Sunday Morning Quotation – May Day Edition

Economist Morgan O. Reynolds (former chief economist at the U.S. Department of Labor and a professor emeritus of economics at Texas A&M University) on labor unions in the Concise Encyclopedia of Economics:

Although labor unions have been celebrated in folk songs and stories as fearless champions of the downtrodden working man, this is not how economists see them. Economists who study unions—including some who are avowedly prounion—analyze them as cartels that raise wages above competitive levels by restricting the supply of labor to various firms and industries.

Many unions have won higher wages and better working conditions for their members. In doing so, however, they have reduced the number of jobs available in unionized companies. That second effect occurs because of the basic law of demand: if unions successfully raise the price of labor, employers will purchase less of it. Thus, unions are a major anticompetitive force in labor markets. Their gains come at the expense of consumers, nonunion workers, the jobless, taxpayers, and owners of corporations.

As I’ve noted before, I think people have a right to belong to unions or any other freely chosen associational institution.  The problem is when governments give unions special privileges – which they have in abundance at great cost to the rest of us (including lots of “workers”). 

Pileus has posted a number of pieces on unions over the last year, especially public sector unions.  Celebrate May Day by reading some by searching for unions in the box to the right!  Here is one particularly interesting series on unions and taxation by Jason Sorens – Part I and Part II. 

And here is Hayek on unions:

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Unionization and Taxes, Part Two

At The Monkey Cage, Andrew Gelman takes issue with my post on union density and tax collections by state. I argued that states with higher percentages of workers covered by collective-bargaining contracts have higher tax collections as a percentage of personal income, and that the relationship is probably causal. Gelman argues that it is inappropriate to infer causation from a correlation among observational data. My UB colleague Phil Arena offers a qualified defense of my post.

I more or less agree with the points Phil makes, as well as Gelman’s main point. Yes, correlation does not automatically mean causation, and in my original post I moved very quickly between the two without acknowledging the difference – not the sort of thing I would do in a journal article. Nevertheless, the most natural interpretation of my results is indeed causal. It does not seem plausible that higher taxes cause higher union densities (I can think of no reason why this should be the case). On the other hand, it is quite plausible that higher union densities cause higher taxes: in my state the education unions have been lobbying heavily against spending cuts and a proposed property tax cap. What about endogeneity due to omitted variables? Well, the most plausible one would be ideology: liberal states have higher unionization rates and higher taxes. But I controlled for ideology, and indeed even “overfitted” taxation to ideology with a squared term.

Finally, the dynamic analysis showed a correlation between unionization rates in 2000 and change in tax burdens over the next eight years, although it was not quite statistically significant. But because it’s a short time period, we shouldn’t expect taxes to change all that much. Most of the dependent variable is going to be statistical noise. The effect found is also substantively impressive, even if not statistically significant, and as Ziliak and McCloskey remind us, that’s often what we really want to know.

So yes, Gelman is right that correlation doesn’t automatically imply causation, but I nevertheless contend that the most plausible interpretation of the relationship between union densities and tax levels in the states is that the former are affecting the latter.

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More Unionized States Have Higher Taxes

One of the purposes of “right to work” legislation, currently being debated in Indiana, New Hampshire, and other states, is to reduce the percentage of the workforce covered by collective bargaining agreements. Leaving aside the ethics of collective bargaining as practiced in the U.S. today, what are the political and economic consequences? Since unions donate almost exclusively to Democratic candidates and lobby heavily for more government regulation and spending, it would be unsurprising if more unionized states ended up with bigger state governments.

To examine the evidence, I ran statistical models of unionization and taxation over the 2000-2008 period. The dependent variable in the first analysis is state and local tax collections as a percentage of state personal income, excluding mineral severance and gas taxes (since large and resource-abundant states will otherwise look like states with large tax burdens), in Fiscal Year 2007-8, the latest year for which data are available. The main independent variable is

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“Entitlement Derangement Syndrome”

David French writes of what he calls “Entitlement Derangement Syndrome,” which he thinks is motivating what we’re seeing in Wisconsin—namely, aggressive protesting over benefits and pensions, as if we had some kind of natural right to them. He likens the Wisconsin protesting to what went on in France last October when they wanted to raise the retirement age to 62.

