Paul A. London, who served as deputy undersecretary of Commerce for Economics and Statistics in the Clinton Administration from 1993 to 1997, is author of The Competition Solution: The Bipartisan Secret behind American Prosperity (The AEI Press). London recently sat down for an interview with americansforwalmart.org Executive Director Luke Boggs.

Tell us about your outstanding book, The Competition Solution?

The basic premise of the book is that the success of the American economy in the 1990s had much more to do with more intense competition than with anything else -- and Wal-Mart is a part of that more intense competition. When I talk about success, I’m measuring success as I think most people do. That is, it became easier to get jobs in the United States. We had what people called the American job machine. And we had unemployment below 4 percent for a while. A rising tide was lifting all boats. Even people at the very low end of the income scale were doing better. That’s how I measure success, and I attribute that to competition.

By contrast, in the 1960s and 1970s, many parts of the American economy were dominated by older companies that had come out of the Second World War in a very dominating position: General Motors, AT&T, the big banks and insurance companies, the big steel companies. In retailing, the department stores in local areas were really very strong. Each of those industries had their unions, and they didn’t so much fight with each other but support one another. At General Motors, the unions had a very comfortable relationship with the company. The unions in the steel industry had a strained but still comfortable relationship in the sense that the wages in the industry were very high, and nobody was really trying to fight those wages down. In telephone service, you had a very strong union and a monopoly company. In airlines, you had strong unions and very limited competition. The financial area was a very comfortable area as well, without a lot of really hard competition.

By the 1990s, that situation had changed. We now have 10 automobile companies making cars in this country. We have a whole new steel industry in the United States, really a modern steel industry that now produces a little more than 50 percent of our steel. This new steel business was built from the ground up, with mini-mills all over the country. Even now, people hardly know about them, except in the communities where they’re located. Now there are steel mills in places like Blytheville, Ark., and out on the West Coast, where you never had a steel industry before. So the book points out that the whole economy has been transformed and that every section of our economy had become more competitive by the 1990s.

In retailing, the most important phenomenon was Wal-Mart, which had been a tiny company in 1970 and a huge one by the 1990s. In every area, these new companies that I‘m talking about drove down prices. Wal-Mart did more to fight inflation than Federal Reserve Bank. In my view, the end of inflation in the 1990s had much more to do with Wal-Mart than it did with the work of Alan Greenspan and the Fed, which I think is much overrated.

Global competition has intensified since the 1970s, yet our economy has performed well since the mid-1980s with almost uninterrupted growth and relatively low rates of inflation and unemployment. Why?

Well, in the global economy, the United States has been able to produce jobs faster than anybody – and move people from one part of the economy to another. Europe has been quite still for the past 15 years. They haven’t grown very much. They try to copy us, but their social systems usually resist. They think American competition is too cutthroat. Countries like China, India, Malaysia and other developing countries have done very well. China is huge, of course. Singapore has done very well. Vietnam is beginning to do well. These are places that, in many ways, have tried to copy the United States. Many of them are producing manufactured goods in very competitive ways, and I would say they have, in many respects, been influenced by the United States.

Tell us about what you call the "revolution in retailing."

The revolution in retailing is really the rise of Wal-Mart and Wal-Mart-like retailers. Retailing used to involve big department stores in larger cities and smaller ones in smaller cities. For a long time, the department store was the center of commercial development in cities. Meanwhile, you didn’t have very good retail services in rural areas. Along comes Wal-Mart and they opened large stores in rural areas, and they began, over time, to compete with not just general merchandise stores but also grocery stores, drug stores, toy stores, everyone.

I don’t think Wal-Mart destroyed the department stores. In the areas that I know in New England, many of the department stores were out of business long before Wal-Mart came along. The smaller chains that sold appliances and furniture and things like that had largely emptied the center of cities like Pittsfield, Mass. Wal-Mart didn’t do in the old downtowns, which had been fading for a long time. But Wal-Mart brought in much lower prices, forced other companies to lower their prices and become more competitive. There’s no question that the drug chains, for example, have had to become more efficient.

Wal-Mart squeezed out a lot of wholesalers in the middle. They demanded lower prices from manufacturers, which had a lot to do with the improvement in the efficiency of American manufacturing. This is a revolution in retailing, but it had a lot of implications throughout the economy, particularly in making the supply chains more efficient.

When Sam Walton began Wal-Mart, how did he shake up the retail status quo?

In rural areas and just on the edge of the suburbs, there had always been chains of stores. They would sell not very good products, and sometimes they would have one or two sale items. They would try to get you in with the sale items and try to get you to buy other things. It was not a great system for ordinary people.

Walton came along and he said, look, if I can get very good deals, I’m going to sell these products at a very low price. Everyday low prices. I’m going to do this very efficiently. I’m going to look at how I run my stores, much more than people used to do. I’m going to get rid of these traditional markups. I’m going to sell goods for as little as I can and grow my business. And that has been their policy ever since. Other people have adjusted to that, and now Wal-Mart is trying to adjust as well, adding more style, for example.

