In Praise of Inefficiency: Should We Serve the Economy or Should It Serve Us?
It’s become a virtual religion among America’s CEO class: maximize efficiency no matter what it does to customers, communities, or employees - Inefficiency, it turns out, has considerable upsides
Trader Joe’s VP Marketing, Tara Miller, announced on the store’s Inside Trader Joe’s podcast that they will not be installing self-checkout machines in their stores. Good on them.
“The bottom line here is that our people remain our most valued resource,” she said. “While other retailers were cutting staff and adding things like self-checkout, curbside pickup, and outsourcing delivery options, we were hiring more crew, and we continue to do that.”
In not using everything available to them to increase efficiency, Trader Joe’s is very much the outlier in America. That’s because — unless regulated — capitalism will almost always push for maximum efficiency because that’s the fastest way to maximize profits.
It’s become a virtual religion among America’s CEO class: maximize efficiency no matter what it does to customers, communities, or employees.
The result has been an explosion of efficiency across the corporate spectrum, leading to monopoly, oligopoly, price-gouging, a crippled small-business sector, staggering profits, devastated downtowns, and even driving today’s inflation.
Efficiency, taken to extremes, can be destructive to both consumers and communities.
Think about it. If there are forty different retail stores in your small town selling a whole variety of things from groceries to books to clothing to hardware, every one of them has to do their own bookkeeping, their own banking, their own inventory and store management, their own staffing and HR.
It’s inefficient, but it keeps communities alive and filled with vitality.
When you buy a book from the local bookstore they deposit those funds in the local bank, which then loans them out as mortgages for local people wanting to buy a house. The bookstore uses their revenues to pay rent to a local landlord and to pay well their local employees, who then spend that money in the locally owned clothing and grocery stores. They, in turn, pay their employees who go on to patronize other stores in town.
It’s a virtuous circle. Money spent in a local economy like this can take months or even years to leave the community, enriching it in multiple ways as it continues to re-circulate from business to business, hand to hand.
It’s how America’s small towns and communities grew so prosperous between 1900 and 1980. It’s why Reagan’s 1983 decision to kill off local economies and family-owned businesses in favor of giant national corporations has impoverished so much of small-town America today.
A single Walmart, for example, can consolidate all of those 40 stores’ operations and HR functions under one roof. It’s far more efficient, which means it can both undercut the prices of the locals and make a larger profit for the investor class.
And it will wipe out those 40 small retailers in short order, leaving your small town depending on a single major employer, a single source for everything people want and need, and killing off the entire downtown.
Worse, every night when the Walmart closes, a store manager will push a button and every penny spent at the store throughout the day will instantly transfer to corporate headquarters in Bentonville, Arkansas. No more local funds for local entrepreneurs to start small businesses or homeowners to buy homes.
All to add to the money bins of the morbidly rich heirs of Sam Walton and fund the politicians they’ll buy to fight local tax increases (to make up for the lost revenue from all those empty stores downtown) and, federally, to fund politicians who will defeat anti-monopoly efforts in Congress.
Once a single company or small group of companies represent the largest share of local revenue to a town, they can then use that economic power to further extract cash from the town by doing things like challenging their property taxes.
That’s what’s happening right now in Houghton, a little town of around 8,000 residents in Michigan’s Upper Peninsula. In 2004, according to reporting from Channel 6 News there, when Walmart wanted to expand, the city gave them everything they wanted:
“The city transferred the property to Walmart, created a public roadway, funded the relocation of utilities, and agreed to wetland mitigation work to help accommodate the expansion. In return, Walmart agreed to increase the taxable property value to $4,780,000, which allowed the city to justify these infrastructure investments.”
Now Walmart’s lawyers have come to town to demand that the bustling store pay much lower property taxes, at the same rate as the largely dead “dark stores” in downtown business districts and strip malls it has destroyed:
“The City of Houghton … is facing a potentially devastating property tax appeal by Walmart as the company uses a legal strategy called the ‘dark store theory’ to reduce its tax burden.”
The city notes they’re fighting a company worth a half-trillion dollars owned in large part by “the wealthiest family on the planet.”
“According to the city, the global company seeks a lowered valuation on its local store, spurring a six-year retroactive $1.2 million refund and a reduction in future property taxes. … If Walmart wins the case, it will dramatically reduce future budgets to local K-12 schools, veterans’ services, county medical care facilities, the local library and the City of Houghton.”
