Sunday, August 13, 2006

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Why the academy needs a South Side fellowship

In the pages of the Boston Globe, Harvard Law professor David Barron looks at how the city of Chicago is treating big box retailers and believes it to be a good thing:

On July 25, the Chicago Board of Aldermen passed an ordinance requiring big-box retailers-those with $1 billion in sales and 90,000 square feet of shopping space in their stores-to give their employees a living wage. By 2010, the stores would have to pay workers $10 an hour and provide an additional $3 in benefits.

Despite strong support from local unions and merchants, and concerns that an influx of low-paying big-box retail jobs could do more harm than good, the mayor has threatened to veto the measure, and some are talking about asking the courts to strike it down if it's enacted. They say the new law is not only unfair but also bad policy. It would, they argue, deprive the city of sales taxes, force consumers to pay higher prices, take jobs from poor people, and push new development to the suburbs.

But whatever one thinks of the merits of this debate, the fact that Chicago is even having it is important. Other cities, including Boston, are already thinking about following the aldermen's lead: As Wal-Mart contemplates its first store in Boston, city councilors Chuck Turner and Felix Arroyo have said they plan to explore an ordinance similar to Chicago's. This surge of interest in regulating big-box retail shows that, at last, America's cities are beginning to think of themselves as choosers rather than beggars. They have emerged from decades of decline with newfound financial strength, and they are now beginning to assert their public powers to decide the kind of cities they want to be....

And so, with demand for urban locations higher, cities-as free marketers should be the first to realize-are no longer willing to sell themselves at any price. The Chicago Sun-Times, in the process of condemning the aldermen's action, hit on just this point: ``[They] think the dense Chicago market is too attractive for the retailers to pass up, especially since most suburban areas already are saturated. They're taking a risk that Wal-Mart and Target are bluffing." Exactly right. The aldermen are betting that big-box retailers will build even if the ordinance becomes law, but it's a safer bet than the Sun-Times allows. After all, the new measure does not bar big-box retailers from doing business in the city. It just requires that they provide employees high enough wages and benefits so that the city won't have to make up the difference through the social services it provides....

Like new office buildings, big-box retailers also bring burdens along with benefits. Some studies show they may depress wages in related businesses or threaten small, usually family-owned retailers. In many cities, including Chicago, it is the growing immigrant neighborhoods, chock-full of such small family-run establishments, that are re-knitting the urban fabric and producing significant amounts of social capital. A law restricting big-box companies from using low wages to support price cuts that might force these important community retailers to close is arguably a tailored response to a reasonable concern. Certainly it's hard to say that Chicago is acting recklessly.

As I've said before about this case two years ago, Chicago is acting recklessly. Erecting significant barriers against big box retailers moving into the inner city does little more to hurt the poor.

Barron seems to assume that without Wal-Mart, the whole of Chicago is this nirvana of small, quaint shopkeepers who provide a diversity of goods and services with a smile and a fair price. Having lived close to the area where Wal-Mart was planning on putting its South Side location, I can assert that Barron doesn't know what he's talking about. There are very few, "small family-run establishments" to displace. The absence of any big-box retailer between Roosevelt Rd. and 85th St. makes it fantastically difficult for the poorest members of the city of Chicago to buy low-priced goods. Barron's focus on unions and small merchants at the expense of, well, everyone else is more than a bit disconcerting.

[He's right about abstaining from tax breaks and the like, though, right?--ed. There's a valid point to be made about putting a halt to cities throwing tax breaks around like candy in a vain effort to attract corporate headquarters, manufacturing plants and the like. However, Barron's implicit economic assumption is that because cities have considerable market power, they can use it to advance the cause of good. The trouble with that argument is that anyone who has ever chatted with a Chicago alderman knows full well that good has very little to do with urban plicy.]

It might behoove some foundation to create a fellowship for enthusiasts of urban reform to spend a year on the South Side in order to get a taste of what it's actually like to live in the inner city before pontificating about policy [Would this apply to free-marketers as well?--ed. Sure.]

UPDATE: Barron responds on his blog. Key section:

I was not arguing that Chicago should pass the ordinance but rather that Chicago should have the legal power to make the policy judgment for itself. Drezner, an economist, skipped right over that distinction. (If I need a fellowship to take me to the South Side, as he suggests, then maybe he needs one to take him to law school.) Actually, though, Drezner is on to something interesting and important. He emphasizes rightly that not all city neighborhoods are the same. It might be that the city would be wise to permit bix box retail in some neighborhoods within the city on more favorable terms than others. The mayor has suggested as much, proposing that each ward be able to decide the matter for itself. It's a complex policy question, however, whether such neighborhood-based tailoring is a good idea or a bad one, and it depends a lot on the particularities of the retail market in the Chicago area. I am skeptical it is a good idea, but open to being persuaded otherwise. But, for me, the key point for now is that a city could not tailor its policy in this neighborhood-focused manner even it was a good idea for it to do so unless it had the legal power to enact such living wage ordinances at all. And that's part of the reason why I think the Chicago ordinance, if enacted, should be upheld against the home rule, equal protection, and ERISA-preemption challenges that are sure to follow.
Question to readers: should a city have the right to mandate a living wage and apply that mandate asymmetrically to businesses? I suspect that for most people this depends on whether you believe a living wage is sensible policy. One could adopt a process-based position that says regardless of the stupidity of such an approach, an elected council has the right to enact such a policy. At the local level, however, on measures that impose asymmetrical barriers to entry, I strongly lean towards a combination of a public choice perspective, which is skeptical that any city-wide ordinance would actually represent something approximating the general will, and a classical liberal perspective, which would be profoundly skeptical of the city imposing property rights constraints.

