A situation at my day job earlier inspired this post. Just for a minute I’d like to explain to the gentle corporate big-wigs what happens when we try to impose Walmart economics on small service businesses.
First and foremost, we are a Walmart world! We want high quality services and goods for low-low prices. There is a very real concern here and let me see if I can explain it in a way where the math is minimal but the average American can wrap their head around this simple economic truth.
So we all know how businesses stay in business, right? You have a service or good you want to sell, you have a customer who wants to buy your service or good, and if your services or goods are reasonably priced or in high demand, you make the sale and move on to the next customer. You make money. Customer gets their widget. Everyone is happy.
Walmart revolutionized this process by going to the companies that made the goods and said, “We’ll buy a million widgets if you can provide them to us for $X.” People high up in these companies said, “Hmm. We can get you these widgets at this price if we close our plants here in the U.S. and open them in a third world country where the people will work for a lot cheaper than the average American worker!”
YAY! So plants here close, Americans lose their jobs, Walmart gets their widgets, the goods company makes its profit, and the American consumer gets cheap widgets from Walmart (who also makes money). Of course Walmart tends to put other retailers of widgets out of business because other retailers maybe can’t get widgets that cheap and consumers stop buying widgest from them. When that business is no longer in business, Americans don’t have a choice but to shop at Walmart. And since all these businesses are being put out of business, more American jobs are lost, people have to work at Walmart, and as a result can’t afford to shop anywhere but Walmart (or have no place else to shop).
Are you still with me?
Now let’s apply this model to the service industry. Big corporation who was using said service provider loves their service provider. They tell the service provider how much they love them. But then one day the big-wigs at X corporation go to the service provider and say, “We don’t want to pay you what we were paying you anymore. Instead, we’re going to pay you XXX for this service – no more than that – and we’ll give you all of our business. But if you can’t do it for that price, we are finding a different service provider.” Service provider is barely surviving in an economy that is putting a lot of small businesses out of business. Cutting prices means they have to find some way to cut back in operating expense in order to service their customer. Since they can’t sacrifice the safety of their equipment or the legal necessities of doing business, or do anything about the rising fuel and energy costs – the only place they can cut is in employees. The problem there being you can’t pay slave wages here and you can’t outsource to another country.
There two main reasons for not being able to pay slave wages here: 1. It’s illegal. 2. The cost of living in the U.S. requires American workers to at least be able to make a minimum wage in order to survive with the basic necessities (like food, shelter, etc…). That’s why the minimum wage exists.
The next option is to cut all employee benefits if there are any. If this doesn’t work, the company either has to stop servicing the account, which may mean a layoff anyway, or go out of business – which amounts to more jobs lost. Yeah – they could start doing things illegally (which really isn’t an option if you’re a law abiding citizen).
Either way – service is going to suffer. Chances are that particular service business is going to go out of business and more American jobs will be lost anyway.
The problem we have with the economy is this — we rely on consumerism. Who is the consumer? The American working class. If the average working American either doesn’t have a job or is working for minimum wage with prices of everything ever increasing – you run out of consumers. The only thing people will be buying are food, shelter, maybe clothes and maybe medical care (in that order).
Then what happens? Big corporations who rely on people to consume in order to make money whither and die. This also means that rich people get poor because they’ve tapped out their consumer base. If no one’s buying (because we’ve low-low priced them all out of jobs) — no one is making any money.
This concludes today’s basic economics lesson.