What Safeway Can Teach Us About Economics

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by John Tamny,  Toreador Research and Trading (Guest Contributor)

Embrace free trade, and let markets correct themselves.

Not long ago Safeway re-opened what Washington residents have long referred to as the "Social Safeway." Conveniently located, well stocked with everything a grocery shopper could want, and staffed with helpful employees, the grand re-opening cheered Safeway's loyal customer base, plus it exposed a few long-held economic misnomers in the bargain.

For starters, over the past year the trade deficits that myriad Washington, D.C., residents have traditionally run with Safeway plummeted. To conventional economists oblivious to the basic truth that we produce in order to consume, this has been a good thing.

But for the average resident of the District, the falling trade deficit with Safeway's flagship location has been a major inconvenience. Thanks to a year-long remodel, residents had to either increase their trade deficits with ExxonMobil and BP in order to drive to more distant grocery stores, or, in my case, shifted their trade deficit from the relatively healthy fare available at Safeway to McDonald's, Popeye's and Burger King.

The lesson here is that far from economically harmful, we're able to have trade "deficits" with the retailers of our choice by virtue of running trade surpluses with our employers. Trade deficits are the reward we attain for productivity in our profession of choosing.

Of course some in the economic commentariat decry free trade in concert with their irrational fear of trade deficits. The idea here is that if we take in too much in the way of imports from where we don't live, poverty will be ours. The revitalized Safeway in our nation's capital disproves this faulty notion.

To understand why, one need only walk the aisles of the new store. Thanks to a major inventory increase, Safeway's customers can access fine wines from New Zealand, obscure cheeses from France and beer made in Mexico.

If D.C. residents tried to produce even a small fraction of the goods Safeway has for sale, they would not only fail, but product supply would be limited, unappealing to the palate and quite expensive. Worse, in attempting to achieve self-sufficiency in the production of goods outside their core competency, they would have less time to do the work that maximizes their individual talents.

Not only would barriers to trade turn a life of plenty in Washington into one of unrelenting want and drudgery, tariffs would also quickly impoverish us all given the need to spend the majority of our time producing life's essentials. At present, D.C. residents have the ultimate deal in place in which they exchange the fruits of their chosen work for the products of others specializing in their labor of choice. Without the ability to trade freely they would simultaneously be poor and deprived.

Of course the mere size of the glitzy new Safeway means that its customers enjoy lower prices given the volume discounts enjoyed by major retailers. Some would say this is deflationary, but in reality, the lower prices don't change the price level for D.C. residents one iota. Taking nothing away from the wealth and life-enhancing nature of free trade, the lower prices Safeway's customers enjoy merely expand the range of products available to them, and money saved is spent on other, formerly out-of-reach goods, thus driving their prices up.

Conversely, the Federal Reserve is presently staffed with many individuals, including Fed Chairman Ben Bernanke, who believe that economic growth itself is the cause of inflation. Among other things, they believe that if employer demand for labor outstrips labor supply, then rising wages will drive an inflationary event. Happily, the Social Safeway disproves this false notion too.

Indeed, rather than wait in line to purchase their groceries from a live human being, many customers do the work themselves. Thanks to self-checkout lines, they're able to scan, bag and pay for groceries on their own. While Safeway's employees are almost uniformly pleasant, simple observation shows that many of its customers enjoy a shopping experience free of human interaction altogether.

The Fed believes that during periods of strong economic growth that it must use its interest rate mechanism to put people out of work in order to restrain inflation. Safeway, through its automated check-out system, proves that markets, if left alone, will create ways to get around periodic labor shortages.

To most Washington, D.C., residents the Social Safeway is--and will remain--a shining example of what all grocery stores can aspire to be. Yet at the same time there are economic lessons in those aisles. And if properly understood by our federal minders, those lessons could save us a lot of economic heartache thanks to Safeway making understandable what politicians presently do not.

About John Tamny:
Mr. Tamny is a senior economic advisor to Toreador Research & Trading, columnist for Forbes and editor of RealClearMarkets.com. Mr. Tamny frequently writes about the securities markets, along with tax, trade and monetary policy issues that impact those markets for a variety of publications including the Wall Street Journal, National Review and the Washington Times. He’s also a frequent guest on CNBC’s Kudlow & Co. along with the Fox Business Channel.