posted by Dan on 08.13.06 at 09:49 PM


Professor Barron has once again proven that education is no guarantee of intelligence. Where does Prof. Barron think these new Wal-Mart employees are coming from ? Former U of Chicago employees? Yeah, I'll give up that $15/hour job to get that fashionable uniform and front door job. Parents, who are footing the bill for a Harvard education, might want to rethink that decision. Even worse, our country is run by this Ivy League elite.

posted by: john perulfi on 08.13.06 at 09:49 PM [permalink]

if big-box retailers are willing to invest $$$ building stores on the south side, why should free-marketers feel any obligation to "spend some time" there?

it seems to me the retailers actions speak louder for the benefits of an open market than some symbolic visit ever could.

posted by: Kurt Koch on 08.13.06 at 09:49 PM [permalink]

if big-box retailers are willing to invest $$$ building stores on the south side, why should free-marketers feel any obligation to "spend some time" there?

it seems to me the retailers actions speak louder for the benefits of an open market than some symbolic visit ever could.

posted by: Kurt on 08.13.06 at 09:49 PM [permalink]

OK, but would someone clue me in to the meaning of the "editor's" comments that I see so often in personal blogs?

posted by: Constant on 08.13.06 at 09:49 PM [permalink]

All right, Vermont is not a great comparison to the South Side, but we have been dealing with the great Wal Mart debate here.

Rather than focusing on wages, the State chose to focus on health care. Under the new health care plan, large employers who have a sizable percentage of employees who are not offered access to affordable health insurance are appraised an additional payroll tax. The payroll tax is then used to enroll uninsured Vermonters in a statewide health insurance program (on a sliding scale based on income).

Walmart, which has 4 stores in VT, howled at this proposal orginally and threatened to pull out of the state. When the popular response was a collective "don't let your ass hit the door on the way out," Walmart became curiously quiet. The legislation passed earlier this year. And you know what, Walmart is looking to open another store in VT and expand an existing store near Burlington.

While I am a bit skeptical about the living wage proposal (the idea of 2 minimum wages in a community is a formula for unintended consequences), I think the Chicago approach is sound. After all, for decades American communities have been stuck footing the bill for a lot of companies on the rationale that companies need to keep cost down to be competitive. While that is true, companies also need to grow to maintain (and hopefully increase) shareholder value. Companies, such as WalMart, have largely saturated their existing markets - the only way for them to grow is to enter new markets, both domestically and internationally. That need to grow gives these new markets some negotiating leverage. Why shouldn't communities , such as Chicago, use that fact to their advantage, and extract the best deal they can? Isn't that the free market at work too?

posted by: SteveinVT on 08.13.06 at 09:49 PM [permalink]

"Walmart, which has 4 stores in VT, howled at this proposal orginally and threatened to pull out of the state"

That approach might well work for a state (at least in areas not near a state line), but not a city. WM just broke ground for a new store a few miles from my house - they moved the site about 1000 feet to get around some environmental restrictions, and they could do the same thing here. If they move across the city line to dodge the requirements, all Chicago does is lose tax revenue. Also, I've worked for an independent mom n' pop business or two, and my experience is that they aren't exactly bastions of astronomical pay and lavish benefits.

Remarks from law professors about business issues should be viewed with extreme skepticism:

posted by: J on 08.13.06 at 09:49 PM [permalink]

The references to small family-owned businesses as among Wal-Mart's victims brings to mind the Robinson-Patman Act, the federal anti-"price discrimination" law enacted in 1914. The acknowledged purpose of the law was to protect mom-n-pop retailers from big chain stores presumed to have unfair pricing power (Sears, Kresge's, Woolworth's etc. at the time).

There must be some empirical work on the impact of Robinson-Patman - whether in fact it protects small local retailers, impacts on consumers and employees, etc. That would be instructive in the Wal-Mart debate. Professor Drezner, any idea?

posted by: Richard Riley on 08.13.06 at 09:49 PM [permalink]

Why do people keep talking about additional costs to the city of health care of low wage employees? There are NO additional costs that Chicago is "picking up" for these employees. Unless you are saying that someone would leave a job with full medical benefits to go to work at a wal-mart that pays "sub-standard" wages and has no benefits. What are these people, who would work for wal-mart, doing for insurance now? My guess is that the city of Chicago is picking up their tab already, so there is no change in "costs", unless they are actually lower.

This whole game of trying to write laws to force certain employers to pay higher wages is a complete farce. Maryland tried it with their ‘wal-mart law/ and it did not work. Why are some people so anti-poor that they won't let them have access to affordable shopping?


posted by: BCN on 08.13.06 at 09:49 PM [permalink]

The real irony is that all the North Side [i.e. 95% white and considerably wealthier, with big box stores] aldermen voted for the ordinance, while those who were against it came from the communities who would have gotten the stores.

The south and west sides are severly underserved when it comes to any kind of commercial uses, particularly grocery stores and big box retailers.

I work at a developer and we've met with the aldermen in some of the wards down there and they are desparate to see more commerce in the south side. They are particularly bitter that Wal-Mart's proposed store for the south side got nixed last year, only to see Wal-Mart open up right over the Chicago City line in a an inner-ring suburb; along with all those taxes.

Chicago is enjoying an Urban rennassance along the lakeshore and inner core city; including the south side. If they keep up this kind of stuff though, folks may decide they don't want to live downtown.

posted by: ElamBend on 08.13.06 at 09:49 PM [permalink]

I think living wages are a damned silly idea myself, but if a community wants to mandate them, let it. I suspect they'll simply induce the same sort of distortions into their local economy that, say, San Francisco has managed to introduce into the market for homes in the Bay Area. In the end, they will pay for their decision in one way or another.

And when they screw it up, they can even George Bush for the homeless problem, like the San Franciscans do!

posted by: Nanonymous on 08.13.06 at 09:49 PM [permalink]

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