What’s Really Wrong with our Economy
by
Robert Roy Pool
with special thanks to Morris Effron for nurturing this idea
Most of the discussion about our economic malaise in the popular media has hewn to a few pre-packaged partisan talking points. To hear Democrats tell it, our economy tanked because of unwise tax cuts and negligent financial regulation during the Bush Administration. To hear Republicans tell it, our current slack economy is all the fault of Obama, who scared businesses with new health care mandates, the threat of regulation, and the possibility of higher taxes. Trembling before the socialist ogre, businessmen have been too terrified to invest or create new jobs.
Both of these explanations may contain tiny germs of truth, but both are mostly irrelevant. Our economy is in the midst of a powerful transformation caused by technology, globalization, income inequality, and demography. Compared to these deep and powerful trends, even the Great Meltdown of 2008 was just a minor speed bump.
One of these trends is beyond the control of any government or political party. Two of these trends will be rectified slowly through the normal functioning of a market economy, and one of these devastating trends can be addressed by government action. The purpose of this essay is to analyze these trends concisely, distinguishing the problems that are beyond anyone’s control from the one that can and should be solved.
Technology
The Internet Revolution has changed the very nature of the way the world does business. This has been very good for some companies, like Amazon and Apple, but terrible for many others, like Borders and Nokia. Net net (no pun intended), it has reduced employment (costs) in many industries.
Amazon distribution center
This phenomenon has affected all industries to some degree, but it can be seen most clearly in the retailing sector. Amazon.com had gross revenues –sales – of $40 billion last year. Amazon required only 33,700 employees to generate this revenue. Wal-Mart, the largest corporation in the world measured by gross sales, sold ten times more goods than Amazon, but required 2.1 million employees achieve these sales, or 62 times more employees than Amazon. In other words, Amazon sold six times as much per employee as Wal-Mart, one of the most frugal in-person retailers in the word.
This fact has profound consequences for our future. If an on-line retailer can sell six times as much per employee as a bricks-and-mortar retailer, it can function on a much lower profit margin. Over time, it can outcompete the traditional retailer.
And this is exactly what has happened. Amazon has seen its sales increase every year since 1996 while its profit margins have remained very low. Over the last four years (since 2006), Amazon’s sales have more than tripled. This is a compound growth rate of 33 % per year. Meanwhile, Wal-Mart’s sales have been nearly flat, rising just 21% since 2006, for an annual rate of increase of just 5%. And in order to achieve this rate of increase, Wal-Mart has had to open hundreds of new stores with thousands of new employees. Amazon’s work force has grown much more slowly.
And because Amazon had taken such a huge market share in book retailing, its traditional in-person competitors – Borders and Barnes and Noble – have suffered tremendously. Borders is now in bankruptcy, and Barnes and Noble is struggling to survive. And of course, this analysis ignores the hundreds or thousands of smaller bookstores that have been put out of business by the combined competition of Borders, Barnes and Noble, and Amazon. The total number of American workers who have lost their jobs because of competition from Amazon is 10,000 at Borders alone. It could easily total three times that number at all the other companies driven from the business over the least ten years.
The Internet Revolution will continue to reduce retailing costs for many years to come. While this sounds like progress – reduced costs are a major goal of every business – what this really means is reduced employment. If the Amazon example provides a good indicator, we should expect that for each percentage of market share taken by on-line sellers, total employment in the retail sector will drop by about 5/6ths of one percent. That’s huge.
This process is called disemployment.
According to the Census Bureau, online sales as a percentage of total retail sales have increased from 1.2% of total sales to 4.4% since 2002. Since retail salespersons and cashiers account for nearly 6% of our total workforce, this suggests that on-line retailing by itself is responsible for a reduction of about 1/6th of 1 percent of our workforce. While this does not sound like a very significant reduction, remember this is just one small example of many scattered throughout the economy.
Overall, the transition from in-person work to on-line work has resulted in work force reductions in many thousands of business. No one accurately can say how many jobs have been lost, but it could easily add up to two or three percent of the total jobs, or somewhere between two and three million private sector jobs. And the on-line revolution is not over; on-line sales could reach ten percent of total sales in another decade. That will mean the loss of an additional half a million jobs in retailing alone, along with millions more in other sectors of the economy.
In-person retail stores will not disappear entirely, however. Some goods simply have to be seen in person and inspected before most people will buy them – an apple, a carton of eggs, a pair of shoes, a shirt, or a pair of slacks. The vast majority of these types of goods will continue to be sold in person. At some point a balance between internet retailing and old-fashioned in-person retailing will be struck, and the process of disemployment will stop. But the jobs lost to the Internet Revolution will never be restored. More goods will simply be sold by fewer people, reducing overall costs and increasing the efficiency of our retailing sector.
No political party has any chance of resisting this powerful economic trend. Here in California we have done the one thing that government can do, and that is to collect sales tax on Amazon’s sales, putting it on a level playing field with normal in-person retailers insofar as sales tax is concerned. The Amazon tax takes effect next year, and it will likely reduce Amazon’s growth rate. But in the long run no government program can prevent the downsizing of our retail sector, or the shrinking of many other industries by the Internet. It is a choice we have made collectively, for better and for worse.
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