Tag: unions

Unions, Productivity, and the 2010 Economic Report of the President

I’ve become a fan over the years of the annual Economic Report of the President, released around this time each year by the Council of Economic Advisers. The more than 100 tables in the back of the book provide an invaluable picture of the economy over many decades, covering all the major indicators from output and employment to interest rates and trade. Each report also contains chapters explaining the economic thinking behind administration policies.

Chapter 10 of the latest report focuses on “Fostering Productivity Growth through Innovation and Trade.” For critics of trade, it offers sound economic reasons why trade raises U.S. productivity and, thus, over the long run, U.S. living standards.

One of ways trade promotes growth is “Firm Productivity.” Economists have come to appreciate that firms within an industry will differ in their productivity. Those that are more productive will tend to grow and prosper in larger and more competitive global markets. As a result,

when a country opens to trade, more productive firms grow relative to less productive firms, thus shifting labor and other resources to the better organized firms and increasing overall productivity. Even if workers do not switch industries, they move from firms that are either poorly managed or that use less advanced technology and production processes toward the more productive firms.

The report doesn’t mention this, but one reason why firms differ in their productivity is unionization. As I spell out in an “Economic Watch” column in today’s Washington Times, and explore in more detail in the latest Cato Journal, unionized firms tend to lose market share to non-unionized firms:

The weight of evidence indicates that, for most firms in most sectors, unionization leaves companies less able to compete successfully. The core problem is that unions cause compensation to rise faster than productivity, eroding profits while at the same time reducing the ability of firms to remain price-competitive. The result over time is that unionized firms have tended to lose market share to non-unionized firms, in domestic as well as international markets.

Compared to equivalent non-unionized competitors, unionized firms are associated with lower profits, less investment in physical capital, and less spending on research and development. By exposing an industry (say, automobiles) to more vigorous international competition, trade accelerates the shift from less competitive unionized firms to more competitive non-unionized firms.

Economists serving a Democratic administration would be understandably reluctant to say such a thing explicitly, but it is certainly there between the lines in Chapter 10 of the new Economic Report of the President.

How the Washington Post Covers Education

Yesterday, the president proposed yet another big increase in federal education spending. The Washington Post quoted ”senior White House officials” as saying that the spending would boost “the nation’s long-term economic health.”

I sent the story’s authors a blog post laying out the evidence that higher government spending hasn’t raised student achievement, and that if you don’t boost achievement, you don’t accelerate economic growth.

Today, there is an updated version of the original WaPo story. It no longer mentions the stated goal of the spending increase. It doesn’t mention that boosting gov’t spending has failed to raise achievement, and so will fail to help the economy.

But it does cite a single non-government source for comment on the president’s plan: the Committee for Education Funding. The Committee is described by the Post as “prominent education advocates,” and as an organization that “represents dozens of education groups.”

Here’s how the CEF itself measures its accomplishments: “The… Committee [has] been very successful in championing the cause of increasing federal educational investment. Through strong advocacy… [it has] won bipartisan support for over $100 billion in increased federal education investment over the last five years.” Its members, if you haven’t guessed already, include virtually every public school employee organization you can name, including, of course, the national teachers unions.

That’s the source, the one source, the Washington Post asked to weigh in on a new federal education spending gambit.

I asked the author of the revised version of the story to comment for this blog post. At the time of this writing, I’ve received no response.

Weekend Links

  • The G.O.P.’s next move on health care: “The challenge for Republicans is not to try to ‘do’ things just like the Democrats but a little less expensively or with a little less bureaucracy, but to present an agenda of personal and economic liberty as a positive alternative… [Republicans] will have to show that this time they are in favor of something positive. It’s called freedom.”

Neither Standards Nor Shame Can Do the Job

Washington Post education columnist Jay Mathews has done it again: lifted my hopes up just to drop them right back down.

