The Wal-Mart Dilemma, the Two-Income Trap and the End of Oil

Posted on June 12, 2008 by Dave Pollard
wal-mart dilemmaI‘ve written before about the Wal-Mart Dilemma: Less disposable real income for workers forces suppliers to lower prices and quality by offshoring production and service and laying off domestic workers, so they have even less disposable income. It’s a classic vicious cycle.

Its consequences — unemployment, underemployment, low wages, low product quality, and endemic poverty — are visible everywhere in North America, and the disease is spreading. The solution — duties on imported goods and services that can reasonably be produced locally — is enough to make globalists and ‘free’ traders foam at the mouth, and they have invested heavily in politicians to make sure it doesn’t happen.

With the advent of $130/bbl oil and $4/gal gasoline ($5-6/gal in Canada and Australia, $8-9/gal in Europe, $3/gal in China) the Wal-Mart Dilemma is starting to be felt in many products that are made of or dependent on oil, such as:

  • food
  • transportation
  • heating and air conditioning
  • health products
  • clothing
  • road and energy infrastructure

What will the average citizen do when these goods become unaffordable? Here’s my take on how the Wal-Mart Dilemma will play out:

  1. We will eat less healthy foods. The cheapest foods are the processed, canned goods made from leftover food products, the stuff that would never sell if presented in its natural state on the shelves. Sugar, corn and soybeans are still very cheap, despite their appeal as bio-fuels. Because we’re mostly (thanks to the Wal-Mart Dilemma and the Two-Income Trap) underpaid, overworked, two-income families, there is no time or energy to prepare healthy meals from scratch, so we’ll continue to patronize take-out junk food places, but buy more of the cheaper, less nutritious items on their menus.
  2. We will buy very cheap ‘second cars’. Two jobs means two cars are needed by most of our suburban sprawl families, but despite the jump in gasoline prices, only 20% of the cost of car ownership is fuel. Rather than going to unaffordable hybrids and diesel vehicles, we will buy new Chinese and Indian-made $2500 ‘junk cars’ as their second vehicles, letting them keep the luxury of one gas-gulping SUV (for the illusion of safety), while keeping the overall cost of car ownership at 1990s levels even with $7/gal gasoline. “Your turn to take the Tata to work, dear!”
  3. We will use space heaters and room air conditioners (made guess where?) instead of central ones. With ever-larger homes to heat and cool, there will be no money for re-fits, so we will close off unused rooms and condition smaller areas (as much as possible given the laws of thermodynamics) to the temperature we’ve become accustomed to.
  4. We will use alternative remedies instead of prescription drugs. 
  5. We will buy no-name clothing (made guess where?) and put fake brand names on it. The kids will never know. In fact, they’ll show us how.
  6. We will start simultaneously importing and selling (and leasing back) our infrastructure. The Alberta Tar Sands equipment and labour pool is the latest model for this. Huge amounts of equipment are brought in because it’s too expensive to build it here. Cheap labourers build it in China, and other cheap labourers are imported to install and operate it. In return, China gets to own part of the project. US agriculture pioneered this model, and ‘seasonal labourers’ (many of whom will stay on under the radar, doing other work for under minimum wage in jobs and conditions we wouldn’t accept) will become the way in which more and more domestic infrastructure is established and maintained.

This is the Wal-Mart Dilemma turned into an entire self-defeating economy, and the vicious cycle of unemployment, underemployment, low wages, low product quality, and endemic poverty will become our way of life. It’s a consequence of (a) the structure of our dysfunctional economy and (b) human nature — to work around ‘problems’ with the minimum possible change to our lifestyle, rather than making long-term, sensible but difficult fundamental changes — like buying (and making) only expensive hybrids, revamping public transit, making our homes energy-efficient, buying durable, local, sustainable goods and “eating food, not too much, mostly plants“. We will, instead, become third-world nations.

There are those that think $7/gal gasoline is just what we need, that it will bring about needed economic reforms and changes in behaviour. They justaren’t paying attention.
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14 Responses to The Wal-Mart Dilemma, the Two-Income Trap and the End of Oil

  1. Paul says:
    June 13, 2008 at 01:58

    “The solution — duties on imported goods and services that can reasonably be produced locally …” Are duties really the answer? If fuel prices rise significantly, won’t they provide just as much incentive to avoid imports and emphasize local products?Anyway, I think that “unemployment, underemployment, low wages, low product quality, and endemic poverty” will be products of capitalism even with less global trade. A system built on alienation in multiple forms, where the engine of production depends on increasing opportunities for profit, is not going to stably serve what we might call human interests, or the welfare of the planet.

