Labor's war on Wal Mart hurts the Poor

[BWV 1080]

Hard Line State: Big Labor's War on Wal-Mart Claims Casualties Among Poor Marylanders
by Steve H. Hanke and Stephen Walters

Steve H. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore and a senior fellow at the Cato Institute. Stephen J.K. Walters is a professor of economics at Loyola College in Maryland.

In Big Labor's war against Wal-Mart, "collateral damage"--in the form of lost jobs and income for the poor--is starting to add up. Of course, since the unions and their legislative allies claim that their motive is to liberate people from exploitation by Wal-Mart, these unintended effects are often ignored.

Here in Maryland, however, that's getting hard to do. The consequences of our Legislature's override of Republican Gov. Robert Ehrlich's veto of their "Fair Share Health Care Act" on Jan. 12 will be tragic for some of the state's neediest residents. The law will force companies that employ over 10,000 to spend at least 8% of their payroll on health care or kick any shortfall into a special state fund. Wal-Mart would be the only employer in the state to be affected.

Almost surely, therefore, the company will pull the plug on plans to build a distribution center that would have employed 800 in Somerset County, on Maryland's picturesque Eastern Shore. As a Wal-Mart spokesman has put it, "you have to take a step back and call into question how business-friendly is a state like Maryland when they pass a bill that . . . takes a swipe at one company that provides 15,000 jobs."

Unfortunately, in Somerset, the new law looks more like a body blow than a "swipe." The rural county is Maryland's poorest, with per capita personal income 46% below the state average and a poverty rate 130% above it. Somerset's enduring problem is weak labor demand that greatly limits its 25,250 residents' economic opportunities.

There are just 0.8 jobs per household in Somerset, barely half the 1.5 figure that applies to the rest of the state. Somerset's top 10 list of employers features sectors like food services (average annual compensation per employee: $9,637), poultry and egg production ($14,320) and seafood preparation and packaging ($19,190).

It is hard to exaggerate how much the planned distribution center might have meant to Somerset's economy. Using an input-output model, we forecast the "ripple effects" of the new income and spending that could have emanated from Wal-Mart's facility as follows:


The center's 800 employees would have created an additional 282 jobs among "upstream" suppliers and "downstream" retailers and service establishments; all told, the center would have boosted county employment by 14% and private-sector employment by 20%.
Total annual employee compensation in Somerset would have risen by $46.5 million, or 19%.
Annual output (or "gross county product") would have risen by $128.3 million, or 19%.
State and local tax receipts would have increased by $19.2 million annually; this would include $8.5 million in property taxes, $5.6 million in sales taxes, and $1.4 million in personal income taxes.

Those losses, though dramatic, probably understate the full extent of the damage in this case. They do not include forgone employment and income from construction of the facility and related infrastructure improvements. What is more, Wal-Mart's tentative plans for a second distribution center in Garrett County, in mountainous western Maryland, also appear dead. Garrett, with a poverty rate that is 70% above the state's, is only slightly better off than Somerset.

How could our legislators turn a blind eye to such areas? Partly, of course, they are simply eager for Big Labor's votes and money and therefore subservient to its interests. The Service Employees International Union actually helped draft what became known as the "Wal-Mart bill." Unable--so far--to organize workers at the company, the union's immediate national strategy is to limit Wal-Mart's competitive reach by raising its costs. Maryland was a shrewdly chosen place to kick off this campaign.

Some estimate that as much as a third of the state's economic activity stems from federal employment and purchases. Over 150,000 Marylanders--six times the population of tiny Somerset--are on the federal (nonmilitary) payroll; they are concentrated in central Maryland, near the nation's capital. Nearly 268,000 more Marylanders draw checks from state and local government.

With so many workers in a sector where revenues appear to arrive automatically and inefficiency never leads to bankruptcy, our state's resulting political culture is quite predictable. Many Marylanders are simply unmindful of the necessities of survival in the private sector: pleasing customers, controlling costs and satisfying shareholders. Thanks to the federal tax dollars collected from the rest of the country and spent in Maryland, the prevailing view of economic reality is inverted: The public sector is seen as the engine of prosperity, with the private one along for the ride.

Reflecting this culture, our legislators often behave as if business is a problem to be solved. On Jan. 17, they also overrode a gubernatorial veto of a $1-an-hour increase in the state's minimum wage. Like the health-care mandate, the hike is a job killer--though not in affluent areas of the state, where strong labor demand long ago pushed the going wage above the minimum. In those areas, the law is largely symbolic and enables well-meaning voters and legislators to conclude that they are "doing something for working families." Safely out of their view, however, at Maryland's impoverished margins, already weak labor demand will be further diminished.

