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Home > Social Issues
How a Regional Economy Works
by Bob Powell, 8/24/06
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The links below are to a paper on "How a Regional Economy Works, Economic Development Strategies, and the Economic Threat from ‘Free Trade’"

The purpose of this short paper is to illustrate how an economy works, from a regional economy within the U.S. to the U.S. economy as a whole. Then “how it works” is linked to the U.S. trade deficit and its associated threat to the U.S. economy.

The threat is serious; the U.S. faces economic collapse within a 2 – 3 years. A dramatic statement, yes, but it's not an exaggeration. It's no joke.

Note 4/24/16: OK, I was wrong. I completely underestimated the ability of the U.S. government and the Federal Reserve to prop up the economy. The continuing wars and deficit spending have helped but now the economic "conservatives" who were in charge of deficit spending for unpaid-for wars, Medicare Part D, tax cuts for the wealthy and bank bailouts are complaining about the growing debt they created. The Federal Reserve lowered interest rates after the collapse of the dot-com bubble to create a housing bubble that also collapsed in 2008 (see The Big Short). Now the banks are bigger than ever and another collapse is inevitable (see Michael Burry, Real-Life Market Genius From The Big Short, Thinks Another Financial Crisis Is Looming).

This paper uses a diagram that portrays a model of “How Does the Colorado Springs Area Economy Work” from a 2003 Economic Development Corporation presentation. Rocky Scott, then president of the Colorado Springs EDC, regularly included this slide in his PowerPoint presentations to educate his audience on the importance of the EDC’s emphasis on attracting what are known as “primary” employers.

Note 4/24/16. For an update and an enhanced model, see Economic Development: What to do locally? 5/29/09

Word doc 228K, Adobe pdf 210K
Click on the links to open the file in your browser. Right Click on the links for download options.
The Word document contains active links to other documents. To find them directly, here are the links:

Urban Embers, a Colorado Springs Online Business Directory start-up promoting local business connections that recently presented to the Peak Venture Group

The national 5-year infrastructure backlog is $1.6 trillion (ASCE). Also, see the August 23, 2006 New York Times article Things Fall Apart: Fixing Americas Crumbling Infrastructure By NICHOLAS KULISH (also posted at America's Crumbling Infrastructure).

Over a period of 14 years, U.S. “trade” in Advanced Technology Products went from a $40B surplus to an over $40B deficit. (ATP trade data link … one has to go into 15 different files to get the data for each of the 15 years ...)

Warren Buffett’s October 2003 Fortune Magazine article
The Trade Deficit and the Fallacy of Composition
A Systems Thinking Perspective on Manufacturing & Trade Policy
There's no 'free market' for Labor

In working on this, I realized that Wal-Marts are the polar opposite of what economic development organizations usually try to attract.  The focus is typically on attracting "primary employers" and should also be on attracting companies that spend locally to increase the circulation of funds in the community and the economic multiplier. Yet many cities and economic development organizations not only do not oppose them, they actively attract them. This has an enormous negative impact on the community.

Here is a link to an article on Ten Reasons Why the Wal-Mart Pundits Are Wrong by JOHN CAVANAGH & SARAH ANDERSON. Here are the myths this article debunks. The comment above adds to #10.

Ten Reasons Why the Wal-Mart Pundits Are Wrong by JOHN CAVANAGH & SARAH ANDERSON. 
[posted online on September 29, 2006]

On September 11, Chicago Mayor Richard Daley used his veto power for the first time in seventeen years to block a measure that would have given Wal-Mart employees and workers at other "big box" stores at least $10 per hour plus benefits worth at least $3 per hour. The City Council had passed the bill by a 35-to-14 vote margin. Daley's brash act was a temporary victory for the chorus of conservative pundits and corporate flacks who have been singing Wal-Mart's virtues for the past year. Here's what they claim and why they are wrong:

1. Wal-Mart's low prices save American consumers $263 billion a year (cited by syndicated columnists Robert Samuelson, Sebastian Mallaby, John Tierney and George Will):

The Economic Policy Institute has ripped apart the methodology Wal-Mart's consultants used to come up with this most popular claim of the Wal-Mart pundits. The consultants based their finding on an analysis of the effect of Wal-Mart expansion in a locality on overall consumer prices in that area. The problem, as EPI points out, is that 60 percent of the consumer price index is made up of services like transportation and housing that Wal-Mart doesn't provide. Therefore, the $263 billion figure is wildly exaggerated.

