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Wednesday, September 20, 2023

The Problem with a Chicago Municipal Grocery Store

When it comes to centrally planned grocery stores, run-of-the-mill government incompetence is the least of our worries.

Image Credit: Chris Waits via Flickr | CC BY 2.0

Chicago’s new mayor, Brandon Johnson, is experimenting with a surprising new city policy— government-run grocery stores.

The policy idea was announced by Johnson earlier this week. “I am proud to work alongside partners to take this step in envisioning what a municipally owned grocery store in Chicago could look like,” he said.

The proposal comes in response to an apparent lack of access to grocery stores after giants Walmart and Whole Foods closed down their stores in large areas of the city.

The companies each claim the closures were due to the stores being unprofitable. The lack of nearby grocery stores has caused significant speculation on how these locations could possibly be unprofitable.

Many speculate the issues stem from rising thefts in Chicago. DailyMail reports, “to date in 2023 over 2022, thefts are up 25 percent according to the Chicago Police Department while robberies are up 11%.”

In any case, municipal authorities in Chicago have decided these closures are severe enough issues to warrant the development of centrally planned grocery stores. How would these stores do? Economic analysis can help us understand what central planning of groceries would look like.

Centrally Ignored Costs

How would a city-run grocery store compare to the private alternative? The main difference between private and government-run services comes down to one word—profit.

Privately run grocery stores have an incentive to make the most profit possible. Profit is simply the difference between the total number of dollars a store receives and the total amount of dollars the store spends (implicitly and explicitly) on inputs such as inventory and labor.

Maximizing profit means trying to maximize the difference between revenue and expenses. For any given amount of sales, stores want the lowest cost possible. Private business wants to buy the minimal amount of labor, inventory, and capital (e.g. shopping carts, shelves, and cash registers) possible while still maintaining high revenues.

This drive to minimize costs is a good thing for society. Every worker and machine used in a grocery store is a worker and machine that cannot be used anywhere else in the economy. Inputs in the production process are scarce, so the less inputs the stores use, the better.

Imagine a grocery store started hiring heart surgeons to work at cash registers. Doctors are smart enough that they’d certainly be good at the job, but this would be incredibly wasteful for society!

Luckily, it would never happen because in order to hire a heart surgeon the store would have to offer higher salaries than hospitals. A grocery store that did this would make a massive loss. This illustrates an important point. The costs a for-profit business faces reflect the cost of that business using society’s scarce resources.

While it may be obvious in extreme cases like this what inputs you should (or should not) use, not all choices have obvious answers. Should grocery stores buy a computer system that better manages pickup or physical metal shelving to have more in-person shopping? Which one is least wasteful for society? Profit and loss can give the answer. If the computer system does not generate enough revenue to make up for the lost opportunities elsewhere in the economy, the business will run a loss—just like hiring heart surgeons for cashiers.

For-profit businesses are necessarily conservationists of society’s resources because every resource used unnecessarily is money out of the pocket of business-owners.

No such logic operates in government-run production, however. There are no profits or losses in municipal operations. This means two things. First, there is no accounting for the value of the assets a business owns and uses in production. How much value are government cash registers producing on net? Without profit, there is no method for being able to tell.

Without the knowledge of profit and loss, there is no incentive for municipal operations to keep costs down. Remember, in for-profit stores every dollar of inputs wasted means a dollar out of the pockets of owners. What about if a dollar of input is wasted in a city-owned store?

Well, the dollar doesn’t come out of the politician’s pocket. It’s not as if the mayor of Chicago takes home the net revenue from Chiagomart. Ultimately, the cost of the grocery store will be borne by taxpayers.

So the problem of the municipal grocery store is twofold. First, a government-owned grocery store will buy and use scarce inputs, but it cannot use knowledge about profits and losses to know if the value created from the input is greater than the cost of using the input. Society’s scarce resources will be wasted. Second, there is no incentive for government-run grocery stores to cut costs because the costs are paid by the taxpayer.

The True Danger

A common claim I’ve seen from right-wing critics of the policy is to laugh at the possibility by saying this will result in a grocery store with DMV-levels of efficiency. They imagine empty shelves, long lines, and bad customer service.

To this point, many conservative commentators have invoked the famous story of Soviet Union leader Boris Yeltsin’s 1989 trip to a Texas grocery store.

As the story goes, Yeltsin visited a grocery store and was enamored by the wide selection of food available. The wide range of choice and quantity of food in the US destroyed any argument that the centrally planned stores in the USSR could do better. Yeltsin was so shocked, he assumed the store must have been staged.

This episode apparently had a big impact on the decision to liberalize the Russian economy throughout the 1990s.

But right-wing commentators are wrong to use this story as an example of their point. While it may be the case that Chicago city grocery stores will eventually be terrible in a visible way, there is no reason to expect them to look bad in the short term.

To see why, consider the difference between the USSR and Chicago. The USSR, despite some illusory economic data, was a poor country. When the centrally planned grocery stores failed to operate efficiently, there was no great pile of wealth for the Soviet government to draw from to support them. There was no masking the inefficiency of socialism in the USSR.

This is not the case with Chicago. Inefficient and wasteful decisions can be masked in Chicago because the city has access to taxpayer wealth. There is no economic law that says the government will be unable to run a grocery store if they are able to take thousands of dollars from unwilling citizens to do so. Ultimately, stocking shelves at the proper times is a technological problem not an economic one, and technological problems can be solved when you have access to a big pile of money.

The real danger with a city-run grocery store is that the tax revenue and inputs used by the store have alternative uses, and without profits and losses the city lacks the knowledge and incentives to make sure that the dollar value created by the store is greater than the dollar value of the resources used to operate the store.

Our big fear with municipal grocery stores shouldn’t be that they’ll be run like the DMV. Our fear should be that centrally planned businesses will destroy wealth. Since the entire Soviet economy was centrally planned socialism, there was no wealth to destroy to enable them to keep up appearances. Since the American economy is by and large capitalistic, the city-run grocery store will be able to operate so long as it can burn the wealth created by the free market.

Subsidized Dysfunction

The fact that Walmart and Whole Foods are not in these locations tells us something. “Greedy capitalists” will always seek to make a profit. If they leave an area, it’s because maintaining a business there destroys more wealth than it generates. Ironically, the city-run grocery store only serves to subsidize the problem at the root of the unprofitable environment of these areas of Chicago.

For example, if it’s true that the issue causing retail giants to pull out is theft, then the city store enables theft. Think of how it plays out. The new city store opens up and thieves plunder it. The constant theft means constantly needing to restock stolen items to keep up with customer demands.

How will the store deal with this shortfall? They’ll ask the city government for a check. Where will that check come from? All government spending comes from the pocket of the taxpayer. If theft is the reason Walmart and Whole Foods exitted Chicago, a municipal grocery store gives thieves access to taxpayer money.

Whatever is at the root of the issue, a government-run store with no knowledge or incentives generated by profit and loss will only exacerbate the problem. When you subsidize something you get more of it—unfortunately that includes wealth destruction and theft.

  • Peter Jacobsen is a Writing Fellow at the Foundation for Economic Education.