What remains to be seen is whether Maryland will be a leading political indicator or an anomaly, for Wal-Mart bills have been drafted in 33 other states. Emboldened by success here, lawmakers in some states have set the threshold for companies to be hit with mandated health benefits as low as 1,000 workers.

In these upcoming battles, legislators should be mindful that companies like Wal-Mart are not the enemy but rather frontline soldiers in a real war on poverty. The profit motive leads them to seek out areas where there is much idle labor and put it to work. Where they are prevented or discouraged from doing so, the alternative job prospect is rarely a cushy spot in the bureaucracy. Rather, it is continued idleness and hardship.

This article appeared in the Wall Street Journal, January 26, 2006.

[Fugu]

Companies like Walmart are why most of American citizens have no health insurance today. Health insurance should be every working person's right, not an exception.

[BWV 1080]

Companies like Walmart are why most of American citizens have no health insurance today. Health insurance should be every working person's right, not an exception.

At the cost of not having a job? That is a nice platitude, but in the real world mandating benefits results in poor people not having opportunities that they would otherwise have, as the article illustrates. What do you think the health benefits are for the industries currently in the region - Food services, Poultry production and seafood packaging?

[Ralph]

Companies like Walmart are why most of American citizens have no health insurance today. Health insurance should be every working person's right, not an exception.

*****

Companies that provide generous health benefits have often gotten into trouble, especially with regard to post-retirement coverage. Even my university, which provides excellent coverage, no longer will pay for post retirement benefits.

There are many things to criticize about Wal-Mart but they employ very many at a time when layoffs and closings are common.

Sooner or later most Americans will demand that public monies be diverted from wrong priorities and put into health care.

[Lilith]

I think this Maryland legislation (and more states are considering similar bills) has prompted a very interesting development.

One of the great questions of American politics has been WHY the manufacturing sector and other large companies have not supported national health insurance. Surely, it is in their interest - in light of the fact that American Corporation's international competitors do not have to carry this very significant burden.
I've seen the Ford and GM ads that calculate to the penny (and its in the thousands) the added cost of providing health insurance for its employees.
It raises the price of all American produced goods and services.
Now that Walmart has been rightly targeted (internal email memos have been publicized that reveals this company's cynical and unethical policies to rid itself of long term employees for this reason), I see that the company is appealing to governors and national politicians on this issue.
Could it be the start of long overdue national health care? One can only hope.

[John Bleau]

Health care in the USA is headed toward 20% of GDP. Priorities will be quite a haggle.

[Corlyss_D]

Health insurance should be every working person's right, not an exception.

Another bulletin from the Peoples' Socialist Republic of Hawaii.

[Corlyss_D]

Companies that provide generous health benefits have often gotten into trouble, especially with regard to post-retirement coverage.

Ever since they discovered the Pension Guarantee Board, companies have plotted to offload their health care committments to their retirees onto the US taxpayer. Yet another lesson on what happens when one tiny group (Studebaker employees) gets an "entitlement:" everyone wants the same treatment, and eventually they will get it, and once the US taxpayer gets the bill, the US taxpayer can never terminate the entitlement.

Sooner or later most Americans will demand that public monies be diverted from wrong priorities and put into health care.

Yeah, right! - Vinnie Barbarino

[Corlyss_D]

I think this Maryland legislation (and more states are considering similar bills) has prompted a very interesting development.

As one of those wonderful Democratic "let's you and him share" maneuvers, it qualifies as a taking under the 5th amendment. It will be struck down as unconstitutional.

[Barry]

We discussed this a couple weeks ago and I concluded that there is no good way around this problem. I don't like the idea of forcing employers to pay for everyone's healthcare. But I also don't find having tens of millions of uninsured people acceptible either. A tax-funded system may be the only way around it.
There are a lot of people to blame here. I want to know how drug research costs SO much that a single pill can go for $50. I want to know why I now have to schedule a second doctor appointment on a seperate day to have a test done (or in today's case, to have my cornea measured) because my insurance company won't pay for it if I have it done when I go in for the initial doctor appointment? What kind of rule is that? When my doctor told me that, he launched into a near tirade (the only think that keeps me from calling that is that he didn't raise his voice when he called them whores) against the health insurance industry and how the make doctors' lives hell.
The entire system sucks, and I don't expect that to change during my lifetime. It's as likely as anything else to be our economic downfall as a nation.

