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What's Good for Wal-Mart Isn't Necessarily What's Good for America

I am traveling to a conference today, so I don't have time to say too much, but I can't resist responding to Wal-Mart CEO Bill Simon's dire warning about inflation. Let me make three quick points:

1. Labor costs are 70% of production costs. Until we see wage inflation, and we aren't seeing this yet, there's little likelihood that prices will be forced upward rapidly.

2. Wal-Mart has an interest in a strong dollar (i.e. anything but inflation). They import most of what they sell, so labor costs here aren't an issue â€" but the exchange rate is. However, the road to recovery is not through maximizing what we bring in from other countries, but rather what we export. Increasing net exports requires a falling exchange rate, the opposite of what Wal-mart wants. Thus, in this regard, what's good for Wal-Mart isn't what's good for America.

3. The other thing to note as that to the extent that this is being driven by a change in the world demand for commodities (and almost all the credible analyses I've seen places the blame for rising commodity prices on this), there's very little the Fed can do about it. For example, one of the concerns of Wal-Mart is rising labor costs in China, but the Fed has no control over labor costs in there, so the Fed cannot fix the problem for Wal-mart. However, this could help businesses here who cannot compete with low labor costs and a manipulated exchange rate, and that would help the US generally, but that is not what Wal-Mart wants.

So this sounds very self-interested â€" what's good for Wal-Mart â€" as opposed to an objective look at the economy.

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