Rock-Bottom Prices! How our new
lowball culture is hurting the recovery.
By Daniel Gross
short-change workers, workers buy fewer
goods—and the overall economy suffers.
Some of the lowballing is a matter of survival. Due to technological shifts and global
competition, some businesses and industries
simply can’t afford to pay the wages that prevailed even a few years ago. Network-television correspondents, mortgage brokers,
bankers who structured CDOs, home-construction contractors—all are finding that it’s near
impossible to command the same wages that
they did during the boom times. State governments, whose collective revenues fell 11 percent in 2009, according to the Nelson A.
Rockefeller Institute of Government in Albany, N.Y., have been raising taxes, cutting
spending, furloughing workers, and slashing
pay.
September 13, 2010
The strike of about 300 workers at a Mott’s apple-juice plant in Williamson, N.Y., is nearly
four months old. Union members walked off
the job after Mott’s parent company, Dr Pepper
Snapple Group Inc., pushed them for concessions. Although Dr Pepper Snapple is highly
profitable, a company spokesperson said that
the company wanted to cut wages by $1.50 per
hour and freeze pensions to align factory costs
with “local and industry standards.” In other
words, because its employees were doing better
than other workers in the depressed upstate
New York region, the company demanded that
they do the same jobs for lower compensation.
Mott’s isn’t the only company squeezing its
employees during this recovery. With lots of
people unemployed and out of work, it’s a
buyer’s market for employers. In the economy
at large, wages have risen only 1.7 percent in the
past year, while corporate profits are up nearly
40 percent. A report by the Washington-based
Economic Policy Institute found that between
the second quarter of 2009 and the second quarter of 2010, men’s wages fell 1.3 percent.
Welcome to the lowball culture. In a world
of sluggish growth, excess capacity, and depressed expectations, buyers of goods and services—labor, houses, and restaurant meals,
among others—have come to believe that desperate sellers should take any offer they make.
But that kind of systemic bargain hunting can
create a dangerous spiral: employers
But plenty of smart people simply are taking advantage of changed circumstances. Take
the housing market. In 2005 and 2006, at the
height of the bubble, real-estate agents advised
clients to offer the asking price and be willing to
bid higher. In today’s housing market, which is
glutted by inventory and foreclosure sales
made by banks, the opposite dynamic is in
play. Buyers toss in a lowball offer and see if it
sticks. The most a seller can do is decline. During the housing boom, the listing discount—the
difference between the list price of a home and
the price at which it went to contract—was usually about 2 percent below the asking price. In
the New York region, a comparatively healthy
housing market, the discount was 9.1 percent in
the second quarter. “The chasm between buyer
and seller is wider than it has been in the past,
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Whether you’re an executive at Mott’s or a
and the wider the chasm, the lower the amount
of sales activity,” says Jonathan Miller, chief ex- fashionista in Chicago seeking a deal on jeans,
ecutive officer of New York–based appraisal lowballing makes economic sense. It’s good for
balance sheets, and the fact that people are befirm Miller Samuel.
Of course, if buyers don’t think the future ing more cautious about what they pay for
price of housing (or labor, or a car, or a stock) goods and services is a welcome reaction. But
will rise, then they will be reluctant to pay the systematic lowballing has broad implications.
current market price. And concerns and fears The economist John Maynard Keynes identithat prices will stagnate are contributing to the fied the “paradox of thrift”—if everybody
lowball culture. A few years ago, with rampant saves, everybody gets poorer, since a rise in
global growth, soaring house prices and savings tends to dry up demand. By the same
$150-per-barrel oil, inflation was both a reality token, there may be a paradox of lowballing. If
and a future threat. With the consumer price in- everybody lowballs and steadfastly refuses to
dex having flatlined so far in 2010, consumers pay existing prices as part of an effort to imand investors are much more focused on defla- prove their financial standing, then everybody
tion. Whether measured through surveys or will suffer.
Lowballing is most dangerous when it
comes to wages. For the past couple of years,
employers—even those making solid profits—have been scrimping on wages and benefits. Now they express mystification as to why
sales aren’t growing. If you lowball your own
workers, they’ll spend less, or shift to cheaper
goods, or start lowballing their service providers. In 1914 Henry Ford instituted the $5 day for
employees at his booming auto plants. He willingly paid above the market rate for labor in his
region and industry because he thought it
would stave off unionization, make it easier to
retain employees, and because he believed it
was good for his business. Ford reasoned that
paying his assembly-line workers more would
allow them to buy cars.
In Williamson, where the strike continues,
managers don’t seem to grasp this principle.
Cutting wages for workers unnecessarily will
render them, and, ultimately, their neighbors,
less able to buy bottles of Mott’s apple juice at
the local Wegman’s. They might switch to a generic brand, or drink water, or buy only when
there’s a margin-killing coupon available. Then
today’s lowballer will be tomorrow’s
lowballed.
through bond-market indicators, expectations
for inflation are exceedingly low.
The searing experience of the 2008–09 recession has also conditioned consumers at large
to seek discounts. Americans have always loved
bargains, but today they require them. Coupons
have morphed from a hobby of retirees to a
technologically enabled form of social media.
Since its launch in November 2008, Chicago-based -Groupon has become a phenomenon. It sends out a daily e-mail blast to people in
specific cities, offering a huge discount on
teeth-whitening, or pizza, or jeans from a specific vendor—but only if a certain number of
your peers commit to buying at the low price.
“This is a way of introducing e-commerce to local and small businesses,” says Andrew Mason,
founder and CEO of Groupon. Mason notes that
local businesses had traditionally looked down
on coupons and discounting because they
didn’t attract the upscale, repeat customers they
desired. But Groupon has tapped into the new
lowballing tendencies of yuppies. “The demographic we attract is one businesses want to
reach: 21 to 35 years old, 70 percent female,
making good money,” says Mason. (Groupon
splits the revenues from sales with vendors who
sign up.)
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