Why Public Sector Unions Are Different Than Private Sector Unions- Part 2

Last Friday I wrote this post, which I intended to be fairly comprehensive. But, more recently, I wrote this post on my companion business blog, and realized, as I composed it, that I omitted an important dimension of the public-private sector union differences in that first post.


It became apparent when I wrote this in the more recent post,


"With the rise of hostile takeovers and raiders taking their targets private, or into Chapter 11, many more businessmen learned about the PBGC. The Pension Benefit Guaranty Corporation is the federal agency which is charged with administering the failed, under-funded pensions of bankrupt firms.



The truth is, the private sector has seen, for some thirty years, a series of sectors experience bankruptcies which dumped underfunded pension plans onto the PBGC. At the same time, many other companies switched to defined-contribution plans, terminating their defined-benefit plans and putting the resulting lump sum into the former.


In short, private industry has learned, over the past three decades, that the defined-benefit pensions are, for the most part, illusory and unworkable.


What's happening now is that public sector employees are discovering the same truth. The major difference, however, is that because state and local governments foolishly agreed to these plans, the public sector unions have, as a counterparty, an entity that cannot, as easily as a private sector company, declare bankruptcy and subsequently renegotiate the pension obligations."


From a political perspective, that last paragraph is a gross understatement.

In past decades, when steel, railroad, airline and other heavily-unionized firms finally buckled under the weight of pension and labor costs, they filed for bankruptcy. Pension plans went to the PBGC funded as was.

Simply put, contracts between parties became settled, in breach, in bankruptcy courts. If unions and their members foolishly pushed too hard on a company and helped it become uncompetitive and, ultimately, unprofitable, then they bore the consequences in the form of unmet financial obligations.

Companies are born, and die. Relying on a private enterprise for long term financial obligations is, at its root, risky business.

But making your employment, pension and health care contract with a town, city, county or state is a different matter. Having it written into a state's constitution? You're in clover.

That's why public sector union rights such as collective bargaining are so pernicious and dangerous. When a private company goes bankrupt, it's not news.

But we bridle at towns and states filing for bankruptcy. Cloaking financial promises in the authority of local or state government means that your counterparty risk is much lower than if your employer is a private entity.

I don't know if AFSCME, NEA and SEIU leaders fully understood this thirty years ago, but by the time steelworkers were losing their pension and healthcare benefits, I'm pretty sure they did. Then it was full speed ahead.

Because when they combined the now-commonly understood virtuous- for union leaders- cycle of having state and local government deduct union dues from paychecks and pay them directly to union bosses, who then funded election campaigns of union- and government-spending-friendly candidates, who then created more government (union) jobs with this special counterparty status, it was organized labor heaven.

Notice that nobody is removing the right of a union to collectively bargain on wages. What the Midwestern Republican governors and legislatures want to remove is collective bargaining on work rules and the non-wage and benefit terms which add so much to the cost of public sector administration. For example, Ohio Governor John Kasich noted that a town had to terminate 27 lower-ranked policemen in order to fire a sargeant.

So, take a step back and look at how public sector unions are different in this regard. They don't negotiate with a counterparty which, when overburdened with the onerous costs of the public sector unions' demands, can and will easily just vanish, leaving the union employees out of pocket. No, they are dealing with governmental entities which either can't, or can only with great difficulty declare bankruptcy.

It's a very special situation in which the union and its employees bear very little risk for pushing their demands to the extreme, without a logical counterweight to stop them.

That's why we need to eliminate collective bargaining powers- they aren't rights in the first place- for all public sector union employees.

Why Public Sector Unions Are Different Than Private Sector Unions

As Wisconsin and Ohio's GOP-controlled state legislatures respond to their governors' calls to pass bills which will remove collective bargaining rights from various public sector unions, Wonderboy and others on the far left, as well as union leaders and their members claim that it's union busting. That it's unfair.

