Seven Microeconomic Steps to End Public Unions
- Posted by Jeff Carter
- on April 25th, 2011
One thing about public unions is that they are seemingly immune to the effects of economics. They operate like a monopolist, but are actually a monopsony. Because of the conflicted relationship between the legislators and unions, they are able to continually try and exert their influence as the government grows. We are seeing that phenomena in the recent Boeing versus NLRB kerfuffle. Two of the three Obama appointments were made during a Senate recess, and thus subject to no Senate scrutiny.
Here are the cost curves for a typical monopsonist.
In case you don’t know the background, Boeing currently builds planes in Seattle, WA. They want to build a new plane in South Carolina. South Carolina is a right to work state, meaning that individual workers have more choice about unions. Washington is union friendly. Senator Jim DeMint said,
“There is no doubt that if the National Labor Relations Board’s claim against Boeing moves forward, it will have a chilling effect on job growth in my state and in right-to-work states across the country. Using the federal government as political weapon to protect union bosses at the expense of American jobs cannot be tolerated. I intend to use every tool at my disposal as a United States Senator to stop the President from carrying out this malicious act.”
In laying out the conflicts of interest, public unions contribute millions of dollars to politicians. Those “in the back pocket” politicians will sit across the table and represent the taxpayer’s interests. They should be driving a tough bargain with the union, but since they are in bed together it’s a cozy relationship. Democrats need unions to win. Nate Silver found that they represented a 4 percentage point swing. That’s enough to turn an election.
The Democrats and unions are so inextricably linked, that virtually every Democrat bows down to their union master. Liberal advocates will say corporations spend money on lobbying too. Boeing spent quite a bit of money lobbying. Their leading recipient was Democrat Senator Patty Murray. The claim that corporations donate exclusively to Republicans doesn’t hold water, but unions only donate to Democrats. The White House, which is in the back pocket of public unions, wants to change the donation game.
Now you have a general picture of what’s going on. Let’s make microeconomic forces apply to unions.
A public union’s revenues work like this. It outsources all the costs and operations for generating revenue to the government. Dues are deducted and transmitted to a bank account directly from employee checks. This guarantees the union of a cheap and consistent revenue stream. The union then invests that money to pay it’s operating costs, and contribute to political candidates and causes that support the agenda of the union. Public unions are not designed to show a profit, and they are guaranteed risk free revenue every year, they don’t have to worry about the bottom line like a private corporation. Their revenues not subject to normal microeconomic forces.
No matter what business or non-profit you are in, there is always an incentive in every operation to grow revenue. Public unions can only grow revenue by increasing the size of government. Every extra or new program, every increase in existing programs, adds more dues paying employees-and more risk free revenue. Every single new government employee increases your tax burden.
How much would a public union be willing to spend to add one new employee?
First I looked at the source of revenue, dues. Interestingly, how much a union member pays in dues is not transparent. Each union charges slightly different rates, and those rates may vary state by state, county by county, union local by local. Union leadership deliberately keeps their members in the dark. Dues are automatically increased without a vote according to a formula. The best source I could find was from 2004 and showed the typical AFSCME employee paying monthly dues of $269/mo. Clearly, dues have increased over the last seven years. If they increased 4% a year over seven years, they’d be $4248/yr. So a union will spend up to $42,485 in dollars today to get one single employee on the rolls today.* (math shown at end of post)
Keep in mind, this doesn’t concern just the federal government, but state, and local governments as well. The AFSCME donated $43.5 million to politicians from 1990-2010. There are 17,775,210 people employed directly by governments in the US. The AFSCME has 1.7 million members. That’s
$25, 588 $25.59 per employee. Clearly the unions are getting huge bang for their buck. Plus, I only figured out the cost of one union, add in all the others and they are paying pennies for benefits they would pay thousands for. $25, 588 $25.59<$42,485. The AFSCME would be willing to spend $42k today to get that employee on any government payroll.
The Seven Steps
1. Break the link between automatic revenue generation and the government. Make unions collect their own revenue. This will decrease their revenue because unionized employees will have to actually write a check to the union. No more auto-deductions. Unions would see increased costs.
2. Have union members vote each year to have their dues raised. Since it’s done automatically today, they have no voice in the outcome. Unions would find that their members might be averse to increasing dues annually, and it will make the fat cats running the unions more accountable to their membership. They would also have increased costs annually to run and tabulate those elections.
3. Ask union workers to contribute more for their own benefits. Currently, many of them contribute very little to the cost of their health care and pension benefits. Ask them to shoulder more of their own responsibilities. Their pensions currently are risk free. Better yet, end defined benefit pensions and go to defined contribution pensions. Very different than the private sector.
3. End collective bargaining for public (not private) unions. Franklin Delano Roosevelt (FDR) said, “the process of collective bargaining, as usually understood, cannot be transplanted into the public service.” This will begin to institute the ideals of merit and pay for performance into the government workplace. The government should become more efficient as well, saving you tax dollars and increasing your service at the same time.
4. Force unions to constantly be in court, filing lawsuits and paying attorneys. Business is optimal when it produces where marginal revenues equal marginal costs. If we increase the costs of the union to produce, it will lower it’s production. The unions will counter all these measures. They will incorrectly assail them as attacks on human rights by filing lawsuits. Lawsuits cost money. They will win some and lose some, but as long as the political will is there the union fixed costs of doing business will be permanently increased. Combine that with a broken revenue model and it will put their bottom lines under pressure. If unions adopt the strategy of constantly filing lawsuits, eventually public opinion will turn against them just like the boy who cried wolf.
