Poor economics and poorer morality
By Robert A. Olsen, Ph.D.
The current recession has reanimated a destructive human belief that some people are less deserving of societal compassion and concern than others. Many of those attempting to reduce government deficits by shackling union membership and reducing existing public employee benefits are implicit purveyors of this belief. These are strong accusations but what these people advocate is economic nonsense and moral wrongdoing.
The most recent period of strong middle-class income growth was from WWII until about 1974, a period of strong unions and a progressive tax structure. The public benefited with better transportation, schools, housing and corporate competition. Since 1974 middle-class incomes have fallen along with the decline in strong unions, increased international job outsourcing and the weakening of regulations on business competition. Most gains in worker productivity have gone to enrich a super wealthy corporate upper class and stockholders. Most middle class workers have lost income and influence through de-unionization and weak political representation, largely due to powerful corporate lobbying.
In general, since 1974 human labor has not paid off relative to investment in stocks and bonds. The U.S. now has one of the most lopsided income distributions in the industrialized world. About 10 percent of the population now owns about 70 percent of all income and wealth, and there is no longer a large, economically viable middle class.
The current recession is especially dangerous because the middle class was the source of prior economic stability and mobility. The latest economic research indicates that where you are now born economically, you will die. This is not the former America, the land of opportunity.
What is wrong with reducing deficits by cutting union and public employee wages? Most of these targeted people barely make enough to support their families. If you reduce their incomes even further, what can they spend?
Workers without college degrees in the public sector make about 6 percent more than those in the private sector, largely because they have better pensions and health care. However, workers with college degrees in the public sector make about 20 percent less than those in the private sector. Thus there is little evidence that, in general, public workers are living the “high life” relative to private sector counterparts.
If one assumes that “economically,” union employees are representative of non-college public workers, which they are, then they make about 6 percent more than those in the private sector. This additional 6 percent is due largely to pensions and health care and amounts to about $1,600 a year. Are health care and pensions luxuries? In most developed European countries they are viewed as rights.
What is wrong with reducing pensions and benefits after an employee has been working for an organization? Consider the following.
« When a worker and employer agree on pay and the labor required to earn it, the employers realize that pensions and benefits are really just another form of delayed compensation. Pay is split between wages and so-called “benefits.” To an employer operating in a competitive economic environment, pensions and benefits cannot be gifts because there are no excess profits to spend. Thus when these are reduced, after the fact, it amounts to forced underpayment and expropriation of the workers labor. Regardless of the economic rationale this is theft and immoral behavior.
« If workers come to expect that pay will be subject to future reduction, they will only work for higher immediate wages and ignore employers promises about the future. This will make it harder for employers to hire better skilled and more productive workers. Thus output quality and the general welfare will suffer. For years governments have offered higher pensions and benefits because they have been unable to generate the up front “cash flow” from taxes to offer higher immediate wages. This is most pronounced in the hiring of teachers.
« Pay cuts and layoffs in the public sector make a recession worse as more people are forced into poverty and out of the marketplace. Layoffs cost other workers their jobs. The psychological fallout from unemployment is immense and long lasting. People become fearful and less trusting and committed to community welfare. Political instability also increases.
So what are the alternatives to local pay cuts and union busting?
« The Federal Government should help local governments maintain levels of support, especially to those most at risk, during recessions.
« Income tax structure should be returned to its earlier 20th-century progressive form.
« Regulations need to enforce business competition and eliminate very large accumulations of economic power in the hands of a few firms.
« Unionization should be encouraged, as unions have proven to be a major means whereby workers can bargain with powerful employerers for an equitable wage. Unions are a countervailing force to a corporate America where the 500 largest firms now possess about six times the wealth and income of all U.S. households.
Robert A. Olsen, Ph.D., of Eugene is a UO graduate and financial economist.