When the wheels came off the Obama administration
Posted September 28, 2009 at 12:00 am
Updated September 28, 2009 at 3:43 am
(Erin Mitchell | Student Life)
A rather frightening development has occurred within the White House regarding economic policy. It would appear that the president’s Council of Economic Advisers has expanded to include labor unions. This is troubling not simply because it represents a misstep in economic policymaking, but also because it demonstrates a yielding of control to economic viruses known as “labor unions.”
Some background is needed on what exactly has been going on in our economy. Roughly two weeks ago, President Obama passed a set of tariffs against Chinese-made tires. This action was taken in response to complaints made by American labor unions that they could not compete with the less expensive Chinese goods. According to a recent Bloomberg article, the tariff is on the magnitude of 35 percent of the cost of the tire. The question now becomes: Why does this matter?
It matters because an increase in union power over the Obama administration’s decision-making represents a threat to our economic recovery. Unions by their very nature drive up the prices of manufacturing. Economic models of production rely on two types of inputs: capital goods and labor. Capital goods are the machines and infrastructure needed to produce outputs; labor is everyone who runs a machine or pieces together an object in the manufacturing process. The aforementioned economic models thus assume various costs to go along with the capital and labor. With labor comes wages. When you buy an object at a store, the price you pay partially reflects the cost of labor. The cost of an employee at a farm, for example, is factored into the price of a cantaloupe at your local supermarket. Likewise, the cost of a worker at Goodyear is reflected in the price of the tires you put on your car.
The tire market is naturally a very competitive one. Companies like Michelin, Goodyear, Bridgestone and Pirelli, as well as dozens of others, compete to sell you some oversized rubber donuts for your car. Tires come in a variety of sizes for various automobiles, but they’re basically all dark, rubbery, wheel-shaped objects with some tread pattern in them. A quick search of TireRack.com to outfit a 2009 Prius reveals that, save for some gimmicky Michelin offerings, brand-name tires run between approximately $50 and $80 each, with the Goodyears and Bridgestones coming in at around $75. They’re all pretty close in price because they’re all, for the most part, the same item, just rebranded. Here’s where the economics comes back in: Those tires could be cheaper. Why aren’t they?
The answer is Obama’s protectionist policies. Charging a tariff on Chinese tires just makes them more expensive to the end consumer. The 35 percent increase means that for every inexpensive $50 Chinese tire that comes into the United States, Joe Citizen will have to pay an extra $17.50 for it. The aim of the tariffs is to bring the price up to better match the American and other non-Chinese manufacturers’ prices so that consumers will buy local tires instead of foreign ones.
Perhaps, though, we ought to ask why American prices are not as low as Chinese ones. The answer lies in the aforementioned labor costs. Unions drive up the price of labor via collective bargaining. Simply put, every worker demands an unnecessarily high salary and threatens to strike unless their demands are met. Instead of paying laborers $20 per hour, they’re now making something like $27 due to their extortion tactics. This 35 percent wage increase is passed onto you, the consumer, through higher product prices. Seems like a tax, no? Regardless of the fact that I cherry-picked those wage examples to make the 35 percent line up with the amount of the tariff, the point remains: Unions drive prices up.
If the White House’s latest actions are indicative of who really carries sway with the president, our economy is not going to recover very quickly, if at all. Appeasing unions will only serve to weaken our economy as people are forced to spend increasing amounts of money on previously inexpensive products. Unions are myopic like that: They see a short-term wage victory but are unable to comprehend long-term economic hardship. If we want consumers to return their spending behavior to normal, we should be asking ourselves why American products are so expensive, not how can we level the playing field to appease economically damaging unions.
Richard is a junior in Business. He can be reached via e-mail at Richard.Markel@gmail.com.
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On September 28, 2009 at 2:47 pm
Max Silverstein said
This argument is interesting, but partially flawed.
1) You seem to be establishing economic protectionism as being exclusively associated with unions. The fact of the matter is that economic protectionism, at least in moderate amounts, has always been politically profitable, albeit quite stupid. Indeed, George W. Bush did the same thing for the steel industry by passing a tariff on steel.
The WTO slapped that one down, as they probably will with this tariff too. In return for this diplomatic faux paus, Obama scores free points with his base.
Right now, President Obama needs as many political points as he can possibly get. Mr. Markel argues that the President is getting economic advice from the Unions. I argue that the President is throwing them some meat.
And yes Mr. Markel. The Democratic party generally represents the interests of the poor and middle class citizens of this country; as such, they are elected with help from Unions. This is not a secret, and it is not new.