  2. Stephen Hinton says:
    June 13, 2008 at 04:03

    just chatting on Second Life yesterday an acquaintance from the US said that she is already eating canned and frozen food as fresh food is too expensive given the rise of gasoline prices and food in general. For a treat she had fresh chicken the other day. What a life! And she has a full time job! It looks to me as if this is all going faster than we could imagine.Actually, there is a need for real innovation in how taxes are set up. Instead of imposing import restrictions, why not just reduce the corporate tax burden on a sliding scale depending on how many citizens you employ? I reckon you could waive sales tax and tax on profits for corporations and small companies that had one employee or more per $100,000 in annual turnover.

  3. mattbg says:
    June 13, 2008 at 08:42

    #3 is interesting, because that’s precisely how people used to live before “central” everything. You’d spend cold evenings huddled near the fire, singing and telling stories, because you had no quality light to read or do other solitary things, and everywhere else in the house was too cold to do anything inactive.One of the worst things about the Walmart effect, I think, is that, by putting the pressure on suppliers to keep prices low, they also reduce the pressure that employees place on their own employers to increase wages because Walmart keeps things affordable (not only in their own stores, but in the stores of those that are forced to compete). So, a big gap forms behind the scenes between the amount of income required to live under the pre-Walmart system and the post-Walmart system. And it’s fine as long as the Walmart model is viable and prices are kept low, but when that model is no longer viable and there is rapid inflation as a result, I think that gap that has been invisibly forming will become apparent quite quickly.Walmart is a smart company, and I don’t completely dismiss the idea that they’ll be able to adapt. But their current system that is heavily dependent on foreign goods, trucking from faraway distribution centres, and modile warehouses that are constantly on the road will have to change, I think. In Canada, I worry about their intrusion into the grocery business. The packaged, processed rubbish that supermarkets depend on for their profits is that type of stuff that Walmart has expertise in selling and strongarming from its suppliers. The less profitable fresh fruit, veg, and meat that supermarkets excel at can presumably be attacked by Walmart by taking the profit out of the supermarkets’ profitable merchandise.I still don’t agree with you that the canned stuff is cheaper. It requires less effort and knowledge to serve on the table, but fresh produce is very cheap. There will be less inflation in processed food products because of thethings you mention — a box of Corn Flakes, for example, probably only has 5-10 cents worth of corn but costs $3 for a box. But canned fruits and vegetables don’t seem cheaper than fresh or frozen to me.Maybe I am wrong, but I don’t think so. The canned stuff is perhaps more profitable because it can sit on the shelf for longer and less goes bad and is thrown away, but it’s not that cheap when you measure the amount of food you’re getting. A 250g bag of potato chips that sells for $2 is far more expensive than 250g of fresh potatoes. How many cans of corn in a bag of frozen corn? When in season, even fresh corn is competitive, I think. But it requires knowledge and skill — even if trivial — to prepare, whereas the can or bag can be opened and served. Frozen may even be better for you because it’s picked and peak and frozen shortly thereafter, whereas the fresh stuff may have been bred for long shelf life and will have deteriorated somewhat, regardless, by the time it’s consumed.And, compare somehing like a can of chick peas to the equivalent amount you get from buying the dried ones and cooking them yourself. The latter requires a bit of skill and effort, but it’s not difficult. It’s cheaper, too, and you don’t get the salt, preservatives and firming additives that you do from the cans.

  4. mattbg says:
    June 13, 2008 at 09:00

    “If fuel prices rise significantly, won’t they provide just as much incentive to avoid imports and emphasize local products?”Paul, I think fuel prices may have to increase substantially before that will happen universally and naturally. When you are making things in China, you are weighing the lower cost of labour in China against the additional cost of fuel. Fuel is still very cheap, especially when the cost is spread across thousands of units of consumption, but the labour cost gap is huge. In China, the labour costs will go up, and fuel prices are obviously going up, but consider that, in China, many products are still made by hand rather than by machine where it’s not detrimental to quality to do so, simply because labour is so cheap — in some cases, cheaper than investing in the machinery to have it done automatically. China still has the option of automating their production when labour costs reach that threshold, and that will drive the cost of labour down as fewer jobs are required to produce the same result. So, I think we still have a way to go before fuel costs neutralize the labour costs.Some offshore industries will fall before others — steel, perhaps, which relies on long-distance shipment of large, heavy things that are cheap by cost per unit of weight.Remember, too, that manufacturing brings with it pollution and greenhouse gas emissions. The US and Canada couldn’t meet their Kyoto targets even when they’d been shifting a lot of their dirty industries offshore!And then you have other advantages of going offshore: those countries allow their industries to pollute a whole lot more than we do, so the costs of environmental compliance are a lot lower. There are fewer restrictions on bribing, and in some countries it’s expected. And there are fewer human rights, so the benefits, safety, and quality of facilities can probably afford to be lower.Do you want to compete with that to bring jobs onshore? China will gradually improve these things, and costs will go up accordingly. But they aren’t stupid. As long as their environment doesn’t collapse (it may), they will be monitoring the above things to ensure that their economy maintains competitiveness and that they keep the things they want to keep. The dirtiest things will shift to other countries further down the totem pole with even cheaper labour and costs of doing business as China’s expertise improves and they start to do a bit more cherry picking regarding what they want to be involved in. And because of their style of government, they have far more control over their economy and industry than do the Western countries.