In November, you might recall, Mathews called for the elimination of the office of U.S. Secretary of Education. There just isn’t evidence that the Ed Sec has done much good, he wrote.

My reaction to that, of course: “Right on!”

Only sentences later, however, Mathews went on to declare that we should keep the U.S. Department of Education.


Today, Mathews is calling for the eradication of something else that has done little demonstrable good – and has likely been a big loss – for American education: the No Child Left Behind Act. Mathews thinks that the law has run its course, and laments that under NCLB state tests – which are crucial to  standards-and-accountability-based reforms – “started soft and have gotten softer.”

The reason for this ever-squishier trend, of course, is that under NCLB states and schools are judged by test results, leading state politicians and educrats to do all they can to make good results as easy to get as possible. And no, that has not meant educating kids better – it’s meant making the tests easier to pass.

Unfortunately, despite again seeing its major failures, Mathews still can’t let go of federal education involvement. After calling for NCLB’s end, he declares that we instead need a national, federal test to judge how all states and schools are doing.

To his credit, Mathews does not propose that the feds write in-depth standards in multiple subjects, and he explicitly states that Washington should not be in the business of punishing or rewarding schools for test performance.

“Let’s let the states decide what do to with struggling schools,” he writes.

What’s especially important about this is that when there’s no money attached to test performance there’s little reason for teachers unions, administrators associations, and myriad other education interests to expend political capital gaming the tests, a major problem under NCLB.

But here’s the thing: While Mathews’ approach would do less harm than NCLB, it wouldn’t do much good. Mathews suggests that just having the feds “shame” states with bad national scores would force improvement, but we’ve seen public schools repeatedly shrug off massive ignominy since at least the 1983 publication of A Nation at Risk. As long as they keep getting their money, they couldn’t care much less.

So neither tough standards nor shaming have led to much improvement. Why?

As I’ve laid out before, it’s a simple matter of incentives.

With punitive accountability, the special interests that would be held to high standards have strong motivation – and usually the power – to demand dumbed-down tests, lowered minimum scores, or many other accountability dodges.  The result: Little or no improvement.

What if there are no serious ramifications?

Then the system gets its money no matter what and again there is little or no improvement.

It’s damned if you do, damned if you don’t!

So what are reformers to do? One thing: Take government – which will almost always be dominated by the people it employs – out of the accountability equation completely. Give parents control of education funds and make educators earn their pay by having to attract and satisfy customers.

Unfortunately, that still seems to be too great a leap for Jay Mathews. But one of these days, I’m certain, he’ll go all the way!

Is Trade Policy Obsolete?

That is one of the conclusions in my new paper, “Made on Earth: How Global Economic Integration Renders Trade Policy Obsolete.”

For hundreds of years, trade policy has been premised on the assumptions that exports are good, imports are bad, and the interests of domestic producers are tantamount to the “national interest.” Though that mercantilist worldview has never been accurate, its persistence as a pillar of trade policy into the 21st century is especially confounding given the emergence and proliferation of disaggregated production processes, transnational supply chains, and cross-border investment. Those trends have blurred any meaningful distinctions between “our” producers and “their” producers and speak to a long chain of interdependent economic interests between product conception and consumption.

Still, trade policy places the interests of domestic producers above all else even though the definition of a domestic producer is elusive and even though actions on behalf of producers often harm interests along the product continuum, which include engineers, designers, financiers, processors, assemblers, marketers, shippers, retailers, consumers, and others.

In 2008, foreign nameplate automobile producers, employing American workers, paying American taxes, and supporting American businesses, communities, and charities, accounted for almost half of all U.S. light vehicle production. The largest “U.S.” steel producer, Arcelor-Mittal, is a majority-Indian-owned company with headquarters in Luxembourg and Hong Kong. The largest “German” producer, Thyssen-Krupp, is completing a $3.7 billion green-field investment in steel production facilities in Alabama, which will create an estimated 2,700 jobs in that state.

So, who are “we”? And who are “they”?