2) Unions are the root of all evil and economic woe. That is what the wealthier citizens and interests of this country would like you to believe. The truth is far more complex.
Unions were established with the intention of protecting workers during an era of laissez faire regulation in this country. Concepts like “worker safety,” “child labor laws,” and “fair wages” essentially did not exist. If anyone complained, they were replaced.
Do we really want to be like China and India? Are we so desperate to keep down costs that we are willing to sacrifice the health and well-being of the American worker?
On the other hand, lobbying from unions got many necessary economic reforms to pass. Now, we have another set of organizations lobbying for their own self interest. As a native of Detroit, I have witnessed firsthand the stupefying spectacle of the auto workers’ leadership refusing to make concessions even as their companies were dying around them.
People have a right to unionize. People have a right to band together to prevent exploitative practices.
However, today, we have a problem that we didn’t have when unions first arose: cheap foreign labor.
What then is the solution? Simply put: we need a new economy. Union or no, no American auto worker can compete with the combination of foreign labor and heavy machinery.
We need to do what the Mexicans, Indians, and Chinese cannot do yet. I don’t know how we are going to manage that. I really don’t. At least not yet. At some point, we are going to have to become a nation of specialists.
However, I do know this: unions aren’t the cause of this, and getting rid of them would not stem the tide of jobs leaving these shores. In many cases, unions have grown too powerful and greedy for anyone’s good, but that does not invalidate their purpose.
Unions are a popular scapegoat, especially in recent years. They are not inherently good or evil. They are simply another interest. We are going to have to deal with that reality. In this tirade against unions, Mr. Markel forgot something: American workers aren’t merely costs. Workers are not some burden that you can simply minimize in a cost analysis. They are people, and they are citizens of this country as well.
On September 28, 2009 at 4:31 pm Dennis O. said
I have been a businessman for over 25 years. I think the writer of this article has a better understanding of unions and the economy than at least 50% of our current politicians have.
Truer words have never been spoken.
I hope instead of business that you take up politics. We as a county really need you.
On September 29, 2009 at 10:50 am Dima Galkin said
I came onto Student Life’s website to provide a retort to Mr. Markel’s argument, but was pleasantly surprised to find that Max Silverstein had already said most of what I wanted to say–and more–very coherently and directly. For that, I thank him.
I would just like to elaborate on one of his points. The higher wages that American tire workers receive compared to Chinese tire workers will not disappear into thin air. True, they will force American consumers to buy more expensive tires. But they will also allow American tire workers to purchase other goods made in America by keeping them employed for higher wages than they would otherwise get, if they could find other jobs at all. Their consumption would then fuel other American production and support other American wages. To put it another way, a tariff on Chinese tires keeps money flowing within the US rather than flowing out to China.
As for Dennis O.’s point, I respectfully disagree. I think that, as Mr. Silverstein has pointed out, Mr. Markel’s argument is flawed in some key ways, which I will not rehash here.
Finally, I would like to refer Mr. Silverstein–and anyone else who may be interested–to:
1) “World of Possibilities : Flexibility and Mass Production in Western Industrialization,” edited by Charles F. Sabel and Jonathan Zeitlin, (especially Sabel and Zeitlin’s argument about “Historical Alternatives to Mass Production,” which can also be found in a 1985 issue of “Past and Present,” pages 132-176) and
2) Chapter 7 from “Retooling for Growth : Building a 21st Century Economy in America’s Older Industrial Areas,” edited by Richard M. McGahey, Jennifer S. Vey (Chapter 7 is entitled “Placing Labor Center-Stage in Industrial City Revitalization”).
The former may be found in the Wash U Law School Library and the latter in the Olin Library; both refer to the possibility of specialization as a way to revive the American economy, which Mr. Silverstein mentioned.
On September 29, 2009 at 11:16 pm rgvongla@wustl.edu said
every wonder why people think WashU kids are snotty? Read this quote from this article as describing what unions do; “every worker demands an unnecessarily high salary and threatens to strike unless their demands are met….they see a short-term wage victory but are unable to comprehend long-term economic hardship”
Really? Have you ever been in a union? Have you ever bargained a labor agreement? Have you ever told your kids then can not have Christmas presents this year because you are trying to maintain their access to healthcare through a strike? Being in a union is about having a voice at work. Workers don’t win if they drive companies out of business, but they do deserve a fair slice of the profit that THEY create. Your generalizations serve to discredit you and the article you write.