I think it's disingenuous for governors Walker and Kasich to deny that they are targeting public sector unions. They aren't technically trying to break the unions, but they are certainly aiming to weaken the unions grips on the public purse.

Public sector unions are different than private sector ones. Perhaps more by degree than by nature, but that's in effect what many states are now about to discern.

Private sector unions negotiate with profit-making companies. When the companies strike unwise deals with their unions, then, in time, the companies' fortunes suffer and, shortly thereafter, so do the union members. One only has to consider the fate of railroads, airlines, steel and automakers in the US to see how union excess, combined with management stupidity, results in pain and suffering for the workers and shareholders.

In the private sector, Schumpeterian dynamics and Ricardian trade economics eventually shift economic activity, business and jobs to lower-wage, comparatively higher-productivity regions or countries.

Thus, in the private sector, global and regional competitive forces serve to curb union excesses for compensation and work rules which disadvantage the companies with which they bargain.

This natural competitive force is absent in the state and local government sector. Add to this the transient, largely semi-professional or amateur nature of most elected officials in state and local governments, and you have a recipe for public sector unions representing firemen, police, teachers and other civil service workers to demand- and receive- excessive compensation, benefits, work rules and other rights without a clear countervailing force.

In fact, the only countervailing forces are taxes and the amount and interest rates on state and local government borrowing. The former becomes a political football at each election, while the latter is poorly understood by the average voter. It takes a lot of effort for the average voter to connect the dots between his rising taxes and the lush, above-private-sector average compensation and benefits granted to unionized public sector workers.

You also don't have much choice in the matter of dodging this liability, short of moving to another locale or state. Which, when taxes rise too much, actually happens.

There's another difference, as well.

Suppose your neighbor works for Coca-Cola. Maybe he drives a delivery truck, or is a regional manager.

Do you worry about his job and well-being when you order a Pepsi or some other non-Coke beverage? Probably not.

If Coca-Cola has to cut wages or benefits, do you feel individually responsible? Again, probably not.

But suppose your neighbor works in the county or town clerk's office. Or is a policeman, teacher or fireman. Suddenly, there's an unsettling personal connection between your taxes, your personal share of the local or state government's spending and deficits, and your neighbor's standard of living.

If you vote for a candidate who promises to rein in spending, cut teacher pay, or maybe even retract their right to bargain collectively, you may feel that you are now personally responsible for the children of your neighbor, a public sector worker, being less well-off.

Frankly, it's not fair. It's not fair to the average voter/taxpayer that they are made to feel responsible for funding the lifestyle of a neighbor or friend who lives off the public trough.

That's one reason why I favor making every public sector job that can be, be outsourced to private sector companies via contract. It removes the human face from public sector jobs.

We all make career choices. If I work at Coca-Cola, does that mean I should take it as a personal insult that any of my neighbors or friends don't buy several cases of Coke products each week? They aren't responsible for my career choices- I am.

So why should I feel responsible when a fireman, policeman, town administrator or teacher is the object of expense reductions by state or local government? Why should I feel some personal guilt about my child's ability to read because someone I know chose to enter the teaching profession and is now experiencing lower compensation or work rule changes due to an inability of the local government to fund the existing union agreements?

Public sector unions are also different for the very reason LaGuardia and FDR originally declined to allow them, i.e., they provide critical services for government which cannot be safely interdicted. Thus, allowing them to possibly strike and suspend key government functions such as police and fire protection, schooling, or garbage collection, is unwise and unfair. If these functions were contracted out to private sector firms, then this wouldn't be a risk.

Simply put, why should some small group of our neighbors be allowed special privileges regarding their ability to legally extort us, through state and local governments, just because they happen to work for us in those governments? Isn't that totally backwards?

Yes, it is. Where they work shouldn't have any impact on how they make us feel about their wages, benefits or work rules.

In fact, because government workers serve all citizens, that's precisely why as many of them as possible should be private company employees- so we don't come to view their personal financial fortunes as our responsibilities as taxpayers and citizens.