Wal-Mart sold quality products at a very low price. After a while, they became large enough that they could actually negotiate lower prices from manufacturers. And they got rid of a lot of middlemen. They are a very tough company, but, as you’ve seen with companies like Target and the dollar stores, some of the rest of the retailing system has adjusted very successfully to Wal-Mart. I think Wal-Mart is under real commercial pressure now.

How would you say the growing success of Wal-Mart and other modern, efficient retailers has impacted consumer choice and pricing?

Consumers in the United States have done very well because of Wal-Mart, especially low-income consumers. All the new electronic appliances sold through Wal-Mart, the enormous amounts of groceries sold through Wal-Mart, these products are significantly lower priced at Wal-Mart. That’s why consumers are going there. It is my experience that shopping at Wal-Mart can be kind of fun, and I’m a relatively upper-income consumer. There is enormous choice. People vote with their feet, and they have gone where the deals are better. This is something that started some time ago with shopping malls and various kinds of big box stores, but Wal-Mart really took it to another level. They really focused on consumers, and it is a very enviable part of the way they work. Along the way, Wal-Mart did more to fight inflation than the Federal Reserve – and killing inflation makes low unemployment possible.

How would you say this type of intense retail competition has benefited American consumers relative to consumers in other parts of the world?

There are some big-box retailers in Europe. In fact, Wal-Mart has bought chains in the UK, Germany and other European countries. But Japan is an example of a place where they’re very good at manufacturing things, but their retailing system is very, very expensive. They have a lot of politically powerful wholesalers, and they have been trying to reduce the wholesalers’ clout for a long time, without much success. Today, the cost of living is very, very high in Japan because of the inefficiency and backwardness of the retailing and wholesaling systems.

How would you say competition from Wal-Mart is driving improvements in grocery stores and other retail segments?

These stores know they have to compete with Wal-Mart. They know Wal-Mart is getting into the food side of retailing, so the grocery chains have really been improving their service in order to keep Wal-Mart from taking business away from them. And I think this is a terrific thing for the consumer in this country. You get better and better service. Wal-Mart doesn’t focus as much on service. They focus on low prices. Some people want to buy a little more service, and a lot of the grocery chains have adjusted. They may have found a way to compete with Wal-Mart in a way that doesn’t force them to lower prices quite to the Wal-Mart level. But competition from Wal-Mart puts a lot of pressure on grocers to be more efficient. They have to be more efficient purchasers, have more efficient trucking operations, better warehouses and logistics. One of the things that drove investment in the 1990s was companies modernizing warehouses and other parts of the supply chain in order to keep up with Wal-Mart.

How would you say Wal-Mart has impacted relative regional prosperity in the United States?

The South has been a low-income region since really the Civil War, but it has been catching up. I think part of the reason is that Wal-Mart has been a southern and western phenomenon. In addition, a lot of the new banks that got really big in the 1980s and 1990s came out of the South and West, as did many of the new mini steel mills. Wal-Mart is part of a pattern of development in the lower-income areas of the country, which has now reduced the income gap between the Midwest and Northeast and the South and the West. I think that’s usually a pretty good phenomenon.

I think the hard thing is that there are a lot of people in the Northeast – where business structures are quite a bit harder to change – who are losing out. It is harder to open a Wal-Mart in the Northeast than in it is to open one in the South. Now Wal-Mart has pretty much saturated some areas of the South and West and is trying to find ways to grow in the Northeast. It is a problem for consumers in the Northeast, where they don’t get Wal-Mart’s help in making the whole retail sector less expensive. And it is also a problem for Wal-Mart because they do depend a great deal on growth.

What’s the relationship between competition and the various PR attacks on Wal-Mart?

The people in the United Food and Commercial Workers Union and other labor groups feel threatened. Wal-Mart has no unions, and they pay significantly less than the unionized super market chains. Of course, Wal-Mart pays more than the minimum wage, and a lot more than the little mom and pop stores. But the unions feel very threatened by Wal-Mart’s success and so do their employers. Both the employers and the unions are part of a pretty tight coalition against Wal-Mart. They bring in a lot of people who are well-meaning – environmental groups and nostalgia people – and they form a coalition hostile to Wal-Mart in various communities. But there are a lot of commercial interests behind it. The unions want to maintain wages that are much higher. I can understand that they feel threatened, but I think the real story is that Wal-Mart pays almost twice the minimum wage and isn’t an especially low-wage employer. It is a middle-wage employer in the retail industry.

Unemployment is down around 4.7 percent, way lower than it was all through the 1980s. Yet, there are still hundreds and hundreds of people out there who want those Wal-Mart jobs. If they wanted, I suppose they could go to some little mom-and-pop store and try to get work. But I think that is the proof that the mom and pops aren’t offering such great health care and wages because there are a lot of mom-and-pops out there.

Efforts to limit retail competition are not new, as you point out in your book, but they seem to have intensified in recent years. What do you think about current anti-competitive efforts?

In general, I’m very worried about hostility to competition in the United States. Today, there’s a lot of concern about competition from imports and a lot of hostility toward Wal-Mart. I think that the genius of the United States is that we have been open to new competitors. Competition has been, since the time of the Founding Fathers, essential to our success. It has been what separated us from the rest of the world, where people inherited their place and stayed in their place. Here, we let new people shake up the economic system, and that’s why ’ve done so well.

