are the poor, who now can afford products that would be out of their reach but for Wal-Mart raising their standard of living.

I was trying to make the same point the great economist Joseph Schumpeter made about the Industrial Revolution. In his book, "Capitalism, Socialism, and Democracy," Schumpeter said: "The capitalist achievement does not typically consist in providing more silk stockings for queens, but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort."

I also noted to Mr. Smith that Wal-Mart, all by itself, was responsible for a significant amount of the U.S. productivity miracle over the last decade. In a 2001 report, the McKinsey Global Institute, a respected think tank, concluded Wal-Mart's managerial innovations increased overall productivity by more than all the investments in computers and information technology of recent years.

Wal-Mart's innovations include large-scale (big box) stores, economies of scale in warehouse logistics and purchasing, electronic data interchange, and wireless bar code scanning. These gave Wal-Mart a 48 percent productivity advantage over its competitors, forcing those firms to innovate as well, thereby pushing up their productivity. The McKinsey study found productivity improvements in wholesale and retail trade alone accounted for more than half of the increased national productivity between 1995 and 1999.

A new study from the prestigious National Bureau of Economic Research found Wal-Mart has a substantial effect on reducing inflation. For example, it typically sells food for 15 percent to 25 percent less than competing supermarkets. Interestingly, this effect is not captured in official government data. Fully accounting for it would reduce the published inflation rate by as much as 0.42 percentage points or 15 percent yearly.

Ignoring these beneficial macroeconomic effects, "Frontline" focused almost exclusively on job losses allegedly caused by Wal-Mart. Acting as what economists call a monopsony, it supposedly forced countless American manufacturers to close domestic operations and move to Asia to get their costs low enough for Wal-Mart to sell their products. It is also said to have caused innumerable local retailers to go out of business, further adding to the job loss.

In fact, academic research by economist Emek Basker of the University of Missouri contradicts this last point, finding Wal-Mart permanently raises local employment.

Even restricting oneself to the material in the "Frontline" episode, it is hard to justify its sweeping indictment of Wal-Mart. For example, it accuses Wal-Mart of buying $15 billion to $20 billion worth of goods from China each year, implying this is largely responsible for our trade deficit. But since our trade deficit with China is about $150 billion, Wal-Mart can be responsible for at most 13 percent of it.