TCS Daily

Howard's Ends

By Megan McArdle - November 21, 2003 12:00 AM

Libertarians thinking about voting for Howard Dean should be taking a long, hard look at their prospective candidate. In an interview with the Washington Post on November 18th, Mr. Dean indicated that one of his major priorities is going to be "re-regulation." He didn't exactly suggest nationalizing the coal industry, mind you, but he did indicate that he wanted the iron fist of government to close a lot more tightly around utilities, large media companies and any business that offers stock options. Oh, and while he's at it, maybe telecoms too. There goes any hope you might have had that Dean's planning to run left for the primaries and then move back to the center for the general election. This is a campaign platform straight out of 1972.

To be fair to Mr. Dean, in the last few years it has become apparent that deregulators haven't always paid proper attention to aligning the incentives of the corporate managers with those of their shareholders, or the markets they are supposed to serve. Our first taste of the new millennium has been a veritable festival of opportunities to observe that economic stalwart, the Principal-Agent Problem, in action.


For those who haven't heard the term before, the Principal-Agent Problem describes the inherent difficulties of hiring an agent to manage some piece of your affairs, whether that agent be the CEO of WorldCom or the night manager of your 7-11: the interests of the agent are not the same as your own, and he will be tempted to pursue his interests at your expense. It is very difficult, for example, to keep your agent from giving free six-packs, or free stock options whose value has been artificially inflated by fraudulent earnings reports, to his buddies.


Some variation on the Principal Agent Problem has been at the heart of nearly every one of the corporate scandals that has shaken investor confidence and defrauded innocent stockholders over the last few years. Libertarians were as appalled as anyone at those abuses -- perhaps more so, because libertarians really care, deep down, about markets. If Howard Dean is ready to try and fix it, why not give him a shot?


Unfortunately, the interview reveals that Mr. Dean is far less interested in trying to fix an important market issue that has been worrying economists for years, than he is in good old fashioned leftist corporation bashing. For among the central goals of his "re-regulation" campaign is increasing unionization. And unions, like corporations, are prime candidates for agent abuse.


Corruption is of course legendary (though thankfully on the wane due to RICO), and generally comes at the expense of union workers whose leadership cut sweetheart deals in exchange for kickbacks. And fraud is so common at unions that the National Center for Policy Analysis reports that between 1998 and 2002, labor union officials were indicted at a rate of 12 per month -- and convicted at a rate of 11 per month. But those aren't the only ways in which union leaders can betray their workers' trust. Possibly even worse are the legal ways that union leaders seek their own interests at the expense of their workers.


Remember the west coast dockworkers, whose contract dispute snarled shipping for months last year? The central dispute between the Pacific Maritime Association (which represents the shippers in collective bargaining) and the International Longshore and Warehouse Union was not over wages or health benefits or working conditions; those issues had been largely settled at the time of the lockout. The sticking point was modernization: the owners wanted to put new systems into place which would increase efficiency and thus (necessarily) reduce the need for labor. The union refused to allow it unless they got to staff the automated operation. Since this would have defeated the purpose of the modernization, the shippers refused.


Well, you might be thinking, the union has a point. After all, a longshoreman in his fifties would have a hard time finding new work if he lost his job. It's a point I'm sympathetic to -- and so was the PMA. They offered job guarantees to make sure that "not one member of the ILWU will lose his or her job because of technology."


Now, for a union worker, that's a pretty sweet deal. CBS Marketwatch lists "West coast longshoreman" as one of the ten most overpaid professions in the country. According to CBS, next year a cargo shipper can expect to make an average of $112,000; an office clerk $136,000; and a foreman, $177,000. Moreover, because the shippers were very eager to move forward with automation the union almost certainly could have used a concession on modernization to extract more compensation or better working conditions for their workers. Instead they put them through an eleven-day lockout that cost them quite a lot in lost pay and benefits -- and would have kept them out longer had the president not invoked the Taft-Hartley act to force them back to work.


Ultimately, the union won -- they got control over the new jobs. But did the workers win? The current workers aren't, by and large, going to be taking the new jobs running complex computer systems (which is why most of the no votes on the new contract came from the shipping clerks who will lose out in the newer system). And they've forgone the premium they could have extracted by conceding the automation jobs. If the union leaders had actually been looking out for the best interests of the workers they were supposed to be representing, they should have taken the deal in exchange for sizeable concessions in other areas. But that would have been bad for the union leaders, since it would ultimately lead to a decline in their membership - and thus a decline in dues, staff, and raw political power.


The agent, as usual, got the best of the deal.


This sort of thing isn't limited to the longshoremen. Consider, for example, the steelworkers. It's common enough to hear that the steel tariffs George Bush signed into law last year are a crony-capitalist sop to Mr. Bush's fat cat friends in the steel industry. A trip to, however, reveals that the steel industry doesn't even make the top twenty list of contributors to George Bush's election campaign. The far more powerful influence seems to be the steelworker's union, which wields considerable power in several of the rust belt states George Bush hopes to win in 2004. Tariffs are a payoff to the union for their support.


Economists Joseph Francois and Laura Baughman, working on behalf of a coalition of steel consumers, have calculated the cost of those steel tariffs at more than $400,000 per job saved. Think about that. We could have given every steelworker who lost his job to foreign competition $300,000 and still, as a nation, have come out ahead. And that's before you throw in ancillary benefits, like not pissing off our trading partners, or giving them an excuse to slap tariffs on our exporters, as the WTO has ruled they may now do in retaliation.


So why don't we do just that, instead of seeking, as the Bush administration currently is, a way to continue these disastrous tariffs? Paying off displaced steelworkers directly seems like that rarest of birds in American political economy, a Pareto Optimal solution: a policy that makes steelworkers better off, without making anyone else worse off. Perhaps it sounds, politically, too baldfaced -- but surely no more so than paying farmers not to farm.


Nonetheless, we'll probably never make such an offer to the steelworkers, because the steelworkers union wouldn't like it. Even though the membership might prefer it, such a deal would ultimately threaten the union leadership's jobs -- and it's the leadership that makes the political endorsements, pays the lobbying bills, and makes the heart-tugging commercials demanding to know why our politicians are shipping high-paying steelworker jobs overseas.


Nor will we get tougher on unions who divert their members' dues to political activities they may not support. We won't increase our financial oversight of union finances (238 audits in 2002, according to the NCPA, compared to over 2,000 audits of private companies), or force union leaders to negotiate the interests of the workers, rather than union headquarters. We won't do these things because the popular mythology sees the union as the worker's friend, rather than as an economic and social institution that can, just like any other institution, be hijacked to serve the needs of its managers ahead of those they are supposed to be working for. And politicians like Howard Dean -- who has picked up a number of high-profile union endorsements -- work assiduously to perpetuate that notion.


If Howard Dean thinks he has a way to address the pressing problem of management -- of all sorts -- run amok, I am all ears (though I would be surprised indeed to find that he has solved a problem that is still worrying some of the finest minds in finance and economics). But if all he has to offer is the same old tired trick of bashing corporations in the name of "The Little Guy" -- the little guy that most liberal politicians couldn't care less about when it's his union, rather than his employer, taking him for a ride -- then those of us with libertarian tendencies had better keep looking for a politician who is really interested in making markets work.


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