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09 July 2009 12:32 PM

Business / Economics

Public Employee Unions, Cont.

Freddie is upset by a previous post wherein I suggested that public employee unions should be abolished, and a Matt Welch post highlighting the outrageous costs imposed by public sector unions in California.

Freddie writes:

Welch ascribes the lions share of California's fiduciary crisis to (can you guess?)... the unions! Meanwhile, he does nothing to acknowledge why unions exist and why people join them: because unions help workers to improve the material quality of their lives. You could be excused, reading economic conservatives' attitudes about unions, for thinking that unions must be a product of some malevolent intelligence bent on destroying our society. In our discourse about unions we are not allowed to point out that unions exist because they are a net positive influence on the lives of those within them, or that improving the financial security and material well-being of the people within society is one of the basic functions of government.
I'll certainly acknowledge that California's public employee unions improve the well being of its members. The problem is that the outlandish compensation it wins workers comes at the expense of the common good. The most obvious example are public employee pensions. In California, a state worker can retire at age 50, do absolutely nothing all day, and collect 90 percent of their salary for the rest of their lives! 5,000 of these pensions amount to six figures incomes. Nor can the state afford the system it has. As the Matt Welch piece mentions, "the state's annual pension fund contribution vaulted from $321 million in 2000-01 to $7.3 billion last year." That is a rather alarming rate of growth, and an astonishing figure, don't you think? Given that the state is bankrupt and issuing IOUs to its creditors, it doesn't seem unreasonable to complain that public employee unions have extracted benefits that are both obviously unaffordable and far in excess of what is enjoyed by the taxpayers who finance them.

Freddie goes on to write:

We are instead expected only to constantly harp on the horrible greed of Detroit autoworkers or California teachers, who have the temerity to want to maximize their wages, to gain job security through their labor and to collectively bargain with their peers in order to do so. Whether or not on net those positive public goods outweigh the negative economic effects of union is a matter of argument. But to ignore those things entirely is not to have an argument at all. That's where we stand in our discussion of unions, though, with only the bad effects at issue and the positive effects dismissed as sops to special interest groups. This is not weak manning. It's no-manning, thwacking away at an antagonist idea without even a shred of a notion that it is necessary or helpful to consider why people support unions in the first place.
Reading all this, you'd think that Matt Welch and I attacked the idea of unions generally. In fact, we attacked public sector unions in a specific state. The specific argument we're making is that their costs outweigh their benefits. Though Freddie acts as though every union is generally under attack, he mentions the teachers unions and Detroit autoworkers specifically because they are other examples of specific unions that come under fire because their effects are particularly deleterious.

I'm sure that somewhere out there, you'll find an economic conservative who attacks all unions as corrupt and terrible. That would be wrongheaded. Some unions are necessary. Sometimes the benefits of unions outweigh the costs. That isn't the case with California's public employee unions.

One last point I'd like to address before closing:

Welch and Friedersdorf  are comfortably entrenched in the world of elite media. That's not a knock on them, and I'm sure they both deserve it. Nor is it precisely an argument against their position. Whether or not unions are a net good for society that we should defend can't ultimately have anything to do with how critics of unions live.  But I wish on an emotional level that people like Welch and Friedersdorf would take care to think a little bit more about what exactly they are advocating, to acknowledge that real people will face real hardship without unions, and to stop talking like every union member is some nefarious villain.
Ah yes, elite journalism. What a comfortable, well-compensated life we all lead! Folks in a cushy growth industry like ours wouldn't even have any use for lifetime job guarantees or defined benefit pensions. It's no wonder we aren't more deferential to, say, a retired pr flack from a municipal fire department pulling in 90k per year to do nothing from 50 on.

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Comments (37)

This morning I read Freddie's post before I came across this rebuttal. When I read "Welch and Friedersdorf are comfortably entrenched in the world of elite media" my immediate thought was "Oh when will someone, anyone, stop seeing conservativism as elitism?"

Well well, Conor. How you've softened!

You, yesterday:

"Here's an idea: outlaw public employee unions."