[FrankAderholdt]

I wanted to write a longer post, but I'm off to a large store three minutes from home to return (with no hassle!) a hair dryer I don't like.

Where am I going? To the Wal Mart SuperCenter, of course. Be back later.

[Corlyss_D]

But I also don't find having tens of millions of uninsured people acceptible either.

You and I have no control over it. We might as well command the tide not to come on shore. The Europeans and the Canadians haven't cracked the nut either. The only solution to it is increased prosperity and some system of forced savings for individuals.

I want to know how drug research costs SO much that a single pill can go for $50.

Because research is heavily frontloaded. There's no way to defray the costs of research other than spread them over the costs of existing products. Failures and long lead time development and the cost of FDA approval all have to be covered by income. We have the best medical research in the world because the government stays out of it. Even the socialized medicine states recognize this: they don't have medical research worthy of the name because we are doing it all. They just buy the product at price-controlled rates after the products are developed in the US. If the government did get into it, they would dictate what could be researched and funding would be constantly jeopardized by our annual budget debacles.

I want to know why I now have to schedule a second doctor appointment on a seperate day to have a test done (or in today's case, to have my cornea measured) because my insurance company won't pay for it if I have it done when I go in for the initial doctor appointment? What kind of rule is that?

It's one of the corollaries to the Prime Rule of Insurance, to wit: You give them money, and they don't give it back.

he didn't raise his voice when he called them whores

It's as likely as anything else to be our economic downfall as a nation.

It won't do it before entitlements does.

[Ralph]

I think this Maryland legislation (and more states are considering similar bills) has prompted a very interesting development.

As one of those wonderful Democratic "let's you and him share" maneuvers, it qualifies as a taking under the 5th amendment. It will be struck down as unconstitutional.

*****

Do you have any case law to support your argument? And it's the Fifth and Fourteenth amendments.

[Ralph]

I refilled several prescriptions yesterday. These are drugs I probably have to take for life. One, a month's supply of Coreg, cost $225 with me paying $20.

[Barry]

I want to know how drug research costs SO much that a single pill can go for $50.

Because research is heavily frontloaded. There's no way to defray the costs of research other than spread them over the costs of existing products. Failures and long lead time development and the cost of FDA approval all have to be covered by income. We have the best medical research in the world because the government stays out of it. Even the socialized medicine states recognize this: they don't have medical research worthy of the name because we are doing it all. They just buy the product at price-controlled rates after the products are developed in the US. If the government did get into it, they would dictate what could be researched and funding would be constantly jeopardized by our annual budget debacles.

I need to find a breakdown of the costs. Because nothing that you say above changes my view that it needs to cost so much as to wreck the havoc on the country that it currently is. Same with your explanation for why the insurance company insists that I have to make a second appointment for something minor that could be done in 15 minutes while I'm there in the first place. I understand that they want to make a profit. But someone along the line must be really making a killing. And it's bad for business to have the employees spending more time away from the office while being paid.

[BWV 1080]

I need to find a breakdown of the costs. Because nothing that you say above changes my view that it needs to cost so much as to wreck the havoc on the country that it currently is. Same with your explanation for why the insurance company insists that I have to make a second appointment for something minor that could be done in 15 minutes while I'm there in the first place. I understand that they want to make a profit. But someone along the line must be really making a killing. And it's bad for business to have the employees spending more time away from the office while being paid.

The average cost of developing a new perscription drug is estimated now to be $802 million (http://csdd.tufts.edu/NewsEvents/Recent ... p?newsid=6)

The full capitalized resource cost of new drug development was estimated to be $802 million (2000 dollars). This estimate accounts for the cost of failures, including research on compounds abandoned during development, as well as opportunity costs of incurring R&D expenditures before earning any returns.
When compared to the results for previous similar studies, the R&D cost per approved new drug increased 2.5 times in inflation-adjusted terms.
After adjusting for inflation, the out-of-pocket cost per approved new drug increased at a rate of 7.6% per year between the 1991 study and the current study. The annual rate of growth in capitalized cost between the two studies was 7.4% in inflation-adjusted terms.
While costs have increased in inflation-adjusted terms for all R&D phases, the increases were particularly acute for the clinical period. The inflation-adjusted annual growth rate for capitalized clinical costs (11.8%) was more than five times greater than that for pre-clinical R&D

These costs, plus an acceptable return on investment have to be recouped over the patent period. The mathematics of the time value of money are such that if the $800 million cost is spread over an 8 year development period then the drug has to earn $2 billion dollars in the next ten years to be tracking an 11% return, which is a bare mininum acceptable rate for a business

I want to know why I now have to schedule a second doctor appointment on a seperate day to have a test done (or in today's case, to have my cornea measured) because my insurance company won't pay for it if I have it done when I go in for the initial doctor appointment?