I think this points to an unanticipated negative consequence of the welfare state: It corrupts people’s moral sensibilities. More specifically, it encourages people to ignore, violate, and even pretend does not exist a central, foundational moral premise of politics, namely that it is wrong to live at others’ expense.

Now of course that premise has to be properly qualified. Children may live at their parents’ expense; adults who have entered into marriages, partnerships, contracts, or other voluntary associations may live at each others’ expense; and sometimes people have to live at the expense of others’ charity.

But able-bodied adults should not live at the unwilling expense of others. And they certainly have no right to live at unwilling others’ expense. That is why forced labor and slavery are wrong. Forced labor and slavery are wrong not because they are costly or because they are inefficient; they are wrong even if they were inexpensive and efficient. They are wrong because it is wrong to live at unwilling others’ expense.

The welfare state clouds that moral intuition, which should be among our most deeply held. Indeed, the welfare state has not only clouded that intuition, it seems it has entirely inverted it. Thus we have people who believe they are entitled to live at others’ expense, even when those others are in debt, having great difficulty of paying their own way, and thus want to pay less.

It is demeaning for adults to live from the charity of others, even when the charity is voluntary. Even when offered with the best of intentions, it can weaken the recipients’ moral fiber and the power of their independent judgment, reducing them to “kept” status—which is why it is to be avoided except when absolutely necessary. But when the support is not charity and thus not voluntary, it is all the more morally suspect.

The fact that so many people, in Wisconsin and elsewhere, can behave and speak as if they nevertheless have a right to the fruits of others’ labors does not change the character of the reality. If they thought that their case warranted overriding the standard moral prohibition of living at others’ expense, then they should, and presumably would, make the case for why that is. But they make no such case. That suggests they don’t believe any such case has to be made. And that is the kind of moral confusion that I think the welfare state can foster.

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Bloated Pensions for All!

The left-of-center commentariat has been doing their level best to provide some kind of defense of the recent explosion in public sector pay and pensions [1] [2]. In the process, they don’t do much to dispel the common impression of progressives as being clueless on economics. At TNR, Jonathan Cohn writes:

To what extent is the problem that the retirement benefits for unionized public sector workers have become too generous? And to what extent is the problem that retirement benefits for everybody else have become too stingy? I would suggest it’s more the latter than the former… In the long term…, it seems like we should be looking for ways make sure that all workers have a decent living and a stable retirement, rather than taking away the security that some, albeit too few, have already.

At Mother Jones, Kevin Drum endorses private-sector unionization as the solution to the problem:

So now it’s going to be a war of taxpayers against unionized public employees. It won’t be hard, especially in lousy economic times, to convince envious clerks and factory workers that these guys need to be brought down a peg or two. It’s just human nature. But wouldn’t it be better if all these envious clerks and factory workers were instead asking why their pay and benefits haven’t kept up with overall economic growth — which, after all, is all that public sector workers have accomplished? I don’t know what the future of unions is in America, but for now they’re really the only ones who are asking that question and putting some muscle behind it. Until someone else starts doing a better job of it, we still need them.

So let’s say that these commentators get their wish, and through “card check” or some other policy the government manages to increase private sector unionization significantly, meaning that a larger percentage of the work force is covered by collective bargaining agreements. I agree that it is likely that these agreements will include more generous wages and benefits for the workers covered by them.

But where does the money come from? Do progressives think that unionization causes the rate of profit in the economy to fall, redistributing wealth from investors to workers? Because that’s just not right. If you force businesses to pay above-market wages, they hire fewer workers. You get structural unemployment, which disproportionately harms the poorest and most vulnerable. Young people find it harder to acquire skills that will allow them to increase their own productivity, because they find it hard to find jobs in the first place. Eventually, economy-wide productivity declines, ultimately leaving everyone poorer.

