Notes on the Economy – 02/22/11

Should Unions Have the Power to Tax?

Whatever the circumstances, it is not acceptable for a group of people to “gang up” on an individual with the intent of doing harm.

Probably everyone would agree as applied to “physical” harm.

But what about “financial” harm?

We have laws that prevent firms from exercising monopoly power and charging prices that are well above the real costs or value of production. But what if a group of workers conspires (usually with the help of government) to overcharge for their services at the expense of the larger public?

The UAW successfully used market power to raise their compensation above levels that the “market” was paying. In simple terms, they “taxed” individual purchasers of cars, extracting as much as $1,500 per car just for healthcare in addition to their higher wages, making it possible for union members to live better, but, dollar for dollar, buyers of cars to have less.

This pretty much destroyed the domestic auto industry, and the steel industry suffered much the same fate.

Only involuntary taxpayer bailouts saved GM (stock value gone, bondholders whacked, $40 billion of earnings of the new company now tax free, taxpayers paying $750 for each Volt GM sell, a $60 billion bailout for GM and GMAC in bankruptcy) and its future survival as a competitor is still in doubt.

Only about 7% of the private workforce is unionized today, but their ability to “tax” union members through union dues and make political contributions gives them top priority in the White House today. Public sector unions represent about a third of public sector workers.

Here, we are held hostage by threats to not pick up our garbage or teach our children. Politicians, not facing a bottom line performance measure like GM or the steel companies but worried about re-election, give in to demands to keep voters from being unhappy. But, over time, this has produced a generally over-paid and over-benefited public sector workforce (compared to market wages).

Their generous compensation can only be supported by reducing the welfare of citizens through higher and higher levels of taxation. The “employers” (taxpayers through their elected officials) have slowly lost their ability to determine the terms of employment offers. The unions now determine working hours, hiring criteria, the quantity of “output” to be produced per day, the number of sick and vacation and holiday days, how their performance will be evaluated etc. No longer can the employer make an “offer” for a job with requirements that fit the needs of the public institution.

The workers themselves now determine these things through the exercise of union power.

Bottom line, union members get higher compensation than the market would pay, but dollar for dollar, that higher compensation comes out of the pockets of taxpayers and customers, leaving them worse off. These are not “high paying jobs” that reflect the value produced by the workers but instead reflect the power of the organized group to impose “pain and suffering” on unorganized individuals in society.

The prices companies can charge are disciplined by competition as is the wage I can earn offering my services in the marketplace. Unions seem to be exempt from this, granted the power to tax individuals to support the lifestyle to which they feel they are entitled.