Don't Let Wal-Mart Off the Hook

 | Dec 26, 2013 | 3:30 PM EST  | Comments
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There's a guy out there who calls himself an economist who recently made a very disturbing video. Let's forget for a moment that this particular guy has been wrong about everything over the past several years. Wrong on interest rates, wrong on bonds, wrong on the U.S. economy, wrong on inflation, wrong on the dollar, wrong on gold, wrong on housing. Why the media gives him even 20 seconds of attention is bizarre, but that probably says a lot about the state of the business media and its declining ratings these days.

Anyway, the intent of this video was to "prove" that Wal-Mart (WMT) cannot pay its employees more without raising its prices and that doing so would hurt the very people who shop there. To do this, the guy stands in a Wal-Mart parking lot and harasses shoppers as they leave with their purchases.

He uses the element of surprise and baits them with leading questions. First he asks them, "Would you like to see Wal-Mart employees get $15 per hour? Since most people are compassionate, they say "yes." That's where he plays the bait-and switch and asks them if they'd be willing to donate 15% of the value of their purchases to help Wal-Mart employees. At that point, most of the shoppers say "no," although some actually try to help, but when it's not enough, he berates them.

Let's leave the economics aside for a moment. I think it's fair to say that this guy is a sadistic jerk. It's bad enough that he is harassing shoppers who are simply out doing their holiday shopping, many of whom probably don't make very much, it's also extremely cruel to the Wal-Mart employees inside who are working hard for very minimal wages. This guy is intentionally trying to make these employees look like the "bad guys" for wanting more money, and I find that to be cruel. Furthermore, each time the shoppers say they're not willing to pay more to help the Wal-Mart employees, you see the glee in his face.

Yet even as he may believe he is proving a point, the real point is being made by the shoppers themselves. Their understanding of economics and accounting is far greater than this dunce's. There is no reason for Wal-Mart to have to raise prices to pay its employees more. There is already plenty of room within Wal-Mart's cost and operating structure to do this. In fact, the company could pay higher wages and offer even lower prices if it wanted to.

Check it out:

Wal-Mart earned over $17 billion last year, and that's while paying its 2.2 million workers (1.4 million in the U.S.) The average Wal-Mart sales associate makes about $15,576 per year, which, by the way, is far below the U.S. poverty level of $23,550 for a family of four.

Looking at some of the company's expenses, let me start right at the top. Wal-Mart's outgoing CEO, Mike Duke, earned $20.7 million last year. That is 1,400 times the salary of a sales associate. In a country where income inequality is already going off the charts, this one is outside the galaxy. There is no way that Duke is worth that kind of money when you look at CEO-to-worker comparisons at other firms. No way. So there's room at the executive level to reduce compensation to the benefit of workers. But while it's a start, we're only talking millions here, which is peanuts, so I'll move on.

Next, the company purchased $6 billion of its own stock for the nine months ending Oct. 31, 2013. By the time the full year is out, it will have spent nearly $8 billion buying up its own stock. Is that a productive investment? That alone could have added another $4,000 per year to every single Wal-Mart employee's pay ($5,700 for U.S. employees).

Let's move on.

The company will also end up paying out about $6 billion in dividends this year. That's money that goes to holders of stock, meaning it's nothing more than an economic rent. Again, is this productive? If only half of that amount were paid out, you could pay another $1,400 to employees ($2,140 to U.S. employees).

Right there, those two things would put the average U.S. sales associate right about at the poverty line. But there's more.

Wal-Mart holds about $9 billion in cash. Why? Why is it necessary for one of the largest companies on earth and one with unfettered access to the capital markets to hold so much cash? You simply don't need that much. If Wal-Mart needs money, it can tap credit or capital markets anytime it wants for as much as it wants at very low cost. So take half that $9 billion in cash, and you add another $2,045 to every worker's salary ($3,200 for every U.S. worker).

That would put these workers well over the poverty line and above $15 per hour. No need to raise prices, no harm to the company. Done.

We as taxpayers are subsidizing the profits of Wal-Mart, along with the CEO's pay and the Walton family's fortune (of about $144.7 billion), because many Wal-Mart employees are on public assistance. In other words, you and I are paying so that Wal-Mart can give its CEO his outsized salary and so the company can buy back stock to the tune of $8 billion and allow the Walton heirs to enjoy their homes and yachts and operas and fancy vacation trips and elite schools for their kids. That's what you call chutzpah. The company needs to get off the dole.

Wal-Mart has plenty of money to pay its employees more without raising prices. Indeed, it should, and it must.

The guy in the video is, as usual, wrong. If you believe that higher profit can only come as a result of higher prices, then you pretty much ignore about 5,000 years of economic history. 

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