November 09, 2003

November 9, 2003

ADAM SMITH AND SAM WALTON MEET DRACULA

HOW A BLOOD-SUCKING GOVERNMENT BUREAUCRACY STIFLES ECONOMIC PRODUCTIVITY AND FREE ENTERPRISE

In 1776 Adam Smith said in “The Wealth of Nations” that if you give people the freedom to pursue their own self-interest without interference from the state it will lead to a better material life for everyone. Furthermore, he said this economic freedom was a fundamental human right. “To prohibit a great people…from making all that they can of every part of their own produce, or from employing their own… industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind….”

According to Smith, economic freedom means not only the right to buy goods from any source without the restraints of tariffs or import quotas, it includes the right to be employed wherever one’s skills and services are needed. Smith was critical of policies that were then in force in most countries in Europe that required laborers to obtain government permission to move from one town to another even within the same country.

Economic freedom, Smith said, includes the right to charge whatever wage the market will bear. “Whenever the law has attempted to regulate the wages of workmen, it has always been rather to lower them than to raise them.” The regulation of wages, Smith thought, should come about through the natural workings of the labor market, not through government intervention.

These principles, recognized universally by economists and governmental policy-makers of the free world and those nations which aspire to western democracy, are often forgotten, distorted, and/or diluted by the bureaucrats of government. Instead of using common sense in the application of law, they become stupefied and rigid in complex situations that require choosing among imperfect solutions and deciding what is best in the long run.

The front page headline in the New York Times of November 5 read “Illegally in the U.S., and Never a Day Off at Wal-Mart.” The story that followed demonstrates the skill and efficacy of Smith’s invisible hand of economic freedom until it comes in contact with the muscle-bound power of the state.

The essence of the Times’ story was this: The United States government sent a battalion of federal agents in the middle of the night to 60 Wal-Mart stores all over the country to arrest 250 illegal aliens who were busy performing janitorial tasks like cleaning the toilets, cleaning and polishing the floors, and emptying the trash. The men were detained pending deportation and the cleaning contractors who hired them were accused by the government of not paying the men overtime wages or paying their social security and workmen’s compensation tithes to the government. The men had not committed any crimes except for working in this country while not having legal status—they were not terrorists, nor had they stolen anything or defrauded anyone. Those were the essential details in the story.

Let’s look at this economic situation through the eyes of Adam Smith.

Wal-Mart is the largest retailer in the world. It has 3470 stores in America alone, and had revenues from these amounting to $245 billion dollars last year. Its basic business plan is extremely simple and enormously effective: It offers good quality merchandise at the lowest prices in all aspects of living—clothing, housewares, groceries—what Sears & Roebuck was to 19th century America Wal-Mart is to 21st except at a discount. Its sales and service people are knowledgable and helpful and it is pleasant and interesting to shop in its stores.

Wal-Mart is a cultural as well as a business icon. Its owners—originally Sam Walton and his family—now number in the millions. Its shares are safe and reliable investments for widows, orphans, and thousands of mutual funds. And it is expected to grow and prosper for the next decade or two.

It has over one million employees—mostly salespeople—who are un-unionized and have chosen to remain consistently non-union. Its labor policy is apparently effective in demonstrating to most of its employees that they are highly valued. During the recent recession, even though business was diminished, no permanent employees were ever laid off.

Horsefeathers has no stock in Wal-Mart, and we do not say these flattering things about the company for any reason except to establish its place in the American economy.

Now this great company has a business commitment to making the store as pleasant a place to work and shop as possible. This means that trash must be disposed of, its toilets—customers and staff—must be kept clean and tidy, and its floors must be kept clean and polished. And this must be done by janitors between closing time of one day and opening time of the next, seven days a week. Because janitors are difficult to recruit and because Wal-Mart did not want to expend managerial effort on store maintenance, they wisely contracted these chores out to national contractors who were paid by Wal-Mart $10/hour/person. These contractors in turn recruited local sub-contractors for $9/hour/person who in turn recruited people for janitorial jobs for $8/hour/person. The recruitment was done on the internet and so people from the Czech Republic, Russia, Slovakia, Mexico, Uzbekistan, Mongolia and other countries saw the advertisements and applied. Although many of the recruits had degrees in higher education, they were either unemployed or were paid wages that were one tenth of what the Wal-Mart sub-contractors were offering. The foreign recruits were eager to take these jobs—jobs that were unfillable by U.S. workers who felt that the work was too hard and degrading. The Wal-Mart janitors did work hard and long hours with no overtime pay, often seven days a week. Many of them grumbled about their long hours, and some quit and went back to their country of origin. But most, despite their grumbling, stayed on and continued to work for what they considered to be relatively high wages.

So the final outcome of these economic dynamics was that Wal-Mart was happy with its janitors’ efforts and with the wages it paid the contractor for their services; its customers and employees were happy with the clean, polished floors and tidy toilets. The janitors were happy with their wages which, compared to their peers in their own countries, were large and enviable, if they were able to get work at all; and in fact some of those janitors were actually proud of the quality of their work. The Times reported, “Mr. Zavala said it was unjust to deport immigrants who worked hard and well. ‘We were proud of what we were doing,’ he said. ‘Every morning we looked back at the floors, and they looked real shiny. I don't want to get too emotional, but do you think we want to go back to our country and earn just $30 a week?’"

The national contractors and the local sub-contractors were happy because they made a profit, small as it was.

Wal-Mart’s investors were happy because the company was able to keep its costs down and was able to continue to grow and expand because its prices were low and its stores were pleasant to shop in, all of which led to more dividends and capital appreciation of its stock shares.

Into all this happiness rain began to fall on last October 23 when hundreds of federal agents rounded up 250 janitors in Wal-Mart stores spread over 21 states. Wal-Mart and the sub-contractors were accused by the federal government of employing illegal immigrants and not paying social security and workmen’s compensation taxes.

The coordinated raid must have taken months to prepare and organize at a cost of millions of taxpayers dollars, to say nothing of the cost of litigating the matter. Even if the government were successful in proving the case against Wal-Mart, which denies knowing the workers were illegals, it would be a Pyrrhic victory for the following reasons.

The costs to the government of collecting the evidence, preparing the litigation and appeals by a platoon of expensive lawyers would be as much or more as any taxes that the sub-contractors neglected to pay the government on behalf of their illegal employees.

Furthermore, the costs to Wal-Mart of paying wages to unwilling American workers for unappealing dead-end jobs would double or treble. It would then be faced with the choice of reducing the standards of cleanliness and pleasant surroundings for their customers and employees or raising the prices of their merchandise or both. This would certainly result in a loss of marginal customers and market share. This, in turn, would impact the net profit of the company and certainly make investors’ ownership of the stock less valuable.

The loss to the government from the reduced income taxes paid both by the company and its shareholders would be in the hundreds of millions. The loss in productivity and efficiency would naturally be reflected in the GDP because more money would be spent for fewer goods and services. In short, all that the government has accomplished in this attack on economic freedom is to throw sand into the mechanism of the free market.

What the government should do is to regulate the process of immigration for low-end workers the way it does for high-end workers. Just as it welcomes immigrants who have skills and knowledge that are in short supply in America, it should welcome the recruitment of foreign workers to compete for jobs that no American workers want. Such hard working foreign workers fulfill an economic need. Let them compete in a free labor market untrammeled by heavy governmental hands. Eventually most would take their earnings and repatriate them to their country of origin. Some would decide to stay on and become legal immigrants who pay their taxes and strive to climb the educational and economic ladder. This would be good for them and good for the country.