February 22, 2011

The Wisconsin Shoot Out on Public Unions

The road to economic growth and fiscal order requires ending all collective bargaining arrangements in all states.

All too many of my recent columns have lamented the threat that public unions pose to the long-term political and financial stability of state government. Operating in their current pampered legal environment, unions have extracted extravagant settlements that are unsustainable in the long run. Now it turns out they are unsustainable in the short run as well. Tomorrow has become today as the ever-rising sea of red ink from union pensions and benefits overwhelms state budgets.

Epstein
Illustration by Barbara Kelley

The rubber has now hit the road with the spate of overdue state initiatives to cut back on the collective bargaining rights of public employees. Ground zero is the extraordinary political spectacle in Wisconsin, where the Democrats took leave of the state (as well as their senses) once it became clear that they lacked the votes to stop Governor Scott Walker’s program to deflate the collective bargaining system for teachers. The governor has moved on two fronts. The first involves rolling back the oversized pensions and benefits that Wisconsin teachers currently enjoy. The second addresses the more basic question of why issues should be determined by collective bargaining in the first place. The bus-loads of union supporters from far and wide have their misshapen priorities correct. They know in their nervous bones that the second issue dwarfs the first.

Part of the pushback against Governor Walker was organized not in Madison, Wisconsin, but in Washington, D.C., spurred on by President Barack Obama, who has rightly treated Walker’s proposals as an "assault" on the labor movement. What Obama should have added is that this assault is long overdue. In principle, the deep problem with Walker’s proposal is that it seeks only to undermine state collective bargaining. The correct approach—in principle—is to kill off the beast once and for all across state lines, before it kills off everyone else.

The issue here is not one of animus toward union workers, but of sound social design. Start with the central blunder of collective bargaining arrangements as they exist in both the public and private sector. The common law regime of freedom of contract works just fine with labor relations because of the unambiguous support that it gives to competitive market solutions. In virtually all settings, abundant workers on one side of the market match up with the many employers on the other side. The usual mechanisms of pairing prospective employees with prospective employers will, in general, result in labor contracts that work to the benefit of both sides. Workers get to keep jobs because the employers think that the benefits that they receive from hiring particular workers exceed their total labor costs. Workers want to keep jobs so long as they cannot do better elsewhere. Easy labor mobility maximizes the number of useful transactions per transaction dollar. Interminable collective bargaining sessions just maximize the transaction dollars per transaction.

Governor Walker’s politically courageous move actually falls short of the ideal. Cutting back on the union’s ability to bargain for pensions and benefits is only a half-measure.

In the short term, workers’ wages in these markets are lower than what they would be if some monopoly union structure was in place. But growth here is the key. In the long run, the market framework pushes real wages higher, as productivity gains are quickly passed through to workers in the form of higher wages. Any doubters need only think of the relative long-term fortunes of nonunion versus union workers in the automobile industry. Put otherwise, if given the choice to go back in time, what worker would prefer working in a unionized Chevrolet plant in Michigan than in a nonunionized Hyundai plant in Alabama?

Unionization is what gummed up Detroit. Under collective bargaining, employers no longer enjoy the same exit rights that they had when dealing with individual workers. Now their duty to bargain in good faith with the union strips them of their ability to just say no. That increased union leverage in negotiations thus generates a transfer of wealth from the employer to the workers that lasts for the duration of the contract. This transfer is large enough to matter for private unions, but it is constrained by pushback from private employers who zealously protect their own resources, knowing that government bailouts are few and far between.

Not so with public unions who have places on both sides of the bargaining table. After all, public unions have assembled huge war chests that help elect legislators who are beholden to them, and intimidate those who are not. Now it should be clear why long-term structure matters. The legislature that grants collective bargaining rights to unions today has implicitly bound future legislatures to find the funds to fulfill those union contracts. Think of the bargaining rights as a huge capital expenditure, and the givebacks in a given bargaining cycle as an annual payment of far less amount.

That is why Governor Walker’s politically courageous move actually falls short of the ideal. Cutting back on the union’s ability to bargain for pensions and benefits is only a half-measure that leaves unions free to push hard on whatever terms and conditions are still subject to collective negotiations. Thus, unions could still push hard on salary if pensions and benefits are ruled off limits. In my view, the unions are right to think that this option offers, at most, only a partial offset to their current pensions and benefits. Salaries are more visible, and they come with an immediate tax. Sharp wage increases can generate more public opposition without generating huge net benefits. Unions are not all that likely to recoup that much.

A principled but vigorous court could knock out these terrible collective bargaining arrangements on constitutional grounds.

The dangers of unionization are also found elsewhere, as with seniority, which does not gain a foothold in nonunion firms in the private sector. But unionized firms have an internal governance structure. Since senior workers cannot cash out of their long-term investment in the union by selling their position to younger workers, the senior workers barricade themselves so that they reap high wages for low performance. This looming battle is now coming to a head in New York City, where the mayor wants to renew the contracts of younger teachers that rank high in both potential and performance, at the expense of the more senior teachers. The intransigence of unions on this point gives evidence to the lie that unions are only in it for the children. In hard times, no conscientious administrator would ever sacrifice a large number of productive teachers earning lower salaries for a smaller number of often indolent teachers earning higher salaries.

As things now stand, this issue is likely to be fought out in the political forum. In principle, however, a principled but vigorous court could, and should, knock out these terrible collective bargaining arrangements on constitutional grounds. All officers and directors of a corporation have a duty of loyalty to the firm, a duty that runs afoul of any arrangements whereby management parties engage in self-dealing transactions that loot the corporation of its assets. It is not that every self-dealing transaction is necessarily infirm. But all of them should be examined to see whether the corporation has received "fair value" from its trading partner for the money paid out. The simple point is that it is a discreet form of corporate looting to sell something to an outsider for $500 when it is worth $5,000, or to buy services from that outsider for $5,000 when they are worth only $500.

As a constitutional matter, this intuition is captured in what I like to call the "givings" clause, which is nowhere in the written Constitution, but which is part of the elusive "public trust" doctrine that grew up to prevent government giveaways of state lands and other assets. Theoretically, this imputed provision is the analytical twin to the Takings Clause, which is in the written Constitution. The givings clause reads: "nor shall public property be given to private parties, without just compensation." A rule that works for corporations should work for governments. Those bloated union pensions and salaries were the product of the illicit gift of collective bargaining rights by legislatures, who by their oath and position are fiduciaries for the public, not the unions. But this case of abject self-dealing should make these contracts "voidable" so that they can be set aside, if needed, by the government, after which these benefit packages could be modified to match comparable packages in the private sector. . Once courts realize that they have a duty to stop these government giveaways, there is a good chance that we will be able to put the public treasury in order.

The heroic political efforts to return sanity to the area of union pensions and benefits could be enormously aided if courts awoke from their unpardonable pro-union slumber. All that it takes is for them to realize that the same rules that rightly limit all other forms of government/private interactions also apply to government/union contracts, where those rules are ever so much more needed.


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


Letters to the editor may be sent to definingideas@stanford.edu. Editors reserve the right to reject or publish (and edit) letters.