5. Provide competition. We have already seen what competition can do to government agencies like the postal service. Fedex, UPS and private delivery services are more efficient and effective than the USPS. We need to extend this to other areas to make markets competitive. School vouchers is one place we can do that. By encouraging a private school network to compete against our public school system, we can begin to cripple the monopoly that government has over education, and thus increase the costs for unions while decreasing their revenue. Privatizing the TSA would be another. There is a lot of low hanging fruit that can be converted to private industry when you start thinking about it. Anywhere, including the Department of Defense, that we can set up a private industry to compete with the government for the same service will challenge public unions.
6. Reduce the size and scope of government. Eliminate agencies, programs and departments. Forget the scalpel or ax, we need to use a nuclear bomb. Supernatural beings don’t have the staying power of a government program.
7. Be Pro-Choice. Enact right to work legislation at the state and local level. Give workers a choice of whether to be unionized or not. States that have right to work laws have lower unemployment and more vibrant economies. From today’s WSJ, “In Indiana, where Governor Mitch Daniels used an executive order to end collective bargaining and gave members the right to opt out, some 95% of state employees chose not to pay union dues.”
Remember, 25 is less than 45. We need to increase their costs by
20k 45k per employee.
Taking these seven steps can affect huge cost decreases in government. This in turn will increase the amount of GDP growth we have, since more investment dollars will be available to the private sector. This will lead to less pressure to increase taxes since government spending as a percentage of GDP would decrease. Contrary to populist myth, wages will not implode if public unions go away. People aren’t stupid. They will demand a wage that will allow them to have a decent lifestyle. The costs to running the government will go down, because there will be less pressure to expand government to infinity.
This isn’t about disenfranchising people, or human rights. It’s about getting government back under control and working for all the people, not just as a cash cow for union members.
Proof of Math
*to calculate this figure, I took the yearly dues rate from 2011 $4248 (which I arrived at from increasing the 2004 monthly dues 4% per year for 7 years to get me from 2004 to 2011 $269×12=$3228 in 2004), increased the dues rate by only 4% per year for ten years (2011-2021), and discounted the cash flow back by 4% (government borrowing rate). These are the actual cash flows I used. (4248, 4418, 4595, 4779, 4970, 5169, 5376, 5591, 5815, 6048) Unions have a huge incentive to spend money lobbying to add employees.
To get my ASFCME number, I divided the dollars spent lobbying per employee by the number of union members. Got that number from their website.
thanks for the link, Riehl World View
tip of the hat to Business Insider.
Welcome to Holy Coast readers.
thanks Before It’s News.
thanks for the link Free Republic. Hope your readers look around the blog and find a home here.
I am getting some pushback from union members saying my figures are incorrect. They state that I am incorrect in the calculation of annual dues, and that they are significantly less.
Let’s use their numbers and do the same analysis and see what happens. At $269 per year in 2004-and assuming a 17.1% increase in each four year period since then (their numbers, not mine) the starting point for yearly dues are $361.
The sequence of numbers to discount is 361, 377, 393, 410, 427, 445, 464, 484, 505, 526. The net present value of those numbers at a discount rate of 4% is $3,655.
They donated $25.59 per employee. However, they would donate much more. Why? $25.59<$3,655. Additionally this doesn't take into account the personal donations many union members surely made to candidates.
You can see why the unions have a powerful incentive to donate millions to candidates. You can also see there is a lot of available headroom to donate money to candidates, $3629.41 to be exact.
For the employee, there is also huge incentive to donate. The average salary and benefits of a federal employee is $123,049. State and local, $69,913. There is no risk to their payout. The government can't have a down year. They also have no risk to their pension, and the benefits are defined. For example, the average teaching in the state of Illinois is actually making $85,631.67. If you wanted that job, and could donate money to a politician to guarantee a position, you’d pay a lot of money for that guaranteed cash flow.
It should be no surprise that union members donate to union friendly candidates. They have a lot of money on the line.
It is very clear that there is little transparency in union dues, or union organizers salaries. It is clear that it’s a big money game that they will continue to spend billions on (in aggregate) to keep playing.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)
Tags Cloud$DF big oil Blackjack Boston Brad Keywell CTA Department of Justice Doug Ross Ed Markey Europe Debt Crisis factory farms Federal Reserve System Friedrich Hayek Gasoline George Soros Glenn Reynolds High Frequency Trading Homeschooling Hurricane Katrina India Jeff Bingaman Jimmy John leadership List of living Medal of Honor recipients Liver transplantation LSU Madison Wisconsin Market Drop Mayor Motorcycle National Association of Scholars NCAA Men's Division I Basketball Championship North American Free Trade Agreement Organizations Outdoors Page view Patience SOTU South Side Chicago State Taxes Tel Aviv Venezuela Win–loss record (pitching) World Cup 2014 Ycharts
Becker Posner Blog
Ben Horowitz Blog
Betting the Business
Black Line Review
Blue Sky Innovation
Both Sides of the Table
Business News Network
Chicago Booth Graduate School of Business
Cooler By The Lake
Daily Economic Release Calendar
Doug Ross @ Journal
Economics of a POW Camp
Foundation for Families
Garden and Gun
George Stigler Institute
Good Beer Hunting
Great Food In Chicago-Steve Dolinsky
Hyde Park Angels
Illinois College of Business
John Taylor's Blog
Legal Issues in Angel Funding
Macroblog-Federal Reserve Bank of Atlanta
Microbrews in Chicago
Mike And G
Milton Friedman Institute
National World War Two Museum
Notes From Underground
Ronald Coase Institute
Senate Banking Committee
The Big Picture
The Clubber Fund
The Daily Crux
The Grumpy Economist
The Jack B Show
The Minimalist Trader
The Musings of The Big Red Car
The Polsky Center
The Streetwise Professor
Tough Love Marketing
US Federal Reserve Bank
US House Financial Services Committee
World War Two Blog