I’m very concerned about the attacks on Wal-Mart because I believe they are based on the idea that there is some good alternative to fierce competition. But there isn’t. Competition is sometimes painful, but it is fundamentally American, it ’t be replaced, and it works. We believe in political and economic competition. You have to have rules for competition, of course, and we do. But, in politics and economics, competition is the American idea that changed the undemocratic world, where elites always prevent people from competing. When people start to think that competition is too intense or that America can’t compete, a lot of what America is about goes away.

What will happen if opponents succeed in limiting competition?

If they are successful, it is going to be very damaging. It will tend to make society very rigid, and you start to get a very different place than America has been. John Deere, for example, came along, and he changes the plow. He keeps on changing it every year, and he doesn’t even really try to protect his patent. He just keeps making it better and better and better. That’s how America has, in the phrase of Woodrow Wilson, "liberated the energies of the people.”"

We have been very good at liberating the energies of our people. When you start telling people they can’t compete, their energies become very bottled up. And it isn’t a good thing. As an extreme example, it ’t government ownership itself that was so terrible in the Communist countries. But there was no competition. And the Communist states just crumbled because such a system eventually just falls way behind.

Hostility to retail competition in the name of small stores has been around a long time. People campaigned against A&P, which was the Wal-Mart of the 1920s and 1930s. If that old dynamic and Wal-Mart’s real competitors were the only things working against Wal-Mart, I ’t be worried. But I think there is a growing sense that America can’t compete, and I think that’s a very bad and potentially dangerous thought.

Many of the most high-profile critics of Wal-Mart identify with the Democratic Party. As a Democrat yourself, do you see this as a winning issue for your party?

I think Americans want to compete. President Clinton always told Americans that they had to make change their friend. We had a very competitive society during the 1990s, with historically low levels of unemployment. So I don’t think it is a good issue for Democrats to rally around. While a lot of opposition to Wal-Mart has been from Democrats, many other Democrats realize that Wal-Mart has been very good for poor people. Many of the unions support Democrats, so Democratic politicians face a lot of conflicting pressures. But I think Bill Clinton was exactly right to say we have to make change our friend. And the proof that change can be our friend is the 1990s, when, for a lot of reasons, the economy did marvelously well.

In Federalist 12, Alexander Hamilton wrote that you just don’t ever quite know what kind of energies are going to be liberated in a free economy. He was the greatest economist we’ve ever had. He set up the financial system, he funded the debt, he understood economics, he dealt with stock market collapses. Even so, Hamilton understood that in economics you never quite know where the next big thing is going to come from. He celebrated that, and I believe we have to celebrate that and not try to nail down on the country a particular set of business relationships.

As America competes in the increasingly global economy, does it make sense to try to penalize highly competitive companies like Wal-Mart here at home?

No. It makes no sense to try to hurt Wal-Mart. I’m not in favor of monopolies. But Wal-Mart is not anywhere near a monopoly. There are huge numbers of real competitors out there that are coming at Wal-Mart from all different angles. So I don’t think it makes sense to handicap Wal-Mart. Its competitors are already working very hard to check and balance it, and I think that is, by and large, enough. I think some of the things Wal-Mart has done they might have done better, some things they’re moving away from. But I think Wal-Mart has been a fabulous company for the United States.

Do you think America could use a Wal-Mart-style competitor in the health care industry or in other areas of the economy where pronounced competition doesn’t exist?

A recent article found that 55 percent of the time people don’t get the right treatment at the doctor. And there isn’t much difference, once you get to the doctor, between the care if you’re really poor and if you’re not. You get, as the article said, lousy care no matter how much you pay, and the cost of this care is rising.

Everyone I talk to has examples of terrible service from doctors. Now I realize many people are saved by doctors. They do wonderful operations, for example. But health care is a totally disorganized industry. One doctor can hardly talk to another, except by telephone, which is the way they would have talked to each other in 1926. They are, by and large, not computerized. They can computerize the bills, but your record is on paper. It is a disaster organizationally.

I think we need a different organization of health care. I think in the next 30 years we’re going to see large, competitive companies with integrated, organized services that are far different from the disorganized system we have now. I don’t think you solve it by having a single-payer system, by the way, which would only change the way we fund the current disorganized, uncompetitive approach.

Ultimately, it’s not about competition between insurance companies. What the country needs is competition to give better care.

Is Wal-Mart good for America and why?

I think Wal-Mart has been very good for America. It’s a very American phenomenon, a new guy coming along and shaking up 20 percent of the economy. It’s a model of competition that the world envies and is trying to copy. I hope there are always Americans who come along the way Sam Walton did, and the way other people did in other industries, to shake up established companies and make them serve customers better. The key to this country, what makes it great, is that we let new people shake us up. And when we stop that, we will not be the same America.

People are trying to copy Wal-Mart overseas, they’re trying to copy the American financial system overseas, they’re trying to copy a lot of things that we do. We’ve had a big effect in the world. I hope that continues, but it won’t if we limit competition here in the way that Wal-Mart’s opponents would like.