Even Wal-Mart's recent announcement that it will sell generic drugs for $4 is mostly hype. According to the New York Times, the plan will only cover about 124 medicines (out of 11,000 generics on the market), and Wal-Mart was careful not to include relatively expensive but widely used drugs like the high-cholesterol treatment Zocor. In her forthcoming book Big-Box Swindle, Stacy Mitchell cites surveys in several states that have found it was independent pharmacies--not Wal-Mart--that had the lowest average prices on drugs.

While Wal-Mart's consumer benefits are clearly overrated, it's hard to dispute that the company sells a lot of cheap stuff. The question, then, is at what price? Slavery kept cotton prices low in the United States for centuries and saved consumers countless dollars. But it was wrong. Likewise, Wal-Mart's strategy of keeping costs down by exploiting sweatshop suppliers abroad while undermining unions and paying less than living wages in this country should be deemed unacceptable in the twenty-first century.

2. If Wal-Mart increases wages, it will have to increase prices (various pundits):

Wal-Mart knows, despite all the bluster to the contrary, that there is ample space in its profits ($11.2 billion in 2005) to increase wages without raising prices. According to the Economic Policy Institute, Wal-Mart could have raised the wages and benefits of each worker by more than $2,000 last year without raising prices--while still maintaining a profit margin substantially higher than Costco's. A key competitor, Costco pays its workers an average of $17 an hour. Wal-Mart claims it pays its full-time employees $10.11 per hour but refuses to reveal average pay for its part-time workers.

3. "When Wal-Mart opened a store in Glendale, Ariz., last year, it received 8,000 applications for 525 jobs, suggesting that not everyone believes the pay and benefits are unattractive" (Sebastian Mallaby):

In a global economy whose rules are rigged in favor of highly mobile global corporations, US workers have precious few choices in the job market. The country has hemorrhaged 3.4 million manufacturing jobs since 1998. Of the ten occupations projected to have the largest growth in coming years, five (retail sales, cashiers, food preparation, janitors and waiters) have median pay that is below the poverty line for a family of four. And even in this job market, more than half of Wal-Mart workers turn over every year, according to the group American Rights at Work.

[... an even more graphic illustration in Chicago of this point, which primarily indicates the vast understatement of real unemployment in the U.S. is: 25 thousand apply for 325 jobs at a new Wal-Mart ... another link to this article or google: "325 jobs" Wal-Mart or see full article below].

4. If cities raise minimum wages, Wal-Mart and other big-box stores will go elsewhere:

This was Wal-Mart's top argument against the Chicago bill. In some instances, Wal-Mart has cut and run to escape pesky unions or regulations. In Quebec, where labor laws are stronger than in the United States, Wal-Mart closed down one store after workers dared to vote in a union, and the company has fought in the courts (albeit so far unsuccessfully) against unionization of a second store. In Germany, Wal-Mart withdrew completely, mostly because of low profits, but the firm had also chafed under the country's stringent labor and environmental regulations. And yet Wal-Mart has also demonstrated that it will bend when it deems the benefits outweigh the bottom line. For example, when British distribution center workers at Wal-Mart's Asda chain threatened to strike this spring, Wal-Mart chose not to bolt but to grant large concessions. Asda makes up 10 percent of the company's global sales.

In the United States, Wal-Mart has virtually saturated rural America. Thus, its future profits depend in good part on breaking into US urban markets. The only question is what standards will the world's largest retailer be asked to meet?

