The End of Unions?

by Richard A. Epstein

What Michigan Governor Rick Snyder gets right and wrong about labor policy.

The age of big government is now upon us. The question is how to respond to this daunting reality. One possible approach is prudential acquiescence to the inevitable. Conservatives could work toward incremental reform within today’s political paradigm. The Hoover Institution’s own Peter Berkowitz offers this advice in his thoughtful column in the Wall Street Journal. Libertarians, in particular, must “absorb” the lesson that frontal assaults on New Deal-era policies are out. He writes:

[C]onservatives must redouble their efforts to reform sloppy and incompetent government and resist government’s inherent expansionist tendencies and progressivism’s reflexive leveling proclivities. But to undertake to dismantle or even substantially roll back the welfare and regulatory state reflects a distinctly unconservative refusal to ground political goals in political realities.

Conservatives can and should focus on restraining spending, reducing regulation, reforming the tax code, and generally reining in our sprawling federal government. But conservatives should retire misleading talk of small government. Instead, they should think and speak in terms of limited government.

I fear the downside of Berkowitz’s counsel of moderation. For starters, no one can police Berkowitz’s elusive line between “small” and “limited” government. At its core, Berkowitz’s wise counsel exposes the Achilles heel of all conservative thought, which can be found in the writings of such notables as David Brooks and the late Russell Kirk. Their desire to “conserve” the best of the status quo offers no normative explanation of which institutions and practices are worthy of intellectual respect and which are not. No one doubts that politics depends on the art of compromise. But compromise only works for politicians who know where they want to go and how to get there.

The call for limited government doesn’t start with the radical proposition to disband the army, fire the police, or close public highways. Rather, it relies on the theory of public, or collective, goods. The sound theory of limited government uses the state to provide those essential public goods that ordinary individuals, acting either alone or in combination, cannot supply for themselves in voluntary markets. Individuals and firms can effectively purchase food, clothing, and shelter in competitive markets, which are the best way to match buyers with sellers, and employers with employees. The sellers who try to raise prices above the competitive levels will lose their customer base. The firms that try to reduce their wages below competitive levels will lose their employees. The result is, in general, the optimal social outcome.

Armed with this insight, the appropriate intellectual approach towards politics always involves this two-step inquiry: first, figure out the desirable social policy; second, figure out the low cost way to overcome obstacles to achieve this social outcome. The great danger of politics is that it waters down principled argument in order to secure a political compromise. But these compromises must be accepted as such: the willingness to take a middle position because the preferred position is not politically attainable. They should never be defended as though they represent the best intellectual solution. To do so is to concede too much to the progressive agenda, which causes the conservative or libertarian reformer to sound evasive and hypocritical, uninformed and foolish.

The Decline of New Deal-Style Unions

A perfect example of these intellectual risks is found in the current debate over the adoption of a right–to-work law in Michigan, an economic basket case and the cradle of American unionism . Right-to-work laws are understood on both sides as a real threat to union power because they allow workers to keep their jobs without having to join a union, or to pay union dues (at least for unit-related activities) if they choose not to join. The key question for conservatives and libertarians is how to defend a proposal that curbs union power.

In this connection, Michigan Governor Rick Snyder, a Republican who signed the right-to-work law in his state this month, gets top marks for political courage and skill in dealing with the Michigan legislature, notwithstanding receiving threats of political retribution from the Democrats. State Representative Douglas Geiss, a Democrat, chose his words carefully when he said “there will be blood,” on the floor of the Michigan House of Representatives.

The effects of the legislation confirm the classical liberal defense of competitive federalism, which argues in favor of state, not national, control over local labor markets. As Snyder pointed out, Michigan has to compete for new jobs and industry with its next-door neighbor, the business-friendly Indiana. The data support him. As F. Vincent Vernuccio and Joseph G. Lehman of Michigan’s Mackinac Center for Public Policy report in their recent Wall Street Journal op-ed, since Indiana adopted its right-to-work legislation, the state has gained about 43,000 new jobs—chiefly from new businesses that have chosen to locate there. In contrast, Michigan, during that same period, lost about 7,000 jobs, and its key automotive business remains on life-support from the federal government.

The gains from right-to-work laws are not just confined to Indiana. As Venuccio and Lehman report, between 1980 and 2011, overall employment levels rose by 71 percent in right-to-work states. In non-right-to-work states, they only rose by 32 percent. That differential does not come at the expense of wages, which grew four times as fast in right-to-work states: 12 percent versus 3 percent elsewhere. The explanation is clear enough. The productivity gains from escaping union work rules are shared with employees as employers bid up wages. The short-term monopoly gains to unionized workers eventually are, over time, more than offset by productivity losses. The New Deal union model is an economic mistake of major proportions.