  5. mattbg says:
    June 13, 2008 at 09:14

    A couple of other things… after becoming far too common and losing its value as a status symbol, the SUV may return to being a symbol of status: as fewer and fewer people can afford to operate them, the last men standing will be able to show off once again.Michael Pollan’s book was good, but I read it after reading “Real Food” by Nina Planck, and I found the latter to be a better book with the same themes, but more detail.Finally, I would not want to buy a second-hand car that had been operated during times like these. I think a lot of people will forego maintenance in order to keep their cars running.

  6. Anonymous says:
    June 13, 2008 at 12:09

    There are so many naieve conclusions in this post it is difficult to know where to begin. At best the article betrays a weak mind, at worst a subtle racism and bias against peoples in countries that want to work. So I took the most outrageous, over broad statement in the post (and there were many to pick from):”the vicious cycle of unemployment, underemployment, low wages, low product quality, and endemic poverty will become our way of life.” Not only is the poster naive, he is deeply ignorant. US employment is very low, especially relative to other countries. Let’s see, why is it that foreigners want to come to the states? Easy employment is a high priority.Low product quality is just stupid — for every example of low quality I could show examples of improvements in quality relative to price (e.g. toyota vehicles) — if the author had his way we’d be driving 1970-circa cars from GM and Ford … but the reality is that imports have been of such high high quality relative to the US that they’ve put the two automakers in dire straits. It must be a wondrous world the poster lives in to go to WalMart, be offended by the people shopping there, then make broad generalizations that are short-sighted and just plain wrong. I wish I could be so naive to the world — I’d be much happier and idealistic.

  7. Anonymous says:
    June 13, 2008 at 16:02

    The author wears his lack of education as a badge on honer in his immodestly written bio, and he touts as one of his greatest abilities as that of imagination. Gimme a break. It must be easy to imagine things without restraints such as reality. And lack of education makes it even more fun to do mental models in economics.From today’s Wall Street Journal front page: “Stung by Soaring Transport Costs, Factories Bring Jobs Home Again.” Looks like Mr. Pollard will have to do a some revisionist history on his post.

  8. Barbara Rubin says:
    June 13, 2008 at 18:38

    “From today’s Wall Street Journal front page: “Stung by Soaring Transport Costs, Factories Bring Jobs Home Again.” Looks like Mr. Pollard will have to do a some revisionist history on his post. “Uhm, No.Dave has it correctly, as I see from my bird’s eye view of the U.S. as it slid from prosperity to the depths of greed which is destroying that which it preyed upon.What do you think will happen when those jobs are brought home? Workers will be offered part time jobs so no benefits need be given with wages vying for a place along a third world scale (given costs of living here); the US taxpayer will then provide the ‘benefits’ that should go with the efforts expended by respectable laborers who used to be able to actually support themselves after putting in a 40 to 60 hour week. Now they still have to apply for housing subsidies, food stamps, substandard medical care offered to the poor, awful day care etc.Corporations will claim poverty due to rising oil yet still show rising profits. They are depriving their own consumers of a wage permitting them to purchase the good they have made! A large number have short working careers due to unhealthy conditions and the fact that employers would rather replace ill senior workers to hire cheaper and younger labor. No one is thinking about the day AFTER tomorrow on the Boards of Directors.CEOs have betrayed the concepts of capitalism. They now assume they will enjoy a sufficient quantity of sales because of over- population and the loss of competition. The latter is attained through devious trade associations which decide for consumers what will be made available for them to buy. Many lines of equally poor products so no one stands out in the pack. By squeezing their suppliers, they are reducing the availability of quality materials to use in their own products. So many suppliers go out of business these days as their profits shrink, that more mega suppliers are created. Then everyone overlooks how badly they are run so supply doesn’t shrivel to nothing. OSHA, the EPA, NIOSH etc – no protection for the labor force.In general, bad business practices are merely creating an ever increasing class of ‘the consumed’.Barb Rubin

  9. mattbg says:
    June 13, 2008 at 20:38

    Barb, I agree with you. I’d also add that, with rapidly expanding economies in Asia, maybe these CEOs are not as dependent on a healthy US economy as they used to be.