Your insurance company has no incentive to do this. You pay your $25 copay or whatever it is which goes to the doctor and the rest of the cost of the visit is billed by the doctor to your insurer. So the second visit costs the insurance company $. It is more likely your doctor's policy.

[Fugu]

Health insurance should be every working person's right, not an exception.

Another bulletin from the Peoples' Socialist Republic of Hawaii.

Another comment from the representative of the People's Fascist State of Utah.

Honestly, Corlyss, your name calling is getting rather old. I'd expect better from a moderator and owner at this forum.

[Gregory Kleyn]

Big Pharma spends far, far, more on advertising than it does on research.

That's what we're paying for.

[Corlyss_D]

Honestly, Corlyss, your name calling is getting rather old.

Have I called you a name? I don't remember. What was it?

I'd expect better from a moderator and owner at this forum.

I mostly leave you and Lilith and Gregory to your little fantasies. Sometimes I can't resist. So shoot me.

[Ralph]

Honestly, Corlyss, your name calling is getting rather old.

Have I called you a name? I don't remember. What was it?

I'd expect better from a moderator and owner at this forum.

I mostly leave you and Lilith and Gregory to your little fantasies. Sometimes I can't resist. So shoot me.

*****

Always with ther guns!

[Barry]

The average cost of developing a new perscription drug is estimated now to be $802 million (http://csdd.tufts.edu/NewsEvents/Recent ... p?newsid=6)

The full capitalized resource cost of new drug development was estimated to be $802 million (2000 dollars). This estimate accounts for the cost of failures, including research on compounds abandoned during development, as well as opportunity costs of incurring R&D expenditures before earning any returns.
When compared to the results for previous similar studies, the R&D cost per approved new drug increased 2.5 times in inflation-adjusted terms.
After adjusting for inflation, the out-of-pocket cost per approved new drug increased at a rate of 7.6% per year between the 1991 study and the current study. The annual rate of growth in capitalized cost between the two studies was 7.4% in inflation-adjusted terms.
While costs have increased in inflation-adjusted terms for all R&D phases, the increases were particularly acute for the clinical period. The inflation-adjusted annual growth rate for capitalized clinical costs (11.8%) was more than five times greater than that for pre-clinical R&D

These costs, plus an acceptable return on investment have to be recouped over the patent period. The mathematics of the time value of money are such that if the $800 million cost is spread over an 8 year development period then the drug has to earn $2 billion dollars in the next ten years to be tracking an 11% return, which is a bare mininum acceptable rate for a business

Thanks. I understand that R&D costs a huge amount. What I don't understand is what exactly is responsible for that. Is it salaries being paid to the scientists; the actual materials or chemicals that go into the drugs, the cost of the patent? Does it literally need to be that high or is someone gouging at some point in the process? Or is the problem what Gregory mentioned; that the cost of advertising (and possibly lobbying?) bumps up the consumer cost.

I want to know why I now have to schedule a second doctor appointment on a seperate day to have a test done (or in today's case, to have my cornea measured) because my insurance company won't pay for it if I have it done when I go in for the initial doctor appointment?

Your insurance company has no incentive to do this. You pay your $25 copay or whatever it is which goes to the doctor and the rest of the cost of the visit is billed by the doctor to your insurer. So the second visit costs the insurance company $. It is more likely your doctor's policy.

I can assure you it's the insurance company's policy and not the doctor's. I've run into this now with both my eye and ear-nose-throat doctors (I had surgery with the latter last year and will be having it with the former this year). The doctor literally called the insurance company a string of obscenities for creating such policies. He was apologetic to me for not being able to get the test done while I was there the first time. I got a similar story from the person who scheduled my return visit for a test at the other doctor's office.