Are these foreign-named or –headquartered companies not “our” producers because some of the profits they earn are repatriated or invested in operations outside the United States? If so, then shouldn’t we consider U.S. Steel Corporation, which earned 25 percent of its revenue last year on steel produced in Slovakia and Serbia, and General Motors, which has had success producing and selling cars in China, to be “their” producers? Why should U.S. Steel, General Motors, and the unions that organize workers at those companies dictate the parameters of U.S. trade policy, while Toyota, Thyssen and their non-union workers have no input? Why should trade policy reflect a bias in favor of producers—or worse, particular producers—at all? That bias hurts other interests—both foreign-based and domestic—in the supply chain.

Global commerce isn’t a competition between “us” and “them.” It is instead a competition between entities that defy national identification because of cross-border investment or because the final good or service comprises value added from many different countries. This reality demands openness in both directions, which flies in the face of conventional trade policy wisdom, which seeks to maximize access for domestic producers abroad while minimizing access for foreign producers at home.

It is only for simplicity’s sake that a container full of iPods shipped from China and unloaded in Seattle registers as imports from China. But the fact is that only a few dollars of the $150 cost to produce an iPod is Chinese value-added. The rest is mostly value attributable to Japanese, Korean, Singaporean, Taiwanese, and American components and labor. Then iPods retail for about $300 and most of the mark-up accrues to Apple, which uses the profits to support innovation and higher paying jobs in the United States.

From a trade policy perspective, each iPod imported from China adds $150 to our bilateral deficit in “high tech” goods. It is regarded as a problem to solve. The temptation is to restrict.

But from a commercial perspective, each imported iPod supports U.S. economic activity up the value chain. Without access to lower-cost labor abroad—if rudimentary component manufacturing and assembly operations were required to take place in the United States—ideas hatched in American labs would be far less likely to make it beyond the white board. Much higher costs would make it far more difficult to create these ubiquitous devices that have, in turn, spawned new ideas and industries.

Essentially, the factory floor has broken through its walls and today spans borders and oceans, making Chinese and American labor complementary in this and many other industries. Yet, despite all of this integration, despite the reliance of producers in the United States and abroad on imported raw materials, components, and capital equipment, trade policy still pretends that access to the domestic market is a favor to grant or a privilege to revoke. Trade policy is officially ignorant of commercial reality.

Openness to trade in both directions is an imperative in the 21st century. Policies that do not try to channel incentives for the benefit of specific groups but rather provide the greatest opportunities for citizens to participate most effectively in our increasingly integrated global economy are the ones that will maximize economic growth and national welfare. People in other countries should be thought of more as customers, suppliers, and potential collaborators instead of competitive threats.

In the 21st century, instead of serving the exclusive interests of domestic producers, trade policy should be about welcoming investment and attracting and cultivating the human capital necessary to make the United States the location of choice for the world’s highest value economic activities.

Why the Democrats’ Health Care Overhaul May Die

The problem that Democrats have faced from Day One is finally coming to a head.

The Left and the health care industry both want universal health insurance coverage.  The industry, because universal coverage means massive new government subsidies. The Left, because that’s their religion.

But universal coverage is so expensive that Congress can’t get there without taxing Democrats.

  • Sen. Jay Rockefeller (D-WV) is the biggest opponent of Sen. Max Baucus’ (D-MT) tax on expensive health plans because that tax would hit West Virginia coal miners.
  • Unions vigorously oppose that tax because it would hit their members.
  • Moderate Democrats in the House oppose Rep. Charlie Rangel’s (D-NY) supposed “millionaires surtax” because they know it would hit small businesses in their districts.

And on and on…

But if congressional leaders pare back those taxes, they lose the support of the health care industry, which wants its subsidies.

