Why are Bargains Bad?

Gordon Laird, after years as a student and journalist in China, started to see “that this part of the world was becoming a major driver of human history.” Combining his work on energy, climate, and poverty issues with his work in China, Laird began work on The Price of a Bargain: The Quest for Cheap and the Death of Globalization. “I was just following the story. It’s a very old-fashioned project in that regard,” he said. “The reporting launched some big questions that led to a larger investigation of how we are becoming captives within our own economy.” Laird chatted with Zócalo about why bargains are dangerous and why globalization may be going into reverse. (And read an excerpt of the book here.)

Q. In a recession, many people are probably finding many things unaffordable. Do we really have a bargain-filled economy? And how did it become so?

A. Certainly we now have more bargains, in objective terms, than a decade earlier. Wal-Mart has claimed that it alone has decreased inflation for Americans, and this is probably true to some degree. But collectively, much of our economy has worked toward lowering the prices of many of our goods, and it has achieved that in part by following the Wal-Mart model, which is part of the most sophisticated and interdependent version of globalization ever devised, one that interlinks affordable labor, cheap energy, cheap transport, and cheap credit in ways that created surprising amounts of prosperity and growth. Much of our modern consumer economy has been leveraged on this model.

There is a catch to that of course. This system isn’t designed to survive the 21st century. In fact, there is plenty of evidence to show that the cheap labor, cheap oil, cheap transport and consumer credit that helped fuel the economic bubbles since the 1990s has already become more scarce. Moreover, former externalities like climate change, poverty, and geopolitical shifts from West to East are making our world more expensive.

Consequently, we’re seeing a breakdown in our chosen economic model, a confluence of spending, shipping, and shopping where roughly 70 percent of our GDP is tied to the consumer. The credit crisis of 2008 and the current hard times are very much a reflection of how consumers themselves have become a threatened resource. Talk of recovery shows how little we actually understand our economy, as many leaders seem to expect that we can go back to normal, circa 2006. The Great Recession is actually part of a phase change in our society and economy that is transforming business as usual. Incremental bits of growth in manufacturing and retail since last fall are likely artifacts of massive government intervention that rivals the command economy experiments of former Communist nations. Western governments have put hundreds of billions of dollars into forestalling the realities of the 21st century with bailouts and stimulus spending, but a great many consumers are still in crisis, especially in the U.S. where as many as six million households now live off food stamps with no other income.

The Price of a Bargain, by Gordon LairdThere is still a great paradox at the core of our economy: certainly we’ve been blessed with a great many things – electronics, flat screen TVs, phones – that have become cheaper and more accessible. But the truly important things – food, education, healthcare, energy – have been gradually and persistently growing more expensive. This is one of the main challenges in the current century, one that is only amplified by climate change and the need for carbon pricing. I don’t see that trend abating.

Indeed, our material systems and our economy have come to resemble troubled ecological systems. They’re becoming gradually destabilized. Even now, many of our leaders make the assumption that we’ll have persistently affordable energy going forward. I’m not suggesting there’s an imminent collapse – I don’t generally believe peak oil theories – but in a world addicted to cheap, even incremental decline in our resources make it hazardous to cling to old ideas and assumptions about what constitutes real growth, prosperity, and security.

Q. In addition to Wal-Mart, what else contributed to building the economy we have today, that you say is now destabilizing?

A. Wal-Mart is, in a sense, a symbol. It gets blamed for a lot, and it certainly is a dominant force in the economy. But if Wal-Mart didn’t exist, someone else would’ve invented something fairly similar. The logistics, the technology, the offshore labor markets, the transportation system – which includes complex warehousing and distribution chains – management strategies, all are resources that Wal-Mart or another company would have taken advantage of. It’s another way of saying that the innovations and opportunities of the late 20th century really pushed us toward the current model. I’m not saying it was all fated to be so, but Wal-Mart is an important illustration of a much broader set of circumstances. Blaming Wal-Mart for everything actually clouds the broader reality. What they’ve done underlies how things work today, and they’ve thrown their weight around and broke some laws in the process. But we’ve allowed them to do that, and many many other companies have done so.

One of the things that continues to amaze me is that what changed our economy in the late 20th century – the way that globalization gained momentum – has a lot to do with changes and innovations developed not long after World War II. There was the development of the credit card. There were a number of failed Communist revolutions not just in China but in Vietnam and other places turned out to be major sources of affordable labor. Petrochemicals began to be developed – many of the things we use every day owe themselves to tremendous innovations in petrochemicals and overall intensification of the use of nonrenewable energy. We’ve upped the ante on that not just by driving more, but consuming more. Our groceries are in large part embodied energies. All these things became everyday aspects of the 20th century. Yet markets and companies and consumers and governments found ways to optimize these things over the course of a few years, mostly during the 1990s, as illustrated by the rise of Wal-Mart as the world’s largest corporation. The bubble of growth in the 21st century wasn’t just about financial speculation and housing, it was also about the consumer economy reaching its fullest expansion, one that I argue isn’t built to last.