[BWV 1080]

Well its their money I guess. Seems like a stupid policy that costs the insurance company more than it would otherwise

When I moved here from Virginia, I was delighted for about a month to have my chiropractic treatments covered by insurance. When I sent in my bills in January 05, BC/BS informed me that whereas they had paid chiropractic charges before 1 Jan 05 because Utah was "medically underserved," they would no longer pay them. My chiropractic treatments were $40 ea. They would however pay for my osteopathic treatments at $115 ea. This was crazy. My osteopath isn't very good, so I quit going to him for spinal manipulation. My chiropractor is very good, but they won't pay for him. So I can go to a guy who's no good for $15 co-pay. Or I can go to a guy who's very good and not be reimbursed. As usual, I'm funding my treatments just has I did for 22 years in Va. The only thing they are any damn good for is catastrophic care.

Chiropracty is just quackery, do you want your insurance to also pay for phrenological exams?

[Corlyss_D]

Thanks. I understand that R&D costs a huge amount. What I don't understand is what exactly is responsible for that. Is it salaries being paid to the scientists; the actual materials or chemicals that go into the drugs, the cost of the patent? Does it literally need to be that high or is someone gouging at some point in the process? Or is the problem what Gregory mentioned; that the cost of advertising (and possibly lobbying?) bumps up the consumer cost.

Here are two reports on drug company pricing by the General Accounting Office. They are as close to a non-partisan research and study group as you're going to find. While the reports are a little dated, I imagine that little has changed in the strategy.

http://archive.gao.gov/t2pbat4/150655.pdf
http://archive.gao.gov/t2pbat3/151899.pdf

And Stephen Moore's testimony before congress on the medicare drug benefit describing the economics of drug companies.

And why price controls are attractive but ultimately destructive.

The idea that the drug companies are charging us for their advertising is technically true without shedding any light on the whole picture. Of course the cost of advertising is in the product; the cost of everything the company does is in its prices.

[Barry]

Here are two reports on drug company pricing by the General Accounting Office. They are as close to a non-partisan research and study group as you're going to find. While the reports are a little dated, I imagine that little has changed in the strategy.

http://archive.gao.gov/t2pbat4/150655.pdf
http://archive.gao.gov/t2pbat3/151899.pdf

And Stephen Moore's testimony before congress on the medicare drug benefit describing the economics of drug companies.

And why price controls are attractive but ultimately destructive.

Thanks. Interesting reading. Although I still didn't see anything on the specifics of what part of R&D actually costs so much. The argument, particularly by the Stephen Moore, seems to be that it's only making massive profits that entices drug companies to do the R&D; not that the R&D is SO expensive that they need to charge what they do for the drugs. A lot of what he says makes sense. But I have a difficult time sharing his enthusiasm for encouraging massive profits and arguing against any sort of break or assistance for seniors from market prices for drugs. He completely ignores the consequences for those who simply can't afford to pay the market price.
As I said before, it's an incredibly difficult issue with no great answers (but of course, foreign policy also generally comes down to the least bad answer, rather than the best one).

[BWV 1080]

What in your definition are "massive profits"? If an acceptable return on capital is not available then drug research will not be funded at a commercial level. In my earlier example, to earn an 11% return on capital (not much considering the risks involved) a company that outlays $100 million per year for 8 years of development needs to get back at least $2 billion in the following 10 years. As with anything else, the interaction of the capital markets and consumers will set the fairest price.

[Barry]

What in your definition are "massive profits"?

I'm really not sure. I'm guessing it would be lower than whatever answer you'd give though .

[Corlyss_D]

What in your definition are "massive profits"?

I'm really not sure. I'm guessing it would be lower than whatever answer you'd give though .

We will work to stamp out the last vestiges of these socialist tendancies you exhibit everynow and again . . .

[BWV 1080]

What in your definition are "massive profits"?

I'm really not sure. I'm guessing it would be lower than whatever answer you'd give though .

Just buy a few hundred shares of Pfizer and see how your attitude changes:)

[Barry]

What in your definition are "massive profits"?

I'm really not sure. I'm guessing it would be lower than whatever answer you'd give though .

Just buy a few hundred shares of Pfizer and see how your attitude changes:)

Yeah, but that would be offset by the sound of my Aunt Yetta complaining about the cost of her drugs on the phone every week . The Jewish guilt would probably force me to instruct my broker to sell the shares as soon as I could take a loss.

[Corlyss_D]

The Jewish guilt would probably force me to instruct my broker to sell the shares as soon as I could take a loss.

You are in rare form lately!

Here's some sketchy info from a Tufts University study into the costs of drugs. I couldn't find a link to the entire report.