John Bejarano

So, here's my question? Why aren't labor unions subject to the Sherman Anti-Trust act? They're monopolies, plain and simple. If you want to make labor unions acceptable, give the corporations, governments, and institutions that have to bargain with them a choice. You can use Union A that has better quality but more expensive workers, Union B that has lower quality but less expensive workers, or Union C that is somewhere in between. Better still, you can contract with each union for different applications depending on the mutual needs. That way, employees would also have a choice as to which union would best suit their needs. Corporations aren't the big, entrenched things they were in the Industrial Revolution anymore. They have to be lean, nimble and competitive or they'll die (GM, notwithstanding). Competition is, and always has been good for them. If it's good for them, it's good for labor unions, too.

What do you think, Conor? Idea of the day? :)

Frog Leg (Replying to: John Bejarano)

There is a specific exemption for labor in the antitrust statutes and caselaw. It is not absolute, but it is very broad.

John Bejarano (Replying to: Frog Leg)

That's a shame. That exemption should be repealed. That's the idea.

TheFrumiousB

I'm not an elite. I'm unemployed (at least, substantially underemployed) and I agree whole-heartedly with Conor (though I would oppose unions generally not just the public variety).

Enforcing job security for some, leads to greater insecurity for everyone else. Unions do not reduce variability in the demand for labor, they just force people who are outside the unions to bear the impact of that variability disproportionately.

Unions are bad because:

1) Unions reduce demand for labor by requiring unnecessarily high compensation (unnecessary to attract qualified workers).

2) Unions harm consumers by increasing the cost of goods and services above their free-market prices.

3) Unions cause employers to be much slower and more reluctant to take on new employees, because if the employee turns out to be a poor fit, or if business turns down, they'll be stuck with them.

4) Unions are cartels. The true enemies of unions are not fat-cat managers and capitalists, but rather fellow workers (i.e. scabs) who would happily accept jobs currently occupied by union members at rates of compensation lower than that which those members are receiving, but who are not allowed to, because the cartel blocks competition.

5) Unions, by offering tenure or other forms of excessive job security as well as by enforcing rigidly mechanical (non-performance based) compensation schemes, reduce worker incentives, thereby increasing costs and reducing output.

I could go on. The second order effects are at least as bad as what I've mentioned so far, but this is a comment not a textbook.

Public unions are more pernicious than private unions because:


1) Negotiators for government employers are not incentivized to drive as hard a bargain as private sector managers and owners (whose compensation, investment, job, company is at risk).

2) Private unions have an incentive to be more moderate in their demands. If they squeeze too hard, they'll push their host company into bankruptcy and lose their cushy outpost. Public unions on the other hand can bleed the taxpayers without mercy.


Not outlawing public unions is a breech of the fiduciary duty elected officials have to their constituents. Those, like Freddie, who are inclined to think of public employee compensation as an appropriate venue for largess, need to recall that public revenues have to come from somewhere. If people in every other part of the economy are tightening their belts, shouldn't the public sector ease the strain by doing their part as well?

lindafranke1952

Americans will continue imposing unreasonable demands due to their attitude of entitlement. It's here and nobody is willing to see the huge elephant in the room. What's wrong with "NO we cannot afford it"???

Of course, not a mention of critisism anywhere for the people that actually agreed to this shitty deal with the unions.

Oh well, why hold public servants accountable when we can just pin all the blame on [insert relevant special-interest group here].

dugmartsch (Replying to: Omnissiah)

Yeah. This is California we're talking about. If it weren't unions I'm sure there would have been a ballot initiative far more lucrative to public sector employees that would have been written into the constitution. At least you can negotiate with unions.

But then, we wouldn't be able to beat up on 'things we've already decided we really do not like except sometimes when we do (to show you we're not totally unreasonable on the subject).'

The problem is that the taxpayers are working for the likes of Walmart where they do not earn a living wage and the benefits either do not exist or are sub-standard. All workers should be unionized as it is the only way to level the playing field with capital. I am not in a union and sure they are far from perfect, but without them workers subsidize the wealthy by working for less than they should. What everyone forgets is that capital enjoys far more freedom of movement than labor -- with a wife, two kids and house it is very difficult to uproot and chase higher wages around.

dugmartsch (Replying to: John)

I'd be happy to do away with unions if we could write a good single payer health care system, strengthen social security, provide better access to higher education and create a decent unemployment program.

