Who profits from rock-bottom pricing?

This "race to the bottom" in labor costs also seems to rub off on a surrounding area, according to research from economists Stephan Goetz and Hema Swaminathan at the Northeast Regional Center for Rural Development at Penn State University. While the national poverty rate dropped 2.4 percent between 1990 and 2000, the rate fell by just 0.2 percent on average in counties that added a Wal-Mart. One theory: Although Wal-Mart creates jobs, the company also eliminates jobs by putting others out of business.

"We didn't expect Wal-Mart would be able to affect poverty on a countywide basis, but lo and behold it did," says Dr. Goetz. Even so, he adds, discounting poses dilemmas. "It's hard to quibble with saving money, unless you're creating costs to society that you are not bearing."

Such findings seem to demand that ethical investors use their clout to insist that discounters compensate their workers better and perhaps set off a positive ripple effect in a geographic area or industry. But Wall Street notoriously punishes firms that raise labor costs, an outcome no investor would appreciate. Even if short-term returns weren't a concern, some wonder if higher prices at the cash register would truly serve the common good.

Goetz, for instance, acknowledges that low prices on goods from food to hardware bring a valuable social benefit: "The standard of living is up for poverty-stricken people. Critics of Wal-Mart haven't looked at that." For Bruce Weber, codirector of the Rural Poverty Research Center at Oregon State University, research on discounters' social impact is still too scant to warrant firm conclusions. Still, he believes the issues are broader than they have been framed in public debate thus far.

"A whole bunch of consumers are better off from the low prices, but a few workers are worse off. That's the way economists soothe themselves about all of this," Professor Weber says. "I think it's an empirical argument. How many people benefit and how many people pay? Most economists believe keeping prices down offers a benefit.... For an individual consumer who doesn't depend on [a discounter's] wages, how could it not be better to have a Wal-Mart?"

Where ethical investors might test their mettle, however, is in weighing the immediate benefits for individual consumers - even the poorest ones - against other long-term goals. If saving American jobs in textiles and other labor-intensive industries is a top priority, discounters who rely on outsourcing to overseas manufacturers might not offer the best investment option. Similarly, those who care deeply about preserving American communities that reinvest locally might not favor the Wal-Mart model, in which Goetz says "all the profits are siphoned off to [corporate headquarters in] Bentonville, Ark."

In the view of the United Food and Commercial Workers Union (UFCW), which represents 1.4 million workers, discounters present a moral challenge to every investor.

"It comes to what kind of human being you are," says Jim Papian, a spokesman for the union, which has found Wal-Mart nearly impossible to organize. "If you're someone with enough money to invest, that means that you've probably been able to take advantage of some opportunities you've had, you have extra cash or whatever. And it means you've probably had good employment opportunities, good working conditions. Why shouldn't the businesses you invest in provide those same conditions for their employees?"

For better or worse, discounting seems poised for a long run in the American economy. That means that diversified investors with an interest in ethics will have no choice but to grapple with the complexities posed by this sector. Doing so means probing lots of gray areas, since researchers readily admit they're just beginning to learn how discounting is affecting society at home and abroad.

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