5. "Wal-Mart's health benefits are about as generous as those of comparable employers" (Sebastian Mallaby):

"Wal-mart doesn't pay high wages and benefits mainly because it's in an industry (retailing) where those are rare," notes economist Robert Samuelson. And Wal-Mart isn't the only employer with crummy wages and benefits. Pressure to compete with the Wal-Mart goliath makes it hard for everyone else to gain better wages and benefits. That was one of the tough lessons learned by the California grocery employees during the failed strike of 2003-04.

6. "Wal-Mart costs about 50 retail jobs among competitors for every 100 jobs Wal-Mart creates" (George Will):

Not so fast, George. Numerous studies indicate that Wal-Mart is a net job-killer. The Public Policy Institute of California found that Wal-Mart stores reduce employment in their local county's retail sector by 2 to 4 percent. A widely cited study by Iowa State University documented that rural communities (the focus of Wal-Mart's initial expansion) lost up to 47 percent of their retail trade ten years after the discount giant's arrival. A University of Illinois study forecast a likely net job decrease in Chicago's West Side if Wal-Mart came in.

7. "Wal-Mart has helped poor and middle class consumers--in fact, more than anybody else" (Richard Vedder):

This hyperbole comes from the American Enterprise Institute, one of four pro-Wal-Mart think tanks that have received grants from Wal-Mart's foundation. In fact, what Wal-Mart has helped to do is lower the earnings of poor and middle-class consumers. Studies by the University of California-Irvine and others show that when Wal-Mart enters a region, the area's overall wages tend to decline as competitors' higher-paying jobs are wiped out. This wage depression has been most severe in the southern United States, where Wal-Mart stores are most prevalent.

8. "The notion that a job is worthless without benefits is like saying a car is useless without a sunroof" (Tim Kane, Heritage Foundation):

Is healthcare really a frivolous "option"? According to an internal company memo, 46 percent of Wal-Mart workers' children either have no health insurance or are on Medicaid. The same memo reveals that less than half of Wal-Mart's associates are enrolled in the company health insurance plan, compared to the nearly 70 percent enrolled with most national employers.

Wal-Mart encourages its 1.3 million US employees to enroll in taxpayer-funded health programs. A number of studies have demonstrated the way Wal-Mart shifts its employee expenses onto taxpayers. A 2004 Congressional study estimated that taxpayers subsidize an average Wal-Mart store to the tune of more than $420,000 a year, or more than $2,000 per employee. This takes the form of government-funded food stamps, housing subsidies and health insurance programs. Another study found that the state of California spent a total of $86 million a year on public assistance for Wal-Mart workers, or more than $1,900 per worker. Wal-Mart employees were the largest users of state healthcare programs in eleven out of thirteen states that reported employer usage.

9. Wal-Mart is now "the green machine" (Fortune magazine):

In an apparent attempt to peel off some of its critics, Wal-Mart has announced a long list of environmental commitments. It has jumped into the organics market and set up a series of "sustainability" groups to get environmentalists' help on specific challenges, like reducing packaging and boosting truck fuel efficiency. The problem is that it's simply impossible for a business model so dependent on a fossil fuel-driven global supply chain to be sustainable. With more than 60,000 suppliers, Wal-Mart's supply chain emits 200 million metric tons of global warming pollution a year.

10. "Wal-Mart coming into a community expands the tax base and boosts overall community development" (various pundits):

It's just the opposite. Wal-Mart gets local and state taxpayers to provide substantial subsidies to Wal-Mart stores in the form of real estate development funds and reduced property taxes. One Good Jobs First study found that 90 percent of Wal-Mart distribution centers received tax breaks and other subsidies, valued at an average of $7.4 million per distribution center. Wal-Mart sought and received subsidies averaging about $2.8 million at 1,100 of their locations, about one-third of its US stores.


Thousands apply for jobs at new Wal-Mart
January 26, 2006

Eighteen months after the Chicago City Council torpedoed a South Side Wal-Mart, 24,500 Chicagoans applied for 325 jobs at a Wal-Mart opening Friday in south suburban Evergreen Park, one block outside the city limits.