Maybe we could be deal buddies.

Andrew Dickson

What gets lost in these discussions is that pensions and retirement benefits are not charity. They are deferred compensation, negotiated in the past and due at some point in the future. It is a system of delayed gratification rather than entitlements in the pejorative sense, where the worker invests in his or her career over a long period of time, sacrificing in the short term for long term gains.

In most cases, workers are very cheap when they are young and so it's very easy for states and corporations to negotiate contracts that say "we won't pay you much now, but you will get something later." In other words, the promise of a pension, retirement benefits, and healthcare is an IOU from the very beginning and the value of the labor during an employee's working years is bought on credit. When an employee receives her pension it's like a bank being repayed a loan.

You can't blame the workers for the fact that local governments and corporations are and were too short-sighted and fiscally irresponsible to think they would ever actually have to pay their employees what they are owed.

vince (Replying to: Andrew Dickson)

This is an argument that I've heard from many of those I know who now benefit from public pensions, that somehow the money they receive after retirement is really "their" money that they paid in (or should have been paid) all the years that they were working.

But the numbers don't seem to bare that out. Let's take, for example, someone who starts in state government making $30,000 and over thirty years rises to make $70,000. With a 75% pension after thirty years, they'd get $52,500 per year. If they retire at 60 and they live until age 80, that's $1,050,000 in total.

For the deferred compensation argument to work you'd have to assume that they were either underpaid or contributed $35,000 per year for each of those thirty years that they worked. So when they started they were really worth double their salary, and when they retired they were worth an additional 50% on top of their salary? Even if they contributed $300 per month to their pension when they were making $30,000, that would only compound to $15,000 over 30 years at 5%, still $20,000 less than the actual payout they receive. It doesn't add up.

Sandman34 (Replying to: vince)

Assuming, as you do, that a state employees salary increases more than 3% per year (in the last 10 years, I believe we have secured a total of 7% increase instead of the 30+% increase your model predicts), and a worker contributes to his 401K with matching funds, a 6% (relatively low for a 40 year period) rate of return over 40 years with standard employer matching (50% up to 6%), you would end up with nearly a million dollars in the bank. If you live to 80 (beyond the standard life expectancy), you get a pretty good deal, especially when you consider the security. If you die at 61 as a 401k worker, your family gets a million dollars. If you die at 61 as a pension worker, your family gets nothing.

vince (Replying to: Sandman34)

But your original argument was not that 401(k)s are a better investment deal than public pensions (which I don't believe is true, given both the fact that the number of employers offering matching contributions is shrinking, and that, as recent events have proven, 40% or more of your 401(k) value can be wiped out and never recovered), but that the money paid in pensions is somehow actually making up for artificially low salaries that public employees had been paid over their careers. Your explanation still doesn't explain how a year of service at $30,000 in the beginning of a career can accommodate an annual pension payment of $52,000 during retirement.

Sandman34 (Replying to: Sandman34)

@Vince
Your initial response is to Andrew, not to me.
I think the answer to your question lies in the compound interest. At 6% annual interest, the $3,000 (assuming 10% contribution) from 40 years ago is now worth more than $30,000, as opposed to the 7,000 contributed in the last year.

Your argument that fewer employers are matching contributions may be fair. I don't know the numbers. That was the rate that my last employer contributed at.

While it is true that a 401k can lose 40% (or more) of it's value quickly, the question of recovery is a question of time. It's also true that your money can double and triple quickly. It depends on when you cash out. While plenty of people are complaining that pensions are unfairly large during poor economic times, I don't recall any editorials bemoaning the way public employee pensions weren't keeping up with 401ks in the 90's.

I don't blame the unions for negotiating maximum benefit for themselves. That's their job. It's the state's goddamn job to keep the pensions under control and clearly they failed at doing this. Never too late to try.