Now, in “corporatist” countries that have comprehensive labor unions that essentially represent the country’s entire labor market, such as Sweden, the unions “internalize” to some degree the costs of unemployment and moderate their wage demands, thus vitiating both the costs and benefits of unionization relative to a competitive job market. Labor centralization is not going to happen in the U.S., but even if it did, it wouldn’t increase wages and benefits across the board, because a comprehensive labor union acts more or less as if it were trying to replicate a competitive job market – just with less flexibility and dynamism. And increasingly, even these corporatist countries are facing higher long-term unemployment, as collective bargaining agreements that comprehensively set wages throughout the economy turn out to do a mediocre job of matching wages and marginal productivity.

Given a distribution of marginal productivities in the workforce, there’s literally nothing government can do to reduce inequality in market wages. If the government administratively sets wages for the entire economy, there would not only result the irrationalities attendant upon central planning, but in addition any attempt to reduce the market income of capital will reduce investment, either through outsourcing or through the withholding of investment in favor of consumption. Less investment means lower labor productivity, which means less wealth for everyone in the long run.

The only way to reduce market inequalities through public policy is to adopt reforms that increase the productivity of the least well off. The sooner progressives face this fact, the better off we’ll all be. School choice, anyone?

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An Oversized Hero

In an era when many Republicans are trying to gain political traction by complaining that Democrats want to cut Medicare, it warms my soul to see a blue-state Republican, Gov. Chris Christie, actually making inroads into fixing the financial chaos of one of our great states.  Like California, New York and other problematic states, New Jersey is being eaten alive from within by its public employees and by a tax and regulatory structure hostile to business.  As many of you have heard, the NJEA has (quite literally) been praying for Christie’s death (they have apologized but, of course, no one got fired).

The WSJ has a nice piece on Christie’s efforts to cut taxes and reduce spending.  The story gives some illuminating details.  I particularly like Christie’s candor on the difficulty of trying to return sanity to the state budget:

“We’re such a long way away from a message,” Mr. Christie says, “because, you know, the message might be, ‘Look at that poor SOB. There he is lying dead on State Street in Trenton. It’s over. OK, everybody back to our corners and let’s go back to the normal game.’ . . . I hope, that if we’re successful, [the message] can be . . . that you can do this.”

As a former Garden State resident (as well as being BMI-challenged myself), I tip my pileus to Governor Christie.  He might end up being a one-termer, but its fun to see him putting feet to the fire.

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Ya’ Think?

So, I’ve often wondered what is the biggest problem with public education today.

Is it something philosophical –like they are teaching kids to love the welfare state?

Or perhaps it is financial–maybe insufficient resources, or poor allocation of resources?

Or maybe institutional–a number of problems related to bloated educational bureaucracies, to excess regulation, to heavy-handed school boards?

Perhaps it is informational–insufficient knowledge about what makes for sound pedagogy.

But after seeing this quote while reading Marginal Revolution today, I’m thinking the main problem is purely political:

The city will end the practice of paying teachers to play Scrabble, read or surf the Internet in reassignment centers nicknamed “rubber rooms” as they await disciplinary hearings, Mayor Michael Bloomberg and the teachers union announced Thursday.

The deal will close the centers, where hundreds of educators spend months or years in bureauratic limbo, costing taxpayers tens of millions of dollars a year.

How many terms in office has it taken Bloomberg to figure this out? I think, just maybe, this would make sense.  Brother.

Newsweek ran a (fairly bold for a MSM outlet) cover story a few weeks ago saying that we really need most is the ability to fire bad teachers.  More and more research is showing the importance of teaching quality, and yet the teachers’ unions continue to hold reform hostage since they pretty much own the ruling Democratic parties in the cities and states where educational reform is most badly needed.

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