"It profits me but little that a vigilant authority always protects the tranquillity of my pleasures and constantly averts all dangers from my path, without my care or concern, if this same authority is the absolute master of my liberty and my life."

--Alexis de Tocqueville, Democracy in America

Monday, February 21, 2011

What Does It Mean For a Public Employee To "Bargain" About Benefits? - An Update on the Standoff in Wisconsin

It's snowing in southeastern Wisconsin, yet the protests go on.   Over the weekend the unions conceded on two of the three main parts of Governor Walker's budget plan -- they say they are willing to pay 50% of the cost of their pensions (roughly 5.8% of their salary) and 12.6% of their healthcare premium (depending on the salary of the person involved somewhere between 3 and 5% of salary).   But they refuse to give on Walker's position that they should give up the "right" to collective bargaining on benefits.  

There are many reasons why there is no such "right."   On the one hand, it is patently not a universal "right" -- many states prohibit public employees from collective bargaining even today, and for many, many years there was no such thing as public employee unions or collective bargaining for public employees.   On the other, since many states do prohibit it, it obviously also isn't a "constitutional" right.   Rather, it is a creature of statute, and what the legislature gives can be taken away.  That is all that is happening here.   A democratically elected Republican legislature has concluded that permitting public employees collective bargaining on benefits is a bad idea.  If Democrats think it is a good idea, let them make their case to the public and win the next election.   I think they won't be able to, because collective bargaining for benefits for public employees is, in fact, a very bad idea.

But why?  Why is it such a bad idea?   I think I have an answer to that question and it has less with the nature of "rights" and more with the nature of "bargaining" and the nature of "benefits" and even the nature of being a "public employee."

When unions and employers in the private sector enter into collective bargaining, the employers try to value the labor that the union members will give them in terms of their other costs (fixed costs or materials, etc.) and in terms of the profit they desire to make.   If the unions demand too much, the employers will "lock out" the employees because paying them their desired amount would cost them more than not having them work at all.   If the employees are intransigent, the employer might even shutter his factory and move his operation offshore to China where he can again maximize profits. 

Meanwhile, the union is making the same calculation.   How much do they think their labor is worth?   If the employer offers too little, the employees will "strike" because they know that the employer will ultimately be unwilling to forego his profits by letting his factory remain inactive.  

Each of them is taking risk in pushing their positions too hard.   The employer risks losing profits he might earn if he hired the union laborers to do productive labor in his plant.   The unions risk losing their jobs entirely if the employer decides he can't do business with them, and instead decides to move his plant to a right-to-work state, or overseas.   The employees have the leverage of threatening a strike.   The employers have the leverage of threatening to move.   It's an arm's length negotiation, and it's a fair fight.  

The problem with "public employees" is that no one knows how to value their work, for the simple reason that the government is not a profit-maximizing institution.   No one really knows what the services the government provides are worth, because there is no competition and no market for government services.   The employer (us) doesn't know how much is too much to pay to the unions; and the unions don't have a realistic idea of how much is too much to ask for.    Beyond that, the public employer can't decide not to operate its factory or business; the public employer can't up and move to a more business-friendly state or even offshore to China or Korea or Singapore.   In other words, they can't do what normal bargainers do when the employees demand too much.  There's no factual basis for pricing the value of public sector union labor, so there's no real basis for negotiation. 

The problem is even worse when you add benefits into the calculation.   Wages are costs today that drop to the bottom line this year.   The value of a wage is precisely the dollar paid.   But the value of a promised benefit is imprecise... health insurance costs might go up more rapidly than expected, and the cost of pension benefits under current actuarial practices is hostage to the expected investment returns of the pension fund.   The employer simply does not know how to value those benefits, so again there is no real basis for bargaining.  

Instead, what happens is that the public employer in negotiating a benefit package takes risk.... risk that health insurance will cost more, risk that the pension fund with suffer investment reversals and require future infusions of cash to pay promised benefits.   But, here's the rub.... the public employer is not risking its own profits or capital, it's risking the wealth of its citizenry, which it will have to tax to pay for those future benefits.   And the governor of a state or the mayor of a munipality has generally not even risked reelection, because the tab for promised benefits could always be kicked down the road to the next governor or the next mayor or the next county executive.

Until now. 

Anyway, the point is that permitting collective bargaining in the public sector is a bad idea, not because of any question of "rights," but because it's economically unsound, because the normal incentives and disincentives of of bargaining don't apply.  

Haven't completely thought this through, but it seems imperative to me that we do so as a country, rather than get caught up in the silly and tired rhetoric of "rights."  


On another happy note, the Wisconsin Medical Society criticized doctors who wrote medical excuses for protesters during a weekend rally at the state Capitol.   In a statement issued Monday, the Society said the actions "were not consistent with established medical practices."

Good for them.  Any doctor who issued "excuses" to protestors in Madison committed fraud, just as sure as if he had forged a prescription for Vicodin for an addict.


Finally, Richard Pollack has a very good article up about why the Democrats have blundered in Wisconsin from the perspective of political image-making.    Here's the money quote:
For in the end, the images and messages tell the story. The showdown in Madison pits pampered public employees against hard-pressed taxpayers. It portrays union workers as an angry mob against those seeking orderly legislative deliberation. It paints Democratic lawmakers as outlaws on the run, undermining the democratic process. It launched a national debate about the generous salaries and benefits for government workers during a time of economic shortages. And it showcased school teachers who abandoned their children in favor of narrow, partisan political gain.

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