Why put all or most of the blame on unions? They cannot get these contracts by fiat. They are the end product of negotiations between the unions and the government. If people of California do not like the deal, they can vote out the government who agreed to the contracts and elect people who might be better negotiators. The same goes for Detroit: blame should be placed squarely on management and directors who agreed to the contracts there. Plus, if they did not get these pensions, then they would have demanded more money up front.

To clarify as a California state worker:
Only police officers get that retirement deal. Everyone else (me included) would get 30% pay at age 50 if I retired after 30 years of service. Police officers get 3% x service years after age 50. Since I started at age 30, rather than 20, I can retire at 60 and get 75% pension. While this may sound very good, there are drawbacks as well. If I put the same amount into a 401K (according to 401k calculator at 5% interest), I would have between 500,000 and 1,000,000 in the bank. My retirement is a good deal if I live to be 80, and a bad deal for my wife and kids if I die at 61.

There are two reasons why the state of California is in this kind of trouble.
1) Two-thirds vote required for the budget. That means no one party is ever accountable for the budget. In this well-gerrymandered state, most of the state legislature is at the edges of the political spectrum, and unaccountable to the middle. Democratic voters don't blame the democrats because they can't pass a budget without republican votes. Republican voters don't blame republicans because they're the minority party, holding the line on taxes.

2) No one wants to raise taxes or cut programs.

Whether the services are provided by state workers or by external vendors, the only real way to cut billions of dollars is to cut programs. So far they've cut our pay 15%, with an another 5% on the way, and in the end that's millions of dollars saved. However, that doesn't come close to closing the budget gap.

dugmartsch (Replying to: Sandman34)

So you're saying this post is a bunch of anti-union bullshit?

Nice job, Atlantic. There are good arguments against unions without having to make stuff up. I guess that's why i don't read this blog regularly.

dugmartsch (Replying to: dugmartsch)

"As the Matt Welch piece mentions, "the state's annual pension fund contribution vaulted from $321 million in 2000-01 to $7.3 billion last year." That is a rather alarming rate of growth, and an astonishing figure, don't you think?"

As we're picking apart bullshit, I think there might have been some intervening circumstances that would cause a state to have to contribute more to a market based pension program. I'm having some trouble figuring out what that might be. "Growth" is not the correct answer.

Sandman34 (Replying to: dugmartsch)

I think that growth relates to:
1) The stock market was doing pretty well back in 2000, so the need for state contributions was limited.
2) The state frequently offers to improve retirement benefits to stay competitive with the private sector instead of increasing salary. Kicking the can down the road has negative ramifications, no matter how hard the legislatures want to ignore them.

Sandman34 (Replying to: dugmartsch)

As a state worker, I am ambivalent about public employee unions. It is too hard to fire bad workers, a lot of people have a sense of entitlement, and some of the hiring/promotion rules seem counterproductive. I think one reason most government agencies are unionized is for stability. Since there is rarely a profit motive in government, elected officials are driven to make popular decisions, rather than good decisions. I also think the unions protect (to some degree) against cronyism. Without the unions, a lot more levels of government work would be filled with campaign staff instead of serious professionals.

DB Cooper (Replying to: Sandman34)

a lot more levels of government work would be filled with campaign staff instead of serious professionals.

Thus robbing the public of the high quality work for which government employees are revered across the world. :)

dugmartsch (Replying to: Sandman34)

Exactly my point. "Because of the fund’s aggressive purchasing of real estate during the property bubble, CalPERS is now the largest owner of undeveloped residential land in America, much of it purchased in Arizona, California and Florida, some of the states hardest hit by the real estate crash. Many of these properties were purchased when their prices were at their peak.
The pension fund is expected to report paper losses of 103 percent on its residential investments in the fiscal year that ended June 30. It is estimated 80 percent of these investments were paid with borrowed money, which means that CalPERS will eventually be obligated to pay them back at the original market price."

That's the reason the pensions are underwater, and that's the reason that California is contributing 7.3bln this year to the fund. Considering that's the first link on a google search for California pensions, I can only assume disingenuous on the part of the author.

