Unions in the Land of Equilibria

from Jim Stanford

The post-crisis assault on public services and collective bargaining rights (in America and elsewhere) has been justified with a storyline that blames unions (rather than speculators and the recession they caused) for the red ink currently dominating public finance.  This storyline assumes that everything would be fine if only public-sector unions weren’t extorting taxpayers to pay for their supposedly cushy jobs; it exploits the envy of private-sector workers who (on average) are treated even worse.  This fable is told and re-told like a fairy tale: one in which unions kill the goose that laid the golden egg, until taxpaying denizens (starting in Wisconsin) throw off the oppressive yoke imposed on them by overpaid garbage collectors and teachers.

Of course, if workers were really paid in golden eggs, unions would never have been invented.  Unions were born in a less pastel-hued world where workers are guaranteed nothing by the so-called “market”, but rather have to fight even for the basics of survival.  Employers and their think tanks have been complaining ever since: always promising that if only unions stopped messing with the free market, we could finally achieve high productivity, low taxes, and a flood of trickle-down prosperity.

I am thinking of a rather different fairy tale: one I learned long ago, in first-year university economics.  It takes place in a far-away land called Equilibria, a happy place where supply always equals demand, and self-starting folks live to truck and trade.

They produce a rich variety of goods and services reflecting the natural comparative advantage of each producer, and meet in a giant flea market to exchange their wares.  Some Equilibrians flip burgers and collect garbage, while others manage private equity placements and devise structured credit instruments.  Some are much better off than others (due to randomly uneven endowments of economic luck), but everyone is better off going to the flea market than just sitting around at home.  So they should be thankful.

Best of all, the whole process is overseen by a giant, omnipresent hand, which ensures that everyone works to the best of their (randomly endowed) abilities.  No-one has ever seen this hand (it is invisible, apparently).  But everyone knows it exists, thanks to the teachings of a caste of high priests called Economists.

Eventually, however, in a kind of economic original sin, the burger-flippers and garbage-collectors became envious, and decided they wanted more out of life than the invisible hand was allowing them.  They got together and began to agitate.  They formed unions that won a better deal at the flea market for many (but not all) of the riff raff.  And they pressured their king and queen to provide certain things that weren’t even available at the flea market (like free education and health care).

The private equity and structured debt specialists did not like this turn of events.  They longed for an earlier era when the richest 1 percent of Equilibrians took home 25 percent of all the stuff from the flea market (instead of merely 15 percent or a measly 10 percent).

In one part of Equilibria (the part that spoke English), a new dynasty came to power, led by King Gipper and Queen Iron Lady, determined to restore proper decorum to the flea market.  They promised that everyone would be richer if unions and free public services were eliminated.  They even argued the flea market didn’t need any adult supervision at all (apart from some well-armed knights to protect the fanciest stuff on display).

After thirty years, the burger-flippers and garbage-collectors were still no better off than when the King and Queen made their trickle-down promise.  But the richest 1 percent once again took home 25 percent of the flea market’s wares.  Strangely, though, the English-speaking flea markets were not working as well as those where other languages were spoken (especially Chinese).  This must have been because unions weren’t yet quite weak enough, nor taxes yet quite low enough.  So the dynasty kept trying.

They even came up with a new idea: they built some higher floors at the flea market, held up not by concrete, but by enormous stacks of fancy paper.  This made the flea market look very busy for a while – until the upper floors collapsed and many tables were ruined.  Indeed, if it weren’t for trillions of special gold coins (called Stimuli) supplied by the king and queen, the whole flea market would have disintegrated in chaos.

Garbage-collectors didn’t cause the flea market to collapse.  And they didn’t capture many of the Stimuli in the aftermath.  But the dynasty wanted someone to blame, and the garbage-collectors were a convenient target.  After all, they made more than the burger-flippers.  And they were rather malodorous, to boot.  So the dynasty sent the town crier out to complain loudly how unfair it was that garbage-collectors made more than burger-flippers, and for a while the riff raff began to fight amongst themselves.

What happened next?  That part of the story hasn’t been written yet.  But one thing is certain: if we cut the wages (and pensions) of the garbage-collectors, the burger-flippers will still be poor.  And despite the collapse at the flea market, there is still some awfully fancy stuff on display at the private equity and structured credit stalls.  It’s hard to believe it will go unnoticed forever. 

A version of this commentary originally appeared in the Ottawa Citizen.