Houghton has become an American sacrifice zone, another town thrown on the pyre of profits and efficiency regardless of the costs to anybody except the corporation itself and its owners.
But it’s not just towns and cities being ravaged by this bizarre neoliberal economic and political religion that Reagan put into law and policy back in 1983.
Because American business is so efficient, every American family pays $5000 a year, on average, more than Canadian or European families do for almost everything from cell phone and internet service to airfare and drugs.
In France, for example, high-speed broadband internet service can run as little as $15 a month and bundles — for example, 2 cell phones with 2 different numbers, free unlimited international calling, no cellphone internet data caps, unlimited high-speed broadband into your home, and hundreds of cable TV channels — are as little as $90 a month.
France enforces their anti-monopoly laws. That’s not happening here, however, because back in 1983 President Reagan directed the Federal Trade Commission, the Securities and Exchange Commission, and the Department of Justice to stop enforcing American anti-monopoly laws that dated all the way back to the 1880s.
Mergers and acquisitions (“M&A”) specialist banks on Wall Street worked with large corporations to buy up their medium-sized competitors, often by hostile takeover, radically shrinking the number of small- and medium-sized companies in America. It was the story of the Michael Douglas’ “Greed is good!” movie Wall Street.
At first it seemed like a consumer bonanza: prices were falling all over the place through the late 1980s. Giant national chains competed with small locally-owned stores on America’s Main Streets and malls. They initially offered lower prices — made possible by their increased efficiency — which local people loved.
Until they discovered those very scales of efficiency - only achievable by national buying power — drove their smaller, locally-owned competitors out of business. Small town America began to die.
Within two decades, around the turn of the century, we’d reached what I call the cancer stage of capitalism. Like a metastasis, giant companies drained nearly all the life force out of communities across the country and used it to fill the money bins of their CEOs and largest investors.
— Through the carrot-and-stick of campaign contributions and the threat to leave town, they now corrupt and even take over local politics to get themselves lower property taxes and taxpayer-funded subsidies to the tune of over $100 billion a year.
— Without local competition, they now charge whatever the market will bear, leading to that $5000 annual “monopoly tax” we all pay in higher prices because we live in Reagan’s America. Profits among America’s largest corporations soared so much in the past two years, unconstrained by competition, that they account for an estimated 60% of our problematic inflation.
— They also replaced quality merchandise with junk made by slave laborers overseas, forcing customers to regularly replace everything from toasters to washing machines to furniture that once lasted years or even decades. Cheap, it turns out, can be very expensive in the long run.
— Reagan’s changes to the enforcement of our antitrust laws are also why hospitals are marking up sutures 675% along with pretty much anything else they want to price-gouge you on: the local, community-owned hospital is dead and it’s almost all giant chains now.
Every consequential industry in America, in fact, is now dominated by 3-5 companies that act as a cartel or oligopoly with the explicit goal of minimizing competition and maximizing profits.
When one airline or cell phone company or internet service provider raises prices $10, every other one does the same within minutes, as I document in detail in The Hidden History of Monopolies: How Big Business Destroyed the American Dream (foreword by Ralph Nader).
This was a crime in America before Reagan. CEOs trying to rip off American communities would’ve gone to prison before Reagan.
Prior to Reagan’s 1983 rule-changes, anti-trust laws were so vigorously enforced that in the 1962 antitrust case of Brown Shoe Co. v United States, the Supreme Court blocked the merger of Brown and GR Kinney, two shoe manufacturers, because the combination of the two together would have captured 5 percent of the US shoe market. (For comparison, Nike today has 18 percent of the US shoe market.)
At some point we must all ask ourselves the question: what is our economy for? After all, economies — both local and national — are the creations of government.
Governments create the rules of the economy, just like the NFL creates the rules of football. Governments provide the stable currency and legal system that allow that economy to run, and they do it by enforcing laws and instituting policies.
So government is where the choice is made: is the economy they created here to serve the people, or are the people here to serve the wealthiest and most powerful who have the greatest control over the economy?
Prior to the Reagan administration, all the way back to 1929, the American consensus was that the economy is here to serve us.
There was a top 91% income tax bracket to prevent the growth of obscene levels of wealth and maintain a strong middle-class. Anti-trust laws kept small businesses and local economies strong and vibrant while still allowing large corporations like Sears and General Motors to operate within reasonable boundaries.
Since the Reagan administration, however, we have re-organized our economy so that We The People serve the economy and its owners, rather than them serving us in exchange for our hard-earned dollars.
