Breaking the Bubble

There’s a trend going on these days in retail marketing that has interesting, and possibly gloomy, ramifications internationally.  Harold Meyerson reports in the Washington Post that the attempts of Wal-Mart, Kohl’s, and other low market retailers to enable cheap prices by squeezing employee wages are backfiring on them.  Their same-store sales are declining and earnings-per-share are falling also.  Meanwhile upscale retailers paying higher wages continue to show increasing profits.  Wal-Mart and Kohl’s are discovering what Henry Ford knew from the beginning, that your employees are your best customers, and when they lack buying power, you will lack sales.  Meyerson reports that retail trade is fragmenting into a prosperous upscale sector and a stumbling mass market sector.  Non-union workers are restlessly seeking increases in the minimum wage and threatening walk-outs.  Things are beginning to resemble pre-depression days of the 1920’s.  Back then, Filene, a leader in retail reform wrote that, “if workers cannot settle their issues inside industry by industrial methods, they will go outside industry and settle them by political methods.”

Meanwhile Fareed Zakaria reports, in an article he titles “The fading American dream,” that social mobility in the U.S. is rapidly falling, both absolutely and in international rankings.  We are losing our middle class and becoming the rich and the poor.  Nowadays Canada and Australia, both similar in many ways to America, have twice the economic mobility of America.  One of the standard excuses for declining mobility has been American heterogeneity and immigration, but Canada actually has more foreign-born people than America.  A recent Harvard-Berkeley study points toward two major facts in the decline.  First is the increasing economic segregation of American cities, which in turn leads to low expenditures on public goods, their “social capital.”  Zoning separates the rich from the poor, and poor neighborhoods suffer from under-funded schools, high crime rates, family breakdown, lack of civic support, and low community-service orientation.  Meanwhile rich neighborhoods prosper, their residents oblivious to the surrounding poverty.  The separate-world “bubbles” grow before our eyes and, like Disraeli’s 19^th century England, we become “the rich and the poor – two nations that do not know each other’s lives and do not understand each other.”  We still remain far from a third-world country, but that is the direction toward which we are heading.  For a nation that has only rich and poor cannot compete in an increasingly high-tech global economy where already China is producing many science and engineering experts for each one we produce and the ability to understand and adapt to constant rapid change is a key to success.

Zakaria notes that a recent OECD report reveals that America is one of only three rich countries that spend less on disadvantaged students than on other students.  That is because, he notes, our nation-wide school funding structure is based on the property tax.  School districts with many poor have low property values, leading to low school revenues and inadequate schools, while wealthy districts have more than enough.  The “big bucks” we spend on education are mostly at the college level, where they benefit students already advantaged.  Americans remain mostly oblivious to major needed educational needs, and consequently are unwilling to fund or support them.  A Washington Post article today reported that two-thirds of Americans do not know about or understand the “common-core” educational reforms already being implemented in 45 states.  55 percent say they oppose providing free public education for the children of “illegal” immigrants.  Both of these measures are aimed at and would strongly enhance our social and economic mobility.

I started out by mentioning Wal-Mart and Kohl’s.  Both are examples, writ small, of what happens when you try to build a prosperous economy while ignoring the poor.  The poor are your neighbors, your customers, your workers, and their children are your fellow citizens of the future.  As they prosper, you prosper.  And as they struggle, you will also.  I mentioned some of the obvious policy areas where reforms would help – increasing the minimum wage, worker re-unionization, residential zoning reform, property tax reform, funding education for the disadvantaged, building the “social capital” of cities.  Other ways exist – re-enacting Glass-Stegall, for example, to make investment for the future by the middle class less a game of Russian Roulette – but it begins with breaking the bubble and becoming aware of the lives around us.  For then we become aware that they and we prosper or fall together, and their future is ours also.