A friend of mine posted a complaint on Facebook about the apparent demise of Hostess Bakeries: that the union acted against its members’ best interests by being greedy and spiteful, calling a strike, and bringing about the end of the company. I sent him a link to a “make your own Twinkies at home” page to console him on his loss1.
But his implicit argument was worrying: that a labor union would act clearly against its immediate best interests; that by voting for the strike, the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union would clearly find themselves in a much worse position without jobs. And that they obviously would be better off if if they had gone to work under the contract being offered3, no matter what its terms are. There seems to be a lot of people who hold that opinion; I believe that a majority of folks feel that a greedy union overplayed its hand, thought that it could wring out a much better deal, and lost.
Yet this kind of opinion runs contrary to a key assumption of economic science, the rational market participant. If you want to avoid invalidating economic theory as a result, you end up having to argue that while, in general, unions make choices they feel are in their best interests4, this union in particular acted irrationally. But many people don’t care about preserving the validity of economics, and they often end up always assuming that unions and workers do not behave rationally. That assumption, that bias, informs much of our current political debate in a subversive way. Unchallenged, that assumption will prevent us from finding the best solution to our problems.
The contrary assumption, that the union logically thought that it would be worse off if its members continued working, is not something most people consider. And yet if you dig into the story, you will find that it really is the case: the union made a perfectly rational business decision. Hostess has a huge unfunded liability to its pension plans. If the company is liquidated, the union’s pension plans stand to get something from the breakup value of the business. If the union agrees to work under a new contract that wipes away some or all of that debt, the workers could potentially end up with much, much less. Was it the correct decision? I don’t think any of us outside of the situation are in a position to say. What we can say is that if any of us knew that going to work on Monday meant we were risking a legal claim to a billion (yes, billion in this case) dollars, we would have to think long and hard before taking that deal. And a lot of us, if not all of us, would consider the billion dollar price tag for going to work on Monday way too high.
The Hostess conversation is but a small part of the debate that raged up to the election and continues now as the government tries to deal with the fiscal cliff. Even though Obama won re-election, republicans often seem to be winning the battle for the tone of the discussion. In the world of the GOP (and its past-candidate, Mitt Romney), the debate is framed as follows: Businesses are active, engaged, logical decision making economic entities: the makers. But workers are inactive, illogical, “takers” of economic benefits. And so long as that tilt to the discussion remains, it will be impossible to find an equitable solution to the country’s problems.
This tilt is so well accepted, I think, that it’s hard for most people to see the forest for the trees. So, just as cold war spies often looked at the negatives from reconnaissance photos to more easily spot the enemy, let me illuminate my point by flipping the conversation to the opposite extreme position:
The problem with the economy in this country is that, while there are plenty of jobs to be had (Facebook alone has 1.733 million job openings listed as of now on its job board), the heavy disincentives of government policy and taxation are discouraging labor providers from entering new markets. Economic theory is clear: the only ways to increase supply is to lower the costs of providing it and/or increase the prices paid for it. The best thing for the government to do is to actively incentivize labor by lowering the tax rates charged on labor providers and increasing the incentives for them to invest in R&D5. By moving from disincentives to meaningful incentives, labor resources will begin to flow back into the economy, finally allowing businesses to acquire the resources they need at an affordable price, returning our economy to the growth rate we all want to see.
It is logical, isn’t it? And it’s just as valid as a business-only focus. It’s correct, in general, to suggest that lowering the burden on labor will produce increases in how much labor is supplied. Fox News’ John Stossel found that there were plenty of jobs to be had in the immediate vicinity of a NYC jobs center. His particular argument, of course, is that the government was making it too easy for people to avoid taking hard labor jobs with entry-level wages2. But there is an equally valid argument that the high government burdens on labor in NY discourage people from taking these lower-paying jobs. Which viewpoint you prefer is driven by politics, not science. Undoubted,the truth probably lies somewhere between these two extremes. If you acknowledge that there is a middle ground, you have a far different conversation about why people are not taking these entry level jobs.