The new Wal-Mart at 2500 W. 95th is one block west of Western Avenue, the city boundary.

Of 25,000 job applicants, all but 500 listed Chicago addresses, said John Bisio, regional manager of public affairs for Wal-Mart.

"In our typical hiring process, you're pretty successful if you have 3,000 applicants," he said. "They were really crowing about 11,000 in Oakland, Calif., last year. So to get 25,000-plus applications and counting, I think is astonishing."

Assistant manager Rachael Fierro, who was still interviewing prospects Wednesday, said "we saw a little bit of everything -- people who hadn't worked for a long time, people who saw an opportunity to do something with themselves. That's the information I got from applicants."

The 141,000-square-foot store has 36 departments, a "tire and lube express," vision center, Subway restaurant, pharmacy, garden center and drugstore. It will sell some groceries but no fresh produce or meats and no liquor. It is expected to generate $1 million in sales and property tax in the first year -- a windfall in a village that collects about $3 million a year in sales taxes, said Evergreen Park Mayor James J. Sexton. Evergreen Plaza, with 100 stores, generates about $2 million.

Anticipating the usual protests over wages, benefits and anti-union practices, the Evergreen Park store was union-built. A protest over minority set-asides was defused in one day. Wal-Mart also came bearing gifts -- Tuesday night, the corporation donated $35,000 to the village library, local hospital, churches and other village institutions, Sexton said.

'We can't beat them'

The Chicago alderman who tried to bring a Wal-Mart to the Chatham neighborhood was left gnashing his teeth.

"I always tell people I'm not for Wal-Mart, but I am for that project coming into the city and to my ward. We can't beat them," said Ald. Howard Brookins Jr. (21st). "The same things they talk about Wal-Mart doing to Small Town U.S.A when they build on the outskirts of town is the same thing they have done to the City of Chicago without fanfare. Nobody distinguishes that if I cross Western Avenue at 95th Street, I am no longer in Chicago. For all practical purposes, Wal-Mart is in the city of Chicago without us receiving any benefit. You're going to see the parking lot filled with cars with Chicago city stickers."

Eighteen months ago, Brookins negotiated with Wal-Mart for a store at 83rd and Stewart, former site of the Ryerson steel plant. His plan fell apart when other South Side aldermen failed to support his request for a zoning change. The week before, aldermen gave the go-ahead for a Wal-Mart in the Austin neighborhood on the West Side. The vote came after a contentious 2-1/2-hour debate.

Brookins said he planned to visit the new Wal-Mart himself this weekend "to see for myself" if the parking lot is filled with cars registered to Chicago residents.

The Beverly neighborhood, long a hotbed for disputes over cul-de-sacs and one-way streets, now faces the prospect of increased traffic from Wal-Mart shoppers.

No road improvements

"Because of the single-family character of our community, we want to avoid cut-through traffic, whether it's our own residents or people coming from trains or highways," said Ald. Virginia A. Rugai (19th), whose ward borders Evergreen Park. "It is our No. 1 quality-of-life issue, traffic. I don't think anyone can predict what traffic will be like. We're not going to know until the opening."

There have been no road improvements in anticipation of increased traffic on that stretch of 95th Street, which will have Wal-Mart directly across from Evergreen Plaza.

"We will monitor the situation and see if additional lanes or turning lanes are appropriate," Sexton said.

Rugai said a few small hardware stores expressed concern about competition from Wal-Mart, but other businesses in the area anticipate a bump from new customers driving to and from Wal-Mart, especially along 95th Street, which has gone upscale in recent years with a Borders bookstore and a Chipotle Grill. A complex planned for the southeast corner of 95th Street and Western Avenue includes Potbelly, Starbucks, Jamba Juice and a FedEx/Kinko's store.

"I think most development projects [in Beverly] are not going to include goods or services that you're going to find at Wal-Mart," Rugai said.


URL: http://www.exponentialimprovement.com/cms/regecon.shtml

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© 2003 Continuous Improvement Associates
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