  • That’s why the health insurance lobby funded this PriceWaterhouseCoopers study saying that premiums would rise under the Baucus bill: the $500 billion bailout they would receive isn’t enough.  They also want – they demand –  steep taxes on Americans who don’t buy their products.
  • The drug companies, the hospitals, and the physician groups are likewise demanding big subsidies, and will run ads to kill the whole effort if those subsidies aren’t big enough.

As always, health economist Uwe Reinhardt put it colorfully:

It’s no different from Iraq with all the different tribes…‘How does it affect the money flow to my interest group?’  They are all sitting in the woods with their machine guns, waiting to shoot.

Once the shooting starts, industry opposition will sway even Democratic members, because there are physicians and hospitals and employers and insurance-industry employees in every state and congressional district.

Can President Obama and the congressional leadership satisfy both groups?  My guess is, probably not, and this misguided effort at “reform” will therefore die.  Again.

Hey G-20! Here’s How You Curb Protectionism

Last week I recommended reading a new paper published by the Lowy Institute in Australia, which proposes an utterly sensible reform for the G-20, if curbing protectionism is a serious aim.

Using Australia’s own successful experience as an example, the authors recommend other countries adopt “domestic transparency” programs, which would essentially include analysis from an independent, apolitical board or agency that measures the real costs and benefits of proposed trade restrictions.

The findings of these independent reviews would be accessible to the public—and probably published in newspapers and other popular media—in advance of any decision to impose or reject the proposed trade restrictions. The findings wouldn’t legally bind the authorities to take any particular action, but would help chase from the shadows the real costs of protectionism, so that those ultimately making the decision know that the public at large is aware of the costs.

When a politician knows that he/she can benefit politically by imposing import duties, the costs of which are hidden in higher prices paid by consumers, who are unlikely to make the causal connection, there is a profound asymmetry of incentives and disincentives. The politician is much more likely to choose to secure the political benefit of imposing duties since the costs are hidden. But if light is shone on those costs, through domestic transparency initiatives, that asymmetry is reduced or eliminated. Politicians, under these circumstances, can go back to the special interests and say how much they’d like to help out with a tariff, but the costs don’t justify the measure. And the protection-seekers know the politician’s hands are tied because the public is aware of those costs.

Well, Alan Mitchell of the Australian Financial Review on Monday supposed how the presence of a domestic transparency regime would have affected President Obama’s tire tariff decision. It is very instructive:

The case of the Chinese tyres provides a striking example. The action was taken under a section of the US Trade Act popularly known as the “China-specific safeguard” provision. The act allows increased import duties if the imports cause, or even just threaten, material injury to US producers. If material injury is identified, the president must take action against the imports unless he determines that the “provision of such relief is not in the national economic interest.”

 The US International Trade Commission (ITC) publicly advises the president on the issue of material injury, and on the level of trade barriers needed to stop it, but not on the question of the national economic interest.

The president is left to determine that for himself. And the public is aware of nothing but the ITC-endorsed case for protection….

Suppose the ITC had been asked to also publicly advise the President on whether action against Chinese tyres was in the national economic interest. There is no doubt about what its advice would have been. The duties on Chinese tyres will save some jobs among US producers of low-cost tyres, but at the price of propping up uneconomic producers, and at the cost of jobs lost among US tyre retailers and in other sectors of the economy….

Had the ITC advised that action was against the national economic interest, the President would have been in a much stronger position to reject the demand, if he had wanted to. He may not have wanted to, of course….

The US action against Chinese tyres was initiated by a complaint from the unions that are an important part of Obama’s support base. But even if Obama had protected the tyre makers against the advice of the ITC, an important blow still would have been struck against protectionism. The American people would have heard the truth from an unimpeachable source: the protection of inefficient tyre makers is against the US economic interest….

It would have been a small but important step towards educating and changing public opinion. And, without that, multilateral trade reform will never gain the domestic political support it needs to bring down trade barriers in agriculture and services.

This is what could have been had ”domestic transparency” already been embraced in the United States.  See the point in such a reform?