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The Amazon Theory of Protectionism
For years, Walmart was the model of efficiency for the retail business. The true genius behind the world’s biggest retailer was not the superstore, or the cheap goods from China, but logistics. Walmart established what was perhaps the best distribution network in the history of mankind: an interconnected web of manufacturers (yes, some in the USA), warehouses, and trucks that moved goods from one point to another with astonishing efficiency. Coupled with advances in computer technology that gave them real-time data on stock levels, Walmart pioneered a way to use its trucking network as mobile warehouses, able to restock stores quickly with the goods that were most in demand. This allowed them to reduce their warehouse footprint, expand their retail presence, satisfy their customers, and make billions of dollars.
Then, a small start-up decided to disrupt it all. Amazon is a tech giant of the 21st century and one of the few dot-coms to not only survive the tech bubble, but to dominate its field going forward. Today, its businesses range from basic Internet retail, to back end server infrastructure, to some of the best darn consumer devices money can buy. It’s easy to forget it all started as a bookstore.
How did Amazon come to dominate so many areas of the 21st century economy? The easy answer is that its CEO, Jeff Bezos, is a genius. While this is almost certainly true — Bezos has a masterful grasp of the passions of the American consumer and was among the first to recognize the utility and importance of data collection in the internet retail age — he had some government help along the way. “What?!?” you might exclaim. “Only a liberal would say ‘You didn’t built that’! Amazon is a model of American dynamism and ingenuity. Bezos built that.” I am not here to gainsay Bezos’s genius or business-savvy but rather shed light on how big business can manipulate regulations and taxes to drive out competition. To which, you all respond “Duh, we’re conservatives!”
In its infancy, Amazon was just an online retailer like any other. It had some amazing innovations like their shopping cart, Amazon Marketplace and — most importantly — data collection/analysis, but it faced many of the same challenges other online retailers did. But another major factor in Amazon’s success was its decision to locate all their business operations and warehouses in states with little or no sales tax. This allowed Amazon, already a purveyor of low prices, to skirt things like California’s 9% sales tax, making their already impressive discounts even steeper in much of the country. For years, Amazon fought efforts by various states to impose their sales tax jurisdiction on Amazon, arguing — quite rightly — that since the commerce was happening on servers and shipped from warehouses out of state, places like California had no right to tax the transaction.
This was only the first step in Bezos’s plan for retail domination. He quickly realized that what was holding Amazon back from even further retail expansion was time; more specifically, his customers’ time. More often that not, patience is not a consumer virtue: People want what they want as quickly as possible and you’re local store has a big advantage in this way over an online retailer. To solve the problem, Bezos took a page from the Walmart book and greatly expanded his distribution network, placing a warehouse within two days of almost all major population centers in the United States, which meant abandoning its low-or-no-tax-only policy. Thus, Amazon Prime was born. Now consumers can get most products within 48 hours of placing their order, within 24 hours if they’re willing to pay for it, and — in some cases — the very same day. This presented Amazon with a conundrum: With all of these warehouses in states with sales taxes, it would have to start collecting sales taxes. Suddenly, one of its key advantages disappeared. The solution for Amazon was a complete about face on taxing eCommerce.
Why? First, Amazon recognized that its network — built during the wild west days of sales tax flaunting — put it in a position to dominate the Internet retail market regardless of any new sales tax laws. Second, collecting sales tax across state lines is complicated, much easier for a retail giant like Amazon to do this than a small upstart retailer looking to disrupt Amazon’s core business. In short, Amazon had outgrown the challenges it had overcome in its youth, and was now happy to see them imposed on would-be-challengers. The result has been an overwhelming success for Amazon.
So what does this have to do with protectionism? In much of America, sales taxes function (in practices) as tariffs on out-of-state purchases. Amazon recognized this and stayed out of most high-sales tax states while it was growing. But once its business was established, it quickly threw its muscle behind laws and regulations designed to protect it. A giant like Amazon can easily wade through the chaos of state and local taxes that drown upstarts and sole proprietors. Amazon captured the regulators and turned it to their advantage. Sure, Amazon could have pushed for legislation making all out-of-state Internet retail tax-free — a position it once held — but it had lost any reason to do so.
The exact same thing happens with international trade. However necessary or well-intentioned tariffs may be, they are inevitably captured by industry. Given the opportunity, government bureaucrats and their cronies in business will decide what goods matter, what companies matter, and what jobs matter. And, as should come as no surprise, they’ll put their own interests over the rest of ours whenever they come in conflict.
That’s always what happens when you try to rig a system, even on behalf of the little guy. I tend to think that the collective intelligence of 300 million people is better at deciding these things than a small cabal of connected businessman and politicians. But that’s just me.
