The Politics of Buy Local

I spurred a discussion on my facebook page recently with a quote from Russ Roberts on CafeHayek.com, one of my favorite econ blogs.

“I often say that we’ve tried the “buy local” experiment, it’s called the Middle Ages. In the Middle Ages, we mainly bought local and pretty much everyone was poor.” — Russ Roberts

One of my good friends from SLU called the economic analysis of my earlier post (and this quote) into question, but not from an economic standpoint. His question was from a political standpoint.

Thus the line between economics and partisan policy blurs. While I tend to err on the side of economics, politics is my specialty! I’ll explain below why the fallacy of “buy local” isn’t inconsistent with the Republican (and Democratic) mantra that small businesses create the majority of jobs in the United States.

First, some may have incorrectly got the impression from my earlier post that it makes no sense to buy from local producers or sellers of goods. Not true. Big box retailers like Wal-Mart and Target may have immense advantages over small mom and pop producers, the biggest of which is economies of scale and buying power. However, there are small businesses that can, and do, compete with the big box retailers. Many internet-based businesses are small, and pass the savings of having no real brick and mortar store front, and a small number of employees, on to consumers. Other small businesses compete with more knowledgable employees and on a service basis. Some compete in the regard that they pay more in straight salary (or commission) that they can afford without having to shoulder the costs of an expensive benefits plan. While not every employee of a big box retailer takes advantage of 100% of the benefits offer, they typically all shoulder the costs of providing those benefits through reduced wages.

When compared with Wal-Mart, or Target, Jim’s House of Goods saves a lot of money by not offering (all or some) of the following:

  • Health Insurance
  • Dental Insurance
  • Eye-wear and vision coverage
  • Optional life insurance
  • Disability coverage
  • Illness protection (sick time)
  • Profit Sharing (stock purchase matching)
  • 401(k)

Now, potential employees of Jim’s House of Goods and Wal-Mart need to weigh whether they want those benefits, or higher gross pay. It may be that their compensation is the same, though not necessarily reflected in salary. Different strokes for different folks, as they say. Some may choose one or the other based on their experience and family situation. Some may want the whole kit and kaboodle, while others choose to invest and buy insurance on their own accord.

Some, if not many, small businesses are franchises. McDonalds, KFC, Re/Max Realtors, your local car dealer, Pizza Hut, Midas, Papa Johns, Ace Hardware, Burger King, Subway, Hampton Inn, H&R Block, Dunkin’ Donuts, 7/11. These may be big conglomerate names, but at the end of the day, the vast majority are small businesses owned by one or a handful of individuals. All compete on price. Whether or not I own 1 or 100 franchises depends on my business acumen, and ability to compete on price. Even against other small businesses.

Now, Republicans and many Democrats do acknowledge that the majority of new jobs are created by small businesses. And virtually all big businesses started out as small businesses that had such a successful model they eventually became national conglomerates. Examples would be Walgreen’s, McDonald’s, J.C. Penny, Office Max (Shaker Heights, OH used to be their headquarters), just to name a few.

These once-small businesses were efficient economic models, and this success propelled them to their multi-national status. In the world of economics, price, for all intents and purposes, is king. Businesses like these were more efficient than their competitors, ran them out of business, expanded, and created a hell of a lot of jobs.

It kind of reminds me of that quote from the Big Lebowski:

“It’s funny. I can look back on a life of achievement, on challenges met, competitors bested, obstacles overcome. I’ve accomplished more than most men, and without the use of my legs. What… What makes a man, Mr. Lebowski?”

Not all small businesses are inefficient. Many (if not most) small businesses eventually fail — as they should, if they cannot compete. Restaurants are an example. As I said in my earlier post:

“A business should earn your hard-earned money because they offer the products you want at competitive prices you’re willing to pay — not because they are located in Cleveland.”

Businesses shouldn’t earn your hard-earned money just because they are small businesses or big businesses. Just like they shouldn’t get your money because they make X in [wherever you are]. They should earn it because their service or product is something you’re willing to buy at that price.

Of course Republicans (and many Democrats) support small businesses. I go to franchises like Pizza Boli’s, 7/11, McDonalds and small businesses like Bestway and any gas station you can think of, all of the time. But I do so based on price. If Old Chicago Pizza across the street has a better deal on a similar product, sorry Boli’s, I am going there.  Like any company, small and large businesses have to compete against other businesses of varying size, experience, and scope.

Local banking institutions are typically credit unions or community banks. Navy Federal Credit Union started in 1933 as a small thrift in D.C. Now it’s the largest credit union in the U.S. with 3,000 employees and $10 billion in assets. Bank of America started out as a community bank in San Francisco, called “The Bank of Italy” in 1903. It expanded, bested and bought competitors, and is now one of the largest financial institutions in the world. Both succeeded because they offered a service at a competitive price.

The most prudent policy is keeping taxes low for all businesses, both big and large, so that the most efficient economic actors prevail. Those who fail to compete shouldn’t stay in business because they are “small” or “large”  or “local” or “multi-national.” They should stay in business because they offer a good or service at a price you’re willing to pay. Companies and people unwilling to change and evolve with the economy deserve to be left behind. Consumers respond to a variety of factors, the most important of all is price. Forcing consumers to pay higher prices just to keep company X, be it small or large, local or multi-national, and its employees in business and employed is, frankly, unjust and immoral.

And that’s the point. Price is the main factor the majority of consumers understand and respond to. Now, marginal of utility of goods and services is another big factor. Consumers respond to a price and quality of a good. It all depends on the quality of the good and its price. But, people who ignore the price of a similar good do so for one (or more) of a few reasons. The first is ignorance and inability to compare prices. The second is that they don’t care about prices, and can afford to spend more money on over-priced products. The third is that they know they’re paying more for a product than it’s really worth, but care enough to keep inefficient actors in business for whatever reason.

My opinion is that all three reasons for patronizing a business on a basis other than price are flawed. Ignorance may be bliss, and you can’t force all horses to drink even if you get them to the river. There will always be ignorant consumers. People who are too rich to care will continue to consume aimlessly, regardless of what business succeeds or fails. And the third group is just subsidizing businesses that are destined to fail anyway, which boils down to them pissing their money away.

The end result of keeping inefficient economic actors in business may very well mean jobs in the short run. But at your and my expense? I won’t stand for that. How well did that work out for U.S. auto manufacturers? General Motors lost the plurality of the domestic market share because they ceded to unions, ignored innovation, while competitors like Ford, Toyota, and Honda embraced technology to reduce labor costs. Sure, employment levels were kept higher in that industry, but eventually, they failed and cut costs drastically to compete. What economic principle applies to big conglomerates like GM also apply equally to small businesses.  In the long run, we’re better off if the market sorts out actors that cannot compete. Price will always ration.

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