I graduated from this university and now work for a labor union. I have bargained contracts that have been good for workers and have bargained contracts that have been hard for workers to swallow. I have been impressed with the sacrifices that workers are often willing to make to keep companies in business or keep the neighbor employed.
I can get along fine with business executives because most are not so naive to believe the gross generalizations that Mr. Markel paints in this article. While I understand that he is a junior at WashU, I really do not think he grasps the full implications of trade policies in his simplistic explanation and vilifying of American workers. I hope he grows up before he takes such beliefs into the actual workforce.
By the way Mr. Markel, if you ever enjoy a 40 hour work week, overtime pay, a pension, utilize the Family Medical and Leave Act, Americans with Disabilities Act, OSHA or countless other workplace protections, you better thank those union workers who were only able to think of their own selfish desires when authoring and fighting for these laws to pass.
On September 30, 2009 at 4:45 pm Richard Jesse Markel said
I think I should clear up one point that I did not put into the article. My personal view is NOT that workers should be paid minimum wage and receive no benefits. Quite the opposite. I subscribe to a concept in economics called “efficiency wages.” In brief, it says that workers paid comparatively premium salaries are more efficient, happier, and more productive. Additionally, turnover is lower when workers are happier. Thus there is a point where the benefits and cost savings of having happy, productive, healthy workers (because of higher salaries and benefits) equals the extra cost to the firm. At this point where the additional benefits of compensating workers better intersects the additional cost of said benefits and increased salaries, I think wages should be set. That point will be above market or minimum wages, but below the level of union extortion.
In addition to the previously mentioned tire tariff example of the United Steelworkers, I’d point to the United Auto Workers as one of the worst forms of union. Their extreme bargaining tactics drove the average price of labor at General Motors up to ~$70 per hour, versus the non-unionized wages of Toyota plant workers which were $10-$20 less (Source: http://www.nytimes.com/2008/11/18/business/economy/18sorkin.html ). General Motors was so burdened by costs that they eventually declared bankruptcy. Only after the company was already on track to going under was the UAW willing to make any kind of concession. The UAW is so myopic that it destroyed the company that provides its members with jobs. I’d furthermore point to the fact that union dues at the UAW are rather high. In fact, at GM they were (until bankruptcy rearranged labor contracts) almost $1000 per employee per year (Source: http://bigthreeauto.procon.org/viewadditionalresource.asp?resourceID=002139 ). It would seem as though the UAW is draining resources from its members whilst simultaneously putting its members out of work. Is there something wrong with this picture? I should certainly think so. The previous comment by “rgvongla@wustl.edu” claims that “[He/She has] been impressed with the sacrifices that workers are often willing to make to keep companies in business.” I would counter that by pointing out that, especially in the case of the auto companies, the unions only gave up a drop of their own blood AFTER they had hacked and drained the entirety of the General Motors organization of its resources.
On October 2, 2009 at 8:22 am rgvongla@wustl.edu said
The numbers from the UAW citation are partially skewed. They include health care costs, which are fair to include, but you ignore the fact that the competitors to the the big three are all in countries with national health care. Health care costs in those nations are much lower, thus providing a competitive advantage to those companies. The UAW and its myopic vision has been fighting to eliminate the competitive disadvantage their employer faced, even at times when their employer failed to see the light.
Second, the problem the big three really had was the product that they made. Members of the UAW attempted to persuade their employer that large gas guzzling cars were not the future of the auto industry. The companies did not listen and have gone bankrupt. It would not matter if the workers made $10 an hour if you make an inferior product.
I am not sure what the relevance is of your concern for union dues. You first suggest that these workers are getting rich by the contracts that they are able to negotiate through their union, then complain that their union dues are too high? Again, I see that you know nothing about unions, but the dues are set by the elected leadership of the locals. So your argument here is again based on your anti-union attitudes and not on sound reasoning.
Fourth you suggest that the unions only acted after it was too late. Compare this with the executives of companies like GM, who often accept lavish by outs after they have made business decisions that have run their company into the ground. 10 years ago GM was in sound financial shape, with their union contracts. In fact for years, GM and the big three have been thriving companies, helping build a stable middle class in this country, especially the St. Louis area. It is simply dishonest to suggest that UAW hacked and drained the resources of this company until it was doomed to bankruptcy. As you pointed out, that would only hurt the UAW in the long run and despite your disdain for working people, we are not so stupid.
Finally, I must take exception to your use of the word extortion. Extortion is a criminal activity. Despite perhaps your desires, collective bargaining is not. You use emotional language well, I just wish it was honest.