Governor Rick Snyder’s Mistake

When Governor Snyder went on MSNBC’s Morning Joe Show last week, his opening remarks stressed these economic facts. His interrogators did not challenge him on that, but they had a field day with him when he tried to defend himself on theoretical grounds. The Governor maintained that his legislation was not anti-union but pro-worker. He argued that a worker should have a choice whether to join a union. Governor Snyder insisted that a worker should not be forced to join a union unless he thinks it is “a value proposition,” which immediately played into the standard progressive objection that rational workers will indeed free-ride on unions to expend their resources to get wage increases that the non-union holdouts will then enjoy for free.

At this point, the Governor—and, for the record, Venuccio and Lehman—claim that they are not against the collective bargaining arrangements that right-to-work laws subvert. But here the Governor sounded hypocritical, uninformed, and evasive in the face of organized labor’s most insistent argument, which led a delighted Andrew Rosenthal of the New York Times to chortle at the naïveté of thinking that right-to-work laws did not hurt the unions that so fiercely opposed them. He’s right on the small point, but wrong on the big one: unions do not serve any useful purpose.

I am the last person who should be telling politicians what they should say in order to secure the passage of controversial legislation without committing political hara-kiri. Neither Berkowitz nor I are politicians. Our job is to cut out the platitudes and state the matter as it is. That said, here is how I would have responded to the Morning Joe panelists:

Your implicit assumption is that the free-rider is a dangerous institution, and that government action should forestall that practice. The condemnation of free-riders, however, is only half-true, for everything depends on the direction of the externalities—are they positive or negative?—in the event that people are allowed to hold out from some collective solution.

With the standard public good of national defense or public highways, those external effects are always negative. In other words, the country that has to rely on voluntary contributions to support its military operations will always spend too little on them. The imposition of taxation allows everyone in society to benefit from the provision of goods that all of them value more than the particular tax dollars that they have to pay for their acquisition. The situation is truly like a Prisoner’s Dilemma game because society as a whole is worse off if individuals are allowed to defect from the cooperative solution on these select issues.

Those assumptions do not hold, however in dealing with free-riders in labor markets. In this instance, the appropriate analog is not the standard social public good. Rather, it is the industrial cartel, whose coordinated activities benefit its members at the expense of the public at large. The cartel always seeks to set its prices in ways that maximize the returns to its members, even at the cost of higher prices to its customers. Its mortal enemy is the free-rider who undercuts the listed prices. It is just that “cheater” who performs a useful social function. So, too, does the non-union worker.

It is, therefore, critical to note that industrial cartels pose a greater threat to social welfare than a single monopoly firm. The monopoly firm does not have to worry about how it allocates its gains among its members. It adopts optimal production methods, and then sells its goods at a monopoly price. Cartels have members that have different costs of production. But they cannot put together a system that allows for efficient production because they cannot make the transfer payments that are needed to keep weaker members in the cartel. Hence, like OPEC, they use quotas that, in effect, substitute the hard-to-refine Venezuelan crude for its light Arabian counterpart. Unions do the same thing through work rules that lead to silly restrictions, such as requiring Hostess cupcakes and Wonder Bread to be delivered to the same location in different delivery trucks.

Given these harsh economic inequalities, it is intellectually incorrect for people to say that they are in favor of the collective bargaining system that insulates labor unions from what are (and before 1914, were) per se violations of the anti-trust laws. It may well be that their clout has become so strong that unions cannot be undone by frontal political assaults. Indeed, the right-to-work compromise was adopted under the Taft-Hartley law of 1947 precisely because the Republicans lacked the political power to undo the 1935 Wagner Act in its entirety.

But we should not scorn half measures that move the system in ways that lead to higher levels of employment, higher wages, and lower consumer prices, without the threat of strikes and the huge public expense of running the National Labor Relations Act. Free-riders in labor markets perform an essential social function insofar as they promote competitive markets.

Right-to-work laws thus represent a strong movement in the right direction. They should be defended, not opposed, for their ability to knock organized labor off its privileged perch. Michigan owes a huge debt of thanks to Governor Snyder. The other non right-to-work states should join in the crusade to trim union power.

Political leaders can be expected to hold back their punches to get legislation through. But the job of independent intellectuals is to offer principled defenses of these legislative changes in order to maintain the long-term coherence of, in my case, libertarian thought, which is needed to make future labor market reforms possible.

Richard A. Epstein, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, is the Laurence A. Tisch Professor of Law, New York University Law School, and a senior lecturer at the University of Chicago.

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