In last week’s Sunday Review, Cornell professor Louis Hyman had a piece looking at the state of Main Street in Trump’s America in which he got some things right, and others wrong. He looks at Main Street as both a cultural, psychological construction and an actual place where folks conduct commercial transactions. He traces how the actual place called Main Street has been under constant attack for the last one hundred years since the dawn of mail-order catalog companies like Sears, Roebuck. The globalization of the supply chain in the late twentieth century, coupled with reduced barriers to national and international expansion, have led to a Wal-Mart in every town, a Subway on every street, and a mattress store in every strip mall. As I mentioned a few weeks ago, there are many cases where the expansion of these chain stores is not a result of free market operations; many cities and towns actively encourage these companies to open local locations, knowing that the stores will offer low prices to residents.
As Hyman points out, though, there are many reasons that these international companies are able to survive in the free market, and would be able to do so even without the subsidies handed out to them. The massive size of these companies allows them huge power when negotiating with suppliers. Because they buy so many products from their producers, they are able to demand much lower prices than those commanded by local, independently owned stores. This, of course, allows them to sell their products at much lower prices, resulting in very real short-term benefits for the local consumers.
Although it’s implicit throughout his piece, Hyman doesn’t spend any time developing in a rigorous way the connection between these lower prices and the discontent on full display from folks living in the small towns where these conglomerates have gobbled up local businesses. He simply says that the “Main Street” way of structuring a local economy is costly because of how much more cheaply large corporations are able to provide goods and services. To read his piece without diving deeper would leave the reader wondering what, exactly, has gone wrong. These consumers now pay lower prices for nearly everything they purchase; why the anger?
The anger comes folks in smaller communities are experiencing comes directly from the trade-offs offered by these companies between short- and long-term value. In the short-term, consumers everywhere are likely to purchase their goods for the lowest price available. If Dick’s Sporting Goods and the local company each sell the same pair of shoes, but Dick’s sells them for less money, most consumers opt for the lower price. This obviously leaves the purchaser better off in the short-term. However, imagine that our shoe-buyer was buying comfortable shoes because he spends all his time on his feet as a butcher. The money he previously paid to the local sporting goods store would have stayed in the local economy; the owner of that store may have bought meat from the shoe-buyer. However, once the butcher buys his shoes from Dick, any profit above and beyond the cost of labor gets moved out of the local economy and to Corapolis, Pennsylvania, where Dick’s is headquartered. There’s now less money in our local economy – and, therefore, less ability for the sport shop owner to pay a premium for the local butcher’s meat over the Stop and Shop down the street. What’s more, the expansion of big box stores sending money out of the communities has occurred at the same time that inflows from coal mining, manufacturing, and other activities have been decreasing. The result is a one-two punch.
This self-reinforcing cycle of money leaking out of the local economy is what has led, more than anything, to the stagnating and falling wealth in small communities. Larger cities do, of course, send money out of their economies when they purchase goods from other areas. This leak, however, is offset by the services (and, less often, goods) they produce that consumers in other places buy. Smaller communities have fewer of these goods and services with which to attract money from other places. And so their money trickles out and away, directly to the places large enough and economically strong enough to offer goods and services to serve the small communities.
When Hyman calls the Main Street way of operating costlier, he’s right on two fronts. In the short-term, it is costlier for me to choose to pay more money for an identical good sold by a local provider rather than ordering from Amazon. He’s also right when he says that it’s costlier in the aggregate, if one subscribes to a bare-knuckled understanding of free-market capitalism. If Wal-Mart can arm wrestle a supplier into lower prices, then the produced good has been produced in a more efficient, less-costly way, because fewer resources have been expended on it. While I’m more inclined to call this a transfer of value from the supplier to the consumer, the efficiency argument isn’t entirely wrong. Hyman is wrong, however, by ignoring the fact that using large companies is costlier for small communities in the long run than the Main Street model. There’s no other way to explain the anger at free trade and large corporations running rampant in small towns. Folks feel duped; they struck a deal with the devil, accepting lower prices yesterday in return for lower wages and less spending power in their communities today. Although Hyman is right when he argues that this outcome was likely inevitable, to ignore how much more costly it has been, not less, for small communities is incorrect.
Hyman goes on to explain that the Main Street experience is not dead: it lives on, “but only as a luxury consumer experience.” It’s unclear from his piece whether or not he is calling the support of local businesses an elite, self-indulgent habit. Support of local businesses in wealthier cities isn’t the focus of his piece, but he spends just enough time with it to seemingly dismiss it as a way for rich people to feel good about themselves. But here again he misses the point. While he is correct that supporting local businesses is more expensive in the short-run, that doesn’t mean that people who do so “don’t really care about low prices”, as he says. It could rather be a manifestation of people being secure enough in their finances that they’re willing to sacrifice some value today for increased value tomorrow. An easy corollary is the example of lower-income folks who ride the subway: Many folks know that buying a monthly pass would be cheaper than paying for each ride, but don’t have $121 on hand now. It’s not unreasonable to think that, if folks in smaller areas were as secure in their finances as people “in gentrified neighborhoods in Brooklyn and San Francisco, in tony suburbs”, they might also feel able to make the penny-foolish but pound-wise decision to support local businesses.
There are, of course, broader implications of choosing to support local businesses. From a public policy perspective, taking this argument to its natural limit results in protectionism, using tariffs to make local businesses competitive in the short-term, and protecting local businesses from competition. However, by insulating small local businesses from any competition at all, inefficiencies are bound to arise. Moreover, such policies are often reciprocated, making the export of goods and services from local communities more expensive to outside consumers. Local policy ought instead to stop subsidizing the expansion of the big businesses, and perhaps facilitate some organization of local firms such that they are able to command volume discounts akin to those enjoyed by enormous companies. And indeed, support for local businesses should have some limits imposed on it by a competitive market. If the large company is able to offer their goods at an enormous discount, then it’s possible that the discount brings more value to the community than supporting an overly expensive, un-competitive local firm.
Folks in small communities are understandably angry – they’ve watched huge amounts of capital leak out of their communities over the course of generations. Hyman is right when he argues that we need to focus on strategies for connecting small towns to the broader market so that they can use their skills to bring money into the community. He’s also right in his analysis of why so much money has left these towns. However, residents in these places have learned much from this experience; they seem to recognize the deal with the devil for what it was. To declare Main Street dead is perhaps pre-mature – maybe, just maybe, if these communities reach a place of economic stability, they’ll next time resist the allure of short-term over long-term economic health.
(As an aside – the picture at the top of the post is of Hudson, New York. Hudson is an example of a small town that has discovered how to attract an influx of money – it’s a wildly popular place for weekend getaways from New York City. By developing a robust tourist infrastructure (and lots of tasty food), they’ve figured out how to benefit from NYC’s hotter-than-hot economy)