What is the cost of Low Prices

Are low prices always a good thing?

I received the following e-mail from my niece...

John Smith started the day early having set his alarm clock (MADE IN JAPAN) for 6am. While his coffeepot (MADE IN CHINA) was perking, he shaved with his electric razor (MADE IN HONG KONG). He put on a dress shirt (MADE IN SRI LANKA), designer jeans (MADE IN SINGAPORE) and tennis shoes (MADE IN KOREA). After cooking his breakfast in his new electric skillet (MADE IN INDIA) he sat down with his calculator (MADE IN MEXICO) to see how much he could spend today. After setting his watch (MADE IN TAIWAN) to the radio (MADE IN INDIA) he got in his car (MADE IN GERMANY) and continued his search for a good paying CANADIAN JOB. At the end of yet another discouraging and fruitless day, Joe decided to relax for a while. He put on his sandals (MADE IN BRAZIL) poured himself a glass of wine (MADE IN FRANCE) and turned on his TV (MADE IN INDONESIA), and then wondered why he can't find a good paying job in CANADA....

Here is my response.

Your email Colleen is quite valid. In fact over the past year Canada has lost over 100,000 manufacturing jobs due to the weak US dollar (not the strong Canadian dollar) and to increased competition from countries that have lower wage rates, usually no benefits and no health or environmental safeguards.

Canadian manufacturing was insulated by a weak Canadian dollar so manufacturing did not have to become more productive and now companies can't retool and increase productivity fast enough. Economists have been worried about that for years and now it is coming to reality.

The unemployment rate in Canada is at its lowest level in 30 years because a) the housing sector is still booming because of low interest rates and b) because the manufacturing jobs were replaced by lower paying service jobs.

Once interest rates go up (they went up again yesterday), the housing market will cool off rapidly. In the GTA most people are carrying a $ 200.000 mortgage. A 1% increase in the interest rate will result in increased monthly payments of about $ 166.00 per month - not too bad but if the rate goes up by 4% (which is possible), this would be over $ 600.00 per month which would force many into bankruptcy.

The rising price of oil will only make this problem worse because many people commute great distances to work. The price of oil is not going to go down much further because a) the economy seems to have been able to absorb the high price and not collapse so there is no incentive for OPEC to drop the price b) demand for oil by North America is still increasing and demand for oil in China and India is exploding (as manufacturing shifts there) and something that has not been a factor is that there is a finite supply of oil in the ground.

While there are some who would argue we have lots of oil - these people are getting fewer and fewer. Oil takes 150 million years to make. We started using oil in earnest 100 years ago and have used about 1 trillion barrels of oil. Best estimates are that we have 2 trillion barrels left. We are at the point where most of the easy to access oil has been used (Iraq being the last source of easy to access oil) and at the point where we are now we are using oil faster then we are finding new sources of oil. New found oil is under the sea, mixed with sand (Alberta) and under the Arctic.

Cheap oil is certainly gone - Extracting oil from the tar sands takes 1 barrel for every 3 (or is it 2) produced. Plus it takes a great deal of water to separate the oil from the sand and the level of most rivers that are used for this have lowered considerably because the glaciers are disappearing (faster now because of global warming).

Wal-Mart is the poster child for all that it is wrong with major corporations and globalization - and for good reason. It is 4 times bigger than home depot its closest competitor. It employs 1 out of 115 people in the U.S., accounts for 10% of the U.S trade imbalance with China, has sales of $ 288 billion (roughly twice the budget of the Government of Canada) , contributes hugely to urban sprawl since each store needs about 20 acres of land and most people have to drive to get there, and forces wage rates down in the retail industry...and that is just for starters.

Wal-Mart sets up a store and immediately local businesses start to close up shop. Wal-Mart is a very efficient machine. People go there because they think its cheap (and it often is) and that you get more variety. Wal-Mart carries many lines but you get less selection then you would have if those 20 specialty stores that use to sell that product had stayed open.

So what price is this low cost? Wal-Mart has been able to keep the unions out which means we have an entire class of working poor - Barely above minimum wage. This causes downward pressure on labour costs because in order to compete with Wal-Mart on price they can only pay low wages. So when you have a class of working poor who has to pick up the social costs - well we all do - crime increases, medical costs increase etc.