Farewell, sweet unions

My previous post about the "above-market wages" of auto workers brought something else to mind. I've written before about the false wonders of privatization, the idea that companies bring inevitable efficiency to whatever they touch, efficiency that simply cannot be provided by government. I laid out that argument is some detail in the cited July post, which you can read, but I can summarize by saying that I see only two real reasons for privatization: to turn long-term assets into short-term cash, allowing more services without raising taxes (and deferring the bill); and to break union contracts. (There is also the argument that it is part of a systematic and deliberate movement of funds into well-connected hands, and you can read more about that in my review of Tom Frank's book, The Wrecking Crew.)

Now we're seeing the opposite happen in response to a crisis, the partial nationalization of several companies, a 180° degree switch in many people's thinking. If this trend continues, government will only own parts of the riskiest companies while shedding those that can easily be made profitable - I find this confusing and will leave it for now.

One thing that has run under the dialogue is a particular distaste for unions. It has been pretty much assumed in the discussion surrounding the proposed auto bailout that the unions are going to have to give back even more, that their time is over. No matter if you're left or right, you have to believe that these union contracts are ruinous, that they're destroying the domestic auto industry.

I didn't grow up in a union household, we thought of ourselves as more "professional" than that, so my impression was fairly ill-formed (and uninformed). I came of age in the era when the power of unions was often misapplied, corruption was thought to be rampant, and ties to organized crime were apparent. As I've matured, however, and seen the excesses to which Big Business is too often prone, I've come to see unions as a counterweight, something necessary in many industries (it's one of those situations where both sides can be wrong, and neither can be allowed to dominate - for example, teachers' unions have some major problems because they have assumed too much power in many districts).

Either way, though, unions are taking it on the chin right now. The process which began under Reagan (I know there are those who say the trend toward union-busting began earlier, but Reagan made it acceptable) has reached full fruit. Privatization leads to the destruction of unions, and so does nationalization.

If you believe, as I do, that unions have a place in our business world, appreciate them now, because there is a whole lot of pressure on them to go away. They're just getting in the way of our genius business executives, and we can't have that, can we?

I thought the market was always right

I have spoken well of the blog Credit Slips before; its authors provide an excellent look at what's going on in the world of bankruptcy (even if the discussion gets a little too inside for me sometimes, I'm glad there is a resource for these issues).

That said, one of the authors, Adam Levitin, seems to have made a few missteps in a post from a couple of days ago. He's discussing the merits of the Citigroup bailout and the GM non-bailout (at least so far). Discussing them from the moral hazard standpoint, he argues that we have it backwards:

GM’s fundamental problems are not the creation of current management. These are problems that go back decades and were inherited by current management. GM’s fundamental problem is not whether it was pushing fuel-efficient vehicles are not. GM’s core problem is that it was and is paying its blue collar workers above-market wages (including benefits).

Citi’s problems, on the other hand, are very much the making of many current Citi managers. Many of the same folks who made bad bets on the market and gambled on unknown and untested speculative products are still working at Citi. Bailing out Citi, but not GM thus strikes exactly the inverse moral hazard chord. We are letting people off the hook for their own irresponsible behavior while refusing to help those who inherited deep-seeded problems of others’ making that arguably helped the economy overall (see below). That's perverse.

Even if I concede Levitin's basic point here, I don't think this reasoning holds up. Moral hazard is about actions in the future, not punishment for the past - that's a whole other problem. The problem with bailing out anyone is that they will factor that into their future decisions, take on more risk than is prudent. We can't say, "GM's been good, therefore the potential for moral hazard doesn't exist for them."

More problematic, of course, is Levitin's contention that GM workers were paid "above-market wages." He cites that as pretty much the entire problem, something anyone who has bought a car in the last 20 years knows is not true. He tries to clarify in comments:

By "above market wages" I mean that GM (and other auto) line employees were getting a wage and benefit package that they couldn't get anywhere else. Blue collar workers in most other industries with equivalent skill sets and experience just don't get paid as well. That's what I mean by "above market".

This is risible. One of the casualties of the conventional wisdom that "the market is always right" is that we no longer discuss the appropriate level for wages in various professions. There used to be such discussions, as people tried to work out why teachers made so much less than professional athletes (or some such comparison). We just don't talk that way anymore; the market has decided what teachers will get, what nurses will get, what baseball players will get, what law professors will get, and so forth, and that is simply right, because the market has decided it.

In that world, there is no such thing as "above-market wages," or "below-market wages"; all wages are de facto correct because their level has been determined by the great wage determiner. If Levitin is trying to open up this discussion, he's going to have to allow a lot more into it. For example, one might argue that hiring a CEO who, in a previous job, in the greatest boom market ever seen for his products, led his company to a lower stock price (and collected a $210 million parting gift) is profoundly misguided, no matter what carryover wages they have (right, Chrysler?). I don't think we want to get off on that track, starting to compare what people "should" make.

This argument also neglects the reality of what a corporation is. A corporation gets a lot of benefits based on the idea that it has continuity, that it persists well beyond any individual's lifetime. What that means is that a CEO can't continually wander around telling everyone, "It's not my fault" (I turned off Charlie Rose's interview last night with Citigroup CEO Vikram Pandit in the first minute, when they showed the "highlight" in which Pandit insisted that his team and approach are good and solid and wonderful). When you take the job as CEO, you're adopting what has gone before, whether that is a strong brand that provides value, or a labor contract that you don't like. If you can change what you don't like, fine, work for that, but for heaven's sake stop whining about it.

To be fair, Levitin does go on and discuss whether it was a good thing that GM workers received these "above market wages," arguing that:

GM's problems are part of a story of democratized prosperity in the post-WWII years, and the bill for that party is catching up with us now. The whole country benefitted from democratized prosperity in a way we didn't from a brief exploding mortgage boom.

This seems to me a far more persuasive point, that giving blue-collar workers "more" than they might have commanded elsewhere was part of a boom in this country that we are now losing. But that's not Levitin's point here, not as he so infelicitously phrased it. A rare slip from a very incisive guy.