And that brings us to the crux of the current political debate. So long as the terms of the debate revolve around why businesses aren’t creating more jobs, as opposed to also asking why people are not willing or able to take the ones that are open, the debate has been lost for workers. When businesses are assumed to be the only rational entities that can grow the economy by responding to incentives, workers are marginalized as if they are merely waiting for job manna from heaven. As a result, the debate becomes a struggle over establishing the point of diminishing returns for business incentives. What money is left over when that point is found is just table scraps; scraps that will be fought over beween competing demands for helping workers to cushion the blows of the recession and the goals of reducing the deficit.
In reality, workers do make logical choices and act rationally in the economy just like businesses do. To deny that is, like in the case of the Hostess workers, factually wrong and often just a tactic to marginalize one side of the debate. But because workers do behave rationally, we must consider a more complex, but fair set of questions: what is the right way to balance the burdens of the government between the labor suppliers and consumers in the economy? Does making the tax rates more or less progressive than they are now get us to the right balance? Where are the right places for the government to provide incentives? Should we provide incentives for business R&D or incentives for worker skills upgrades? It all comes down to how best to optimize policy so the suppliers of labor — workers — and the consumers of labor — business — will reach an optimal economic equilibrium.
That kind conversation will be one that respects the contributions of both business and labor to making our country prosperous. Questions about tax rates for labor and business are of course fair to ask and may well have answers that skew towards business. The republicans might even be closer to the right mixture of policy than the democrats. I know I’d love to see everyone’s taxes go down. But so long as we have a conversation that starts from the viewpoint that business income is virtuous and labor income isn’t we will always end up with a government that plays economic favorites for political reasons — something that conservatives naturally abhor! So long as we keep those simplistic bad assumptions, we will never find a decent solution.
Again, none of this is an argument for or against anyone’s specific proposals. It is an argument against the way the debate is taking place in Washington D.C. and against the way that debate gets framed by the media and society. Each and every one of us — as business leaders or workers — engages in the economy out of a general goal of maximizing the benefits we receive. A fair and honest discussion recognizes and respects that both sides are engaged in fundamentally the same thing, commerce, and respond to incentives in the same ways.
In the 1960s, Memphis african-american sanitation workers fought and won a historic battle against racial discrimination and the perception that they were less worthy than their white co-workers6: they did it, in part, by marching through the streets of Memphis with signs that read “I am a man.” It would be sad and ironic if, in this day and age, workers who want to assert their economic equality will need to march through the streets with signs that say “I am a business”.
2: Anyone who makes the argument that taking a $7/hour job is always better than holding out to find a $20/hour job is financially illiterate. Trivial case: you can either take a $7/hour job today and lock yourself into that pay rate, or take a $20/hour job tomorrow. Which do you do? Knowing how long to hold out is the same as being able to predict the future, and people do their best to answer that question. Stossel’s argument really comes down to this: he thinks it is better to force people to take lower paying jobs sooner than to allow them some chance to wait for a higher paying job later. But the reality is that, for the health of the economy, it is far more important to ensure that people are employed where they are most productive, and allowing some grace period for people to find that optimal point is better for the economy as a whole. That you can argue for how long the grace period is does not imply the right answer is 0.
3: And, of course, that the business deserved to remain in business paying as little as necessary to eke out a profit making a product that is increasingly being shunned by health-conscious consumers…
4: Whether the choices prove to be the best choice or not is irrelevant. Just so long as, at the time, the decision was reached in an informed and logical fashion. None of us can predict the future.
5: E.g., more grants for students, lower interest rates for student loans, better funding for public colleges, etc.
6: While, unfortunately, as a nation we suffered a great loss: the assassination of Martin Luther King. The history of that struggle is so much more than merely one of economics, and I honor and revere those who participated in it.