A Modest Proposal to Stimulate the Economy


The 1935 Wagner Act was one of the more important mis-steps FDR took that hampered recovery. In the two years after the Wagner act passed, union membership almost tripled, to over 30% of the work-force, and pushed up costs for businesses, further wounding hiring and investment. The Crash of 1937 followed, in which the Dow fell by a third, and unemployment reversed years of small gains, running back up from 14% to 19%. The country remained mired in the Great Depression for several further years. And the consequences and descendants of the Wagner Act are a huge drag on the economy to this day.

In the 2008 election cycle, unions spent massively electing Democrats, and so Obama and the Democrats in Congress are proposing again to greatly extend the powers of unions through legislation. However, if their priority is getting us out of the recession, what they should do instead is to repeal all laws establishing unions. Make unions totally voluntary and allow corporations to replace union members as any other at will employees. That would do more to stimulate the economy than another trillion dollars in deficit spending, and incidentally it would solve the big three automaker's fundamental problems and do more for the public schools than a dozen no-child-left-behind bills.

Unions are a creation of Federal law for political reasons, that are horrible for the economy. Basically, Federal law grants a monopoly to a union. As is well known, monopolies are bad for the economy. Monopolies rationally charge a monopoly price, at which profits are maximized, but social utility is not. At the elevated monopoly price, fewer goods are sold than would in the presence of competition, imposing a dead-weight cost on society. Unions do the same thing. Under unionization firms employ fewer people at higher monopoly price (wage) to build (for example) cars that are then costlier, and fewer are sold.

There is no moral reason, no requirement of justice, that says the government should grant unions a monopoly in dealing with an employer. Indeed it is a fundamental restriction on the liberties of job seekers, employees, and employers. The government grants these monopolies because it is politically expedient for politicians, and perhaps out of confusion, but, as we've seen for 60 years, these monopoly grants impose huge costs on the general welfare.

Unions hit directly at profit, and thus discourage investment, and thus hamper growth, making workers (and everybody else) worse off in the long run.

Unions impose huge transaction costs. Both the union and the company maintain costly bureacracies to deal with each other. The negotiations are very costly, and sometimes even involve work stoppages. Day to day management decisions may have to go before these bureaucracies. There is nothing like this in non-union industries. This is all dead weight loss to society.

Unions in practice also negotiate all kinds of restrictive work rules. These are devastating to progress, productivity, and flexibility, and arguably, job satisfaction.

Union workers get lousy incentives. Firms are prevented from incenting them individually to improve production, can't reward them individually for hard and effective work. This also devastates productivity, and, arguably, job satisfaction.

Multi-year union contracts prevent automatic economic adjustment to recessions. When the money supply contracts, wages and prices should naturally follow, bringing the nation out of recession automatically. Unions hamper this, leading to prolonged recessions.

Unions have political clout, which they use to impose various costs on society. For example, they lobby for protectionism, so that they can extract even higher monopoly rents from the public.

By and large, workers don't even want to work for unions. Being in a non-union industry, in the long run, means growth, the possibility of taking initiative in your job, and of advancing accordingly, more flexibility in your craft, prosperity. That's why union membership has been receding, even though Federal law continues to grant unions special priviledges, and why the unions are trying to get rid of the secret ballot for union certification so that workers won't get a free choice.

Unions have destroyed the big three of the US auto industry, destroyed the public schools, destroyed big steel in the US, run down US manufacturing, perenially hampered the airline industry, and generally have been a huge drag on the economy. The fact that so many government workers are union is perhaps a big reason government agencies are so mediocre, and if the problem is corrected, we may find the DMV and AmTrak becoming much more efficient. Against this there are no (zero) examples where unions have actually improved things. The vast majority of American workers are non-union, and what problems have arisen from this?

Why do we need to keep hitting our heads against the wall? It would feel so good if we stopped. Congress should immediately repeal all special priviledges granted to unions, and allow corporations and their employees to negotiate freely. To Obama and the Democrats in congress, I appeal: do this and you will see an immediate huge rally in the Dow, and you will dramatically prove to the voters and the world that you can govern both effectively and fairly.



Eric Baum
Last modified: Thu Jan 15 16:10:02 EST 2009