  10. Anonymous says:
    June 13, 2008 at 20:55

    Barb wrote: “the U.S. as it slid from prosperity to the depths of greed which is destroying that which it preyed upon”I’m not trying to be rude, but I’ve read this several times and it just makes no sense.Regarding the argument that, well, even if the jobs are coming back, they will be poor paying, and the “cycle” continues… this is the “forever poor” argument. It just isn’t so. The poor in the US move on up, just like the Jeffersons. They get cars, they get TVs, they get washers and dryers, in most states (like mine (MN) they get healthcare). The fact is there will always be those that make a lot, and those that make a little. The best we can do is support a system for those that make a little to move on up, if they want to put in the work. And, by golly, this is what you can do in America. Barb wrote: The latter is attained through devious trade associations which decide for consumers what will be made available for them to buy. Many lines of equally poor products so no one stands out in the pack.Mind you, this prophecy is exactly what Mr. Pollard is predicting when he limits consumers’ choice to only domestically produced goods. As I mentioned earlier, his way is we all drive 1970s GMs and Fords. Quite short-sighted. Do not discount the ability of the individual consumer to dictate quality versus price (the eternal tradeoff). If there was a value to higher quality, the consumer will weigh this value and vote with his dollar. The simple-minded answer is trade protections. To the extent trade associations limit consumer choice, I agree with you they are harmful. It’s all about consumer choice, you see, and Mr. Pollard’s ill-conceived policies would be disastrous to consumer choice.If you’re really all about driving DOWN quality, and reducing consumer choice (an inherent theme on Mr. Pollard’s website), a great way is to support your local union. Both reduced quality and limited consumer choice are well-documented side effects of unions.

  11. Emilio Osorio says:
    June 14, 2008 at 11:41

    Hi,Just reading your “predictions” on how would this change your way of life. Kind of funny, because down here in mexico, but I can say in most of the world, THAT is our way of living. Maybe you are finally just experiencing in your own land what the big capitals have already done everywhere else.. Sad but true.. On the other side, happiness IS achievable with out central heating. Hapinnes is inside not outside.Abrazos,Emilio

  12. Barbara Rubin says:
    June 14, 2008 at 22:04

    Emilio wrote:”On the other side, happiness IS achievable with out central heating.”Not here in New England where temperatures reach twenty below zero on some winter nights. Hard to be happy when you have just morphed into a popsicle! Material things do matter. But fuels were meant to be used in essential ways, not to waste on Barbie Dolls. I agree that consumerism has gotten out of control as a substitute for dealing with life.I am not going to reply to anonymous postings because the contents are more argumentative than substantive. However, I will say(regarding unions), that my grandparents worked in sweatshops as children and it is only due to unions that they did better as adults. It was only due to unions eradicating child labor that many children were able to go to school at all, instead of following in their parents’ impoverished footsteps. Mandatory education became enforceable since children were essentially unemployable during school hours. Remember that just as consumers have few choices in products these days because corporations have lowered standards in manufacturing for all product grades, people have few options today to stand up for bad pay or working conditions unless the unions regain lost power. If all employees (regardless of citizen status) made the same money for the same labor, there would be no reason to play games with part-timers and underqualified candidates. Labor is worth what it effectively produces, regardless of who provides the labor.Labor and materials have to be assessed a value rather than have it arbitrarily assigned based on how many starving people are waiting to be employed at any wage.Barbara

  13. mattbg says:
    June 15, 2008 at 12:04

    Barbara, re: “Not here in New England where temperatures reach twenty below zero on some winter nights.”I think the key word was “CENTRAL” (in “CENTRAL heating”). Of course you need heating, but do you need CENTRAL heating — heating rooms that are not occupied just for the sake of having the room warm in case you just happen to want to wander in there some time.What about a heated living room with an electric blanket for bed? Or something like that…

  14. Barbara Rubin says:
    June 15, 2008 at 16:20

    Central heating with multiple zones is most efficient in cold climates. Pipes burst easily and mold forms in damp corners so some amount of heat is needed throughout spaces while maintaining humidity at around 45%.Heating and cooling is a major issue for preservation of living spaces and health. Many homes and lives/careers are lost to poor building management. It is not a simple science and many people have purchased very badly built homes at exhorbitant prices. They look flashy and emit huge amounts of formaldehyde and other VOCs. The ‘glitter’ doesn’t last more than a couple of years (with bad indoor air quality that is measureable) and the first heavy rain/snow begins the process of degradation. This is a significant issue in the mortgage crisis, with houses nowhere near worth the original purchase price. Filtration of particulates is vital when dealing with burning fuels of any kind. Smoke from wood burning is a major cause of mortality in the third world and a large contributor to respiratory problems in all sectors here. The technology can be improved so that sustainable and affordable heating is possible. But we aren’t there yet since there was more money to be had ‘elsewhere’.Hey, I’ve heated bricks to put on the floor of my car when the heater went! Don’t knock some of the old ways :-)

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