Q. You mentioned that the U.S. is heavily reliant on the consumer economy. What about around the world – how does the consumer economy impact other Western countries, or countries like China that provide cheap goods and labor?

A. The good part of the European Union is very similar to the U.S. Big retailers, like Tesco, from Europe compete globally with American companies. Parts of Europe vary – some countries are more in debt and some less, some are more dependent on globalization and some less. Germany used to be the world’s largest trading nation; just this year that title went to China. But there is sort of an East-West divide. North America more clearly encapsulates the trouble with having an economy highly dependent on consumerism, but our problem is by no means limited to that. Most rich nations in the world have adopted, by default or design, economies that depend on affordable input and consumer activity to drive growth. These countries are characterized by having a large portion of their economy be service industries – the part that doesn’t actually make something but includes retail, software, finance. That’s what you hear when people say about 70 percent of our economy is consumer-based.

Curiously, though, in China, the portion of their economy that is the service economy has recently grown larger than their export economy. It’s another way of saying that their economy is becoming a little more like ours in ways that may surprise people. As I discuss in the book, the current path of globalization is a path of deglobalization. Trading nations may need each other less. China’s interests and the interests of North America in particular are diverging. It’s in no small way related to the fact that exports are becoming very gradually a smaller portion of China’s economy. They’re becoming less dependent on shipping the U.S. cheap stuff and building our technological and Internet networks. I’m not saying this is happening overnight – the economic collapse of 2008 slowed that process a little bit. China will continue to make things for us, but their long-term path will not be toward our advantage. I think two recent geopolitical moments – President Obama’s China visit and the Copenhagen climate talks – underline how confident and powerful China has become. And we financed this change because we can’t seem to stop buying cheap stuff.

Q. The idea that the economic crisis actually stopped deglobalization, and kept globalization going, seems a bit counterintuitive. Can you explain deglobalization a bit more?

A. I argue that we may well in fact have reached the peak of what we can gain from globalization. There are a number of things pushing us toward a pattern of deglobalization, like the diverging interests of major trading nations and conflicts that arise. The climate negotiations in Copenhagen reflected this – China doesn’t see its interests in aligning with America. A lot of that has nothing to do with climate – it’s about who will be the superpower of the 21st century. A lot of this conflict has been managed by the interlinked economy – countries that have Wal-Marts or McDonald’s generally don’t go to war with each other. But as their core interests start to diverge, that’s going to change.

Gordon LairdOne of the things driving this is energy. If we go back to $150 for a barrel of oil for an extended period, that profoundly changes the economics of shipping. It’s not something we’ve had to think about much in recent decades – the cost of transportation – but that’s a major issue. To move containers half way around the world for relatively cheap has been one of the blessings of our time, but it is not going to persist. This is just one aspect of deglobalization. There are a number of weak spots in our current model.

I would argue that it isn’t merely about resources growing more expensive. We have trouble putting value on things that do matter – we tend to undervalue labor, natural resources, and energy. This is certainly illustrated by the failure of the Copanhagen talks, which was really about our inability to price carbon in the face of climate change. This isn’t an economic question – it’s a social, ethical and cultural question. We’ve had it very good for quite a while, and we haven’t been challenged to think about the true cost of things.

Q. Is deglobalization dangerous, or is it corrective, and bringing us to some sort of equilibrium?

A. If we were to describe it as a correction, that would suggest we’re going back to some kind of normal. I’m not sure we have the luxury of some kind of normal in this century. As I mentioned, there is a lot of momentum behind this idea of recovery after a recession – just put enough money into the economy, and jobs and spending pick up, and we go back to how it was in 2005. It’s unwise to assume a return to normal. By the same token, globalization has become such a major part of human civilization. We are dependent upon it in ways that will surprise us.

Consequently, with deglobalization, there will be opportunities and challenges, and more profoundly, there will be winners and losers. Dealing with poverty is going to be a bigger challenge. As some of our goods and services have become more expensive, and we will have trouble maintaining the great bargains and consumer empowerment we’ve had. If we can’t even maintain the cheapness found in dollar stores – which have become something of a private sector food bank for many households – a great many people already facing hard times will fare worse. It’s not just the unemployed – it’s 17 or 24 percent of people having serious employment issues and facing grave instability. Even incremental changes in the relative affordability of things would have big effects for people who are literally on the brink of foreclosure, of homelessness, of malnutrition.

If we put our efforts into regaining the status quo of even a few years ago, I think it would be an irresponsible use of resources. Personally, I would love to go back to normal, but it’s not a realistic goal. Partly it’s just human nature – we cling to what is familiar.

*Photo of candles courtesy ken mccown.