The Walmart World

George Packer @ The New Yorker  takes a look at the fragility of the Walmart consumer economy after decades of increasing income inequality and years of Great Recession:

If you were to write a social history of America through the story of business, what would be the most significant companies in the years since the Second World War? I’d divide the period into two: from 1945 to the mid-seventies, I might name General Motors and Woolworth’s. They set the standard for corporate success and behavior during a period that could be called the Roosevelt Republic, when a social contract underwrote American life. It included an expanding middle class, a strong safety net, high marginal tax rates, a white male establishment that grudgingly made way for other groups, a bipartisan approach to legislation in Washington, and a business culture that was cautious, loyal, hierarchical, and unimaginative.

In the decades since the mid-seventies—you could call it the Reagan Republic, but I prefer the “Unwinding”—the social contract has frayed to the point of disintegration. The middle class has shrunk; tax rates (especially on upper brackets) have plunged; inequality has exploded; the safety net (especially for the poor) has weakened; the old power structure has given way to a more diverse and broad-based upper class based on education; bipartisanship—well, you know; and business culture has become entrepreneurial, fast, risk-taking, and harsh. The trade-off: more freedom, less security.

Two companies have defined the years of the Unwinding: one is Apple, the other, Walmart. Steve Jobs’s genius for design and marketing helped create the consumer taste of that educated upper class—the spare, sleek, Bauhaus-inspired devices; the turtlenecks and jeans; the self-congratulatory language of revolution and inspiration; the Einstein fetish—with the Apple Store a kind of secular temple for devotees in prosperous cities and suburbs, mostly along the two coasts.

Jobs’s stylistic and philosophical opposite was Sam Walton. He came out of the heartland, where he saw the potential for a strategy of low cost and high volume in overlooked backwaters like Siloam Springs, Arkansas, and Coffeyville, Kansas. Walmart’s period of explosive growth coincided with decades of wage stagnation and deindustrialization. By applying relentless downward pressure on prices and wages, the company came to dominte both consumer spending and employment in small towns and rural areas across the middle of the country. The hollowing out of the heartland was good for Walmart’s bottom line: its slogan might have been an amoral maxim attributed to Lenin—“The worse, the better.”

If Jobs cultivated a priestly air of élite taste, Walton catered to cheapness and averageness. Apple fanatics lined up in the early darkness on Palo Alto’s University Avenue to get the first iPads, then their upgrades. Walmart shoppers pushed and shoved to score fifteen-dollar mp3 players on Black Friday, the riotous discount-shopping event on the day after Thanksgiving. Together, Apple and Walmart represent the intense separation of American life into blue and red, rich and poor, overpriced and undersold, hyperconnected and left behind. (China, of course, is the huge beneficiary: Apple’s factories and Walmart’s imports have become staples of the world’s second-largest economy.)

Last week, Bloomberg News reported that Walmart’s sales in the first days of February were abysmal. In internal e-mails that were leaked, one corporate vice-president described the situation as “a total disaster,” while another asked, “Where are all the customers? And where’s their money?”

The executives answered their own question. Their customers’ money—some of it—has gone back to the government, in the form of the two-per-cent increase in payroll taxes that took effect with the new budget deal on New Year’s Day. That deal supposedly allowed the economy to avoid going over the “fiscal cliff,” and its aversion was a source of much relief in Washington and on Wall Street. But there turned out to be, if not a cliff, at least a gulch still embedded in the deal. It’s amazing how little attention the payroll-tax increase got at the time—maybe because so few of the players and observers involved could imagine how much difference fifteen dollars out of the weekly paycheck of someone earning forty thousand dollars a year could make.

It made enough difference to send Walmart’s earnings into a temporary free fall. A payroll-tax cut had been part of President Obama’s stimulus package, renewed once and always intended to be part of a short-term kick-start out of the recession. The Administration and Congress have overestimated the recovery countless times—was the end of the payroll-tax cut one more example? Walmart’s customers needed that fifteen dollars more than most Washington politicians and Apple Store shoppers might have guessed. “The worse, the better” is bad ethics; it also turns out to be bad economics, and, ultimately, bad for business. America’s vast population of working poor can only get so poor before even Walmart is out of reach.