We’re now experiencing America’s second great brush with monopoly and oligopoly. The first was during the late Industrial Revolution, when, in his 1888 State of the Union address, Democratic President Grover Cleveland pointed out:
“We view with pride and satisfaction this bright picture of our country’s growth and prosperity, while only a closer scrutiny develops a somber shading. …
“We discover that the fortunes realized by our manufacturers are no longer solely the reward of sturdy industry and enlightened foresight, but that they … are largely built upon undue exactions from the masses of our people. The gulf between employers and the employed is constantly widening, and classes are rapidly forming, one comprising the very rich and powerful, while in another are found the toiling poor.”
And what was causing this crisis for America’s 19th century working-class families? President Cleveland laid it out with a surprisingly blunt vehemence in the next sentence:
“As we view the achievements of aggregated capital, we discover the existence of trusts, combinations, and monopolies, while the citizen is struggling far in the rear or is trampled to death beneath an iron heel. Corporations, which should be the carefully restrained creatures of the law and the servants of the people, are fast becoming the people's masters.”
The people — and Congress — were listening. America was outraged at the way corporations and the morbidly rich were behaving, and President Cleveland gave voice to their anger. A mere two years later the Sherman Anti-Trust Act of 1890 was passed, criminalizing monopolies (called “trusts” back then).
The law opens with:
“Every contract, combination in the form of trust or other-wise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal.
“Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, at the discretion of the court.”
A short two decades later progressive Republican presidents Teddy Roosevelt and William Howard Taft were using that same law to break Rockefeller’s Standard Oil Trust into almost 30 pieces.
While Reagan abandoned enforcement of the 1890 Sherman Act (and its successors, including the 1914 Clayton Act and the 1976 Hart-Scott-Rodino Antitrust Improvements Act), most other developed countries around the world continue to protect their towns and consumers by defending the small and medium sized companies that make them vital.
Up until about two decades ago, India even had a law on the books making it illegal for a single corporation or family to own more than two of any kind of retail store or over a certain threshold of farmland in the country.
Walmart and Monsanto, among others, came in with piles of cash to get that law changed. Now small businessmen and farmers in India routinely commit suicide as they’re pushed into indigence by giant transnational corporations.
Trader Joe’s, in rejecting at least one aspect of efficiency in favor of humanity and local employment, has taken a great step forward. It’s an example for all.
Now we need to reverse Reagan’s policies and, like Richard Nixon did when he initiated the breakup of AT&T in 1974, start forcing the monopolies and oligopolies that have seized control of America’s retail and other sectors to break themselves up into smaller companies to allow for competition.
We need to reset our economy so it serves We The People, rather than just the morbidly rich and their massive corporations.
For those concerned about their 401Ks invested in these giant companies, a share of AT&T stock before the breakup grew substantially in value when it became seven shares of stock in the six “Baby Bells” and Bell Labs/Lucent Technologies. And it led to an explosion of telcom innovation.
Inefficiency, it turns out, has considerable upsides. Only the morbidly rich lose out when nations return to slightly inefficient but fully competitive marketplaces.
Here in the United Kingdom, more and more places are ripping out cashier tills in favour of self-service channels.
One local supermarket here is mostly self-service with their queuing system. It looks like an airport check-in hall.
The bogus "Maximum Efficiency" doctrine also wears down and exploits the employees of these stores and corporations as well. When my wife-partner and I were doing stress management training in corporate settings we saw this process in action, particularly in the late 1990's. All of this "Mckensian efficiency" scam was predicated on creating increases in productivity. For any business the largest fixed cost is employee compensation--wages, benefits etc. Increases in productivity meant that companies could do more with less, i.e. fewer employees. So for instance, a work unit of 10 produces 100 widgets a day. But then there is a "downsizing" and five of the 10 employees are fired. But the remaining five employees are still required to produce 100 widgets a day. Presto! A quantum leap in productivity. That worked so well for the bottom line that the next step was a "Right Sizing" which required the five remaining employees to produce 120 widgets a day. Another increase in productivity. As a result of this great leap forward, employees' elevated stress levels increased and they started breaking down with health problems. The older ones in their 40s and 50s of course, were more vulnerable. The employee attrition began increasing. But new younger fresh-out of college twenty-somethings were hired, at lower wages of course--another productivity increase-- and the beat went on. Gradually, our stress management programs were eventually ended despite our reports to management pointing out that the increase in productivity was damaging the workers producing this vaunted productivity. Management's response? Ho Hum.