Mark S (Replying to: Sandman34)

Thanks for the clarification. It is more interesting to read facts than outrage at straw dogs.

Of course, if one is outraged at the thought that a cop can retire at 50, no doubt one would truly enraged by the benefits afforded to the (non-unionized) members of the armed forces:

"The military retirement system is arguably the best retirement deal around. Unlike most retirement plans, the Armed Forces offer a pension, with benefits, that starts the day you retire, no matter how old you are. That means you could start collecting a regular retirement pension as early as 37 years old. What's more, that pension check will grow with a cost of living adjustment each year."

There are a lot of lawyers, engineers, computer programmers, etc.. that are a lot better at their jobs than someone who shows up to the college young republican meetings would be.

I think if you examine the quality of work when the government contracts out, you'll find it's very similar to that of state workers except it costs three times as much.

I also doubt very much that the level of performance for state workers would be improved if they were paid less.

dugmartsch (Replying to: Sandman34)

You can bet their incentives towards corruption would be much higher though.

I understand people who are anti-government libertarian. But they still want what remains of their government to be competent and incorruptible, right?

Sandman34 (Replying to: dugmartsch)

The critical piece is that if you want less government, you need fewer government programs. Say what you want to cut, and cut it. The complaint about the unions really only nibbles at the edge of the larger problem. If you have fewer programs, oversight is also easier and bureaucratic overhead can be cut. No one is really willing to stick their neck out and cut anything, they always want to target the "waste, fraud, and abuse". That may be a legitimate course when you're looking at a couple of million dollars, but that is certainly not the case here.

just some added info:
I know that Cali teachers don't pay into social security.

Sandman34 (Replying to: stagemom)

California state employees pay into social security and medicare.

I'm just not sure where you get your facts. I am a CA state employee and I have the "beneifts pdf" right in front of me. If you retire at 50, the most you can make is 33% of your salary, and that assumes 30yrs of service. In other words, if you started working for the state when you were 20 and never lost a job or interrupted your service for the next 30 years you could retire at 50 and make a third of your average salary. The earliest you could retire and make nearly 90% of your average salary is at 59yo with 38yrs of service.

Of course, no one works the same job for 30 years and no one retires at 50, so this is hypothetical. But at least it is a hypothetical based on reality, not whatever Conor is smoking.

And yes, CA employees pay Social Security, Medicare, all of it.

Sandman34 (Replying to: renbot)

He is correct only if discussing public safety employees (CHP Officers, etc...). For most state employees, you are correct. I made a mistake in an earlier comment when thought that standard retirment at 50 was 1%, when it is actually 1.1%. In my case, I started at age 30, so the most I could get at 50 is 22%, not the 20% I indicated earlier in the thread.

renbot (Replying to: Sandman34)

So the only public employees really "gaming the system" and getting the kinds of pensions that conservatives misleadingly attribute to all public employess are also the only public servants that conservatives praise.

I would give Conor $10 to write a column about how cops and fireman are overcompensated and treated too well in retirement.

oh, dear. i was just recounting my own family's plight.
my father died in 1958. their was no social security for him or for us children, and no teacher's pension. it was put into place after that.
my mother retired before the 1983 changes. she doesn't collect any social security. she sold encyclopedias to get her quarters in for medicare.

perhaps by english was incorrect about "paying into." for this i am truly sorry.

I don't work in CA but I have worked for another state but I moved onto another job mainly because the state job was too low paying which I couldn't afford at that point. I believe my state has a similar retirement system. What hasn't been mentioned is that state jobs are in general lower paid compared to the private sector. For me I made almost twice as much outside but with much fewer benefits. I have a friend who's an attorney who works for the state. He makes around $90K but that's after putting in almost 30 yrs. If he retires now he gets about $50K. My guess is if he had worked in the private sector he would have been making $150K for at least the last 10 yrs if not 15 yrs. I can tell you the numbers are similar if not worse for healthcare workers. The state could not attract the people they need without the good benefits. I know a lots of people who work for the government precisely because of the benefits,esp. healthcare benefits.

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