April 14, 2008

We are the Free Market Change We are Waiting For

Marc Comtois

The April 7, 2008 edition of National Review (dead-tree: subscriber only) contains a piece by Stephen Spruiell, "The Buckeye Stops Here," that focuses on the Ohio economy. Here's an illuminating excerpt:

Robert S. “Steve” Miller, the CEO of Delphi when it declared bankruptcy, has some experience managing distressed companies. His previous jobs included CEO of Bethlehem Steel and board member at United Airlines. Addressing reporters in 2005 on the subject of the Delphi bankruptcy, he analyzed the painful transformations occurring within each of the industries he’s worked for (steel, airlines, and autos), and argued that import competition wasn’t the primary force driving any of them to change.

“In the steel industry,” Miller said, “we were being run off the road, not so much by imports, but by domestic competitors such as Nucor and Steel Dynamics.” (These companies operate “mini-mills” that are more flexible and less costly than the large, integrated mills Bethlehem Steel operated.) “They paid equally good wages,” he added, “but needed half the labor hours per ton to do the same job.”

In the airline industry, Miller said, “Delta and Northwest were shot down by JetBlue and Southwest, not Air India or