Peas in a Pod

An emerging response in the debate over public sector unions and Wisconsin’s attempt to constrain them is that “yes, it’s fair to ask public employees to contribute more to their health care and pensions to help address state fiscal woes, but it is not appropriate to restrict collective bargaining rights because they have nothing to do with the budget problems.”  Or, to quote University of Wisconsin economist Menzie Chinn: “collective bargaining rights do not in themselves have direct budgetary implications.”

You have to be either clueless or extremely disingenuous to make this argument.  (I’ll put Mara Liasson, who made the argument on Fox News Sunday this morning, into the former category, based on her extensive track record.)

Seriously, how did these extremely generous benefits come to be?  Did a stork bring them?  Did Moses bring them down on tablets after a conversation with a burning bush?  Hardly: they were the product of collective bargaining between public employee unions and politicians and bureaucrats subject to perverse incentives.

The incentives are perverse because (a) the public sector unions are a concentrated interest with a large stake, and their members can and do provide extensive support to those politicians who advance the union agenda, (b) those who pay the cost of this incestuous relationship–the taxpayers at large–are a diffuse, heterogeneous group, with each person having a small stake in the outcome, (c) by rewarding unions with benefits that extend far into the future, politicians can both obscure the costs of their actions and pass the costs onto many who have no voice in the process (e.g., those currently too young to vote, or those who may move into a jurisdiction at a future date), and (d) politicians have very short time horizons whereas the union employees have much longer ones.

In short, collective bargaining in the past is directly responsible for the fiscal disaster looming over just about every state and city in the country.  And no, you can’t weasel out of that reality by saying that collective bargaining rights “in themselves” don’t “have direct effects.”  Yeah, it takes two to tango–the unions and the politicians/bureaucrats.  The rights extended to the unions don’t “in themselves” uniquely determine the outcome: you need the connivance of the politicians too.  But it is clear that the existence of such rights is a necessary condition for the entirely unsatisfactory outcome we are all grappling with today.  And since it is a necessary condition, restricting these rights is an effective way of mitigating, and perhaps eliminating, the problem in the future.

You aren’t going to change politics or politicians fundamentally.  Controlling public employee compensation costs requires measures that impede corrupt bargains between politicians subject to the background condition of bad incentives and public sector employees.  Limiting the scope of collective bargaining is one way to do that.

Controlling costs requires a credible constraint on the bargaining process that permits captured politicians to extract money from diffuse taxpayers and giving it to those that have captured them.  Period.  Limiting the scope of what can be negotiated between the captors and the captive is the best way to do that.

This is exactly why the unions in Wisconsin and elsewhere are making such a big deal about legislation to limit the scope of collective bargaining: that’s where the real money is.  And that’s also why they, their mouthpieces, and the useful idiots that are sympathetic to them feel obliged to concoct such disingenuous arguments that attempt to disassociate collective bargaining from the fiscal issues that have such resonance among taxpayers.  But overly generous benefits and the right to bargain collectively over these rights with interested politicians are peas from the same pod.

About Craig Pirrong 223 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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