Published in Culture, Domestic Policy
It’s in the Constitution – The Interstate Commerce Clause:
That clause was there precisely because, prior to the Constitution, states were imposing restrictions on goods from other states, ranging from mild to severe tariffs, including outright import bans. States were running protection rackets for native industries.
Interstate sales taxes were banned before the internet anyway, and not an issue because, aside from border cities, the inconvenience of going across state lines meant that most people shopped locally. Now that inconvenience has been mitigated, laying bare the consequences of ever ratcheting sales taxes.
Like Skip, I also am subject to a state “use tax” paid on goods bought out of state. Unenforceable, but on the books nonetheless. When Amazon started collecting sales tax, it actually made my life easier.
Our tax regime was established long before mail order, catalog, and Internet sales became a significant part of our commercial life. Now we have a question that has never been satisfactorily answered: In what jurisdiction do these transactions take place? That of the seller, or the purchaser?
As things stand, states tax their consumers. But if state and local jurisdictions are allowed to tax consumption at all, IMO they should be allowed to tax only sellers, not buyers. That way, sellers only need to deal with a single tax regime. Buyers can go where taxes are lower, if they choose. And if leftists really think “you didn’t build that”, why are they going to their consumers to fund their schemes, instead of the businesses that ostensibly benefit from them?
“Established” is a useful word because its definition lies in the eyes of the beholder. To a protected or subsidized company and its hired politicians, “established” is always “not yet.” Wind turbines, for example, have been heavily subsidized for decades. Their supporters’ judgement of their ability to compete with other forms of energy depends upon the audience. If the audience consists of politicians deciding whether to continue federal subsidies, then turbines are not yet “established.” If the audience consists of the faithful, then wind turbines are kicking butt.
We owe nothing to capitalism. It is a system of economic laws without morality or personality. We do not owe anything to gravity or natural selection either – we take them into account, but we are under no obligation to cooperate with them.
I am for capitalism because it describes reality and is the most effective system, not because of any devotion to capitalism. If a capitalist option is going to hurt my bottom line, I am not interested. I have no principled commitment to capitalism – my commitment is solely based on its efficacy. No, I am not a libertarian, thank you very much.
If you think that the conditions of the 1950s boom can be continually replicated,
We owe it to ourselves to utilize the best tools for economic advancement at our disposal. Capitalism has lifted more people from abject poverty than any other force in the history of mankind – I can find no more greater moral case than that. Its not like we haven’t tried protectionist mercantilism before – we have and found it wanting.
Then you do not in fact subscribe to capitalism. Capitalism means you take the bad with the good because in the long run good usually wins out. It does not mean you abandon the free market when you don’t get your way.
Then you are in fact a statist – you want the State to step in and fix problems for you when they don’t work out in your favor. Say – isn’t that what the “too big to fail” banks did?
Where have I said this? In fact in my time on Ricochet I have continually pointed out that the 50s were an aberration. That the American economic boom of the 50s/60s can’t be replicated again says nothing about capitalism or its utility for America and the world as a whole.
Omega.
Capitalism is a term we wrongly apply to freedom under the rule of law. The marxists gave us the term, not Adam Smith or his successors. Freedom is a moral position, or is a thing that allows humans to make moral choices and prosperity and human flourishing are the result. But yes it’s just the way things are and its driving forces make government or protected business gradually stagnate then rot, i.e. the same abstract model and assumptions about human choice in a world of scarcity. Free market’s organic reality also makes the idea of an effective regulatory state as unachievable as central planning.
Oh, yes!
I am going to stop using “capitalism” and replace it with “freedom under the rule of law.” It is much easier to defend Freedom!
How about “freedom under morality?” May not be more convincing, but it’s more correct (and less words). :)
Not sure. Morality then becomes connected (or not) to religion. Rule of Law is something most people can agree on. For me, it is the Freedom, as much as the Rule of Law, that is inherently moral.
Capitalism is completely amoral. Murder for hire is capitalist. Slavery is capitalist. Extortion is capitalist. It adheres to the rule of law, but it lacks any humanity. It’s no different from thermodynamics or the inverse square law. It’s how the net effect of humans buying and selling will work out, as long as resources are limited. The market will find a price for everything, including your life.
But don’t mind me. According to Jamie, I am a statist because I lack sufficient devotion to capitalism.
Excuse me? Where did that last line come from?
Capitalism encourages moral behavior by its very nature. No one will do business with you if you act immorally, commit murder or try to cheat the system. Capitalism might not be moral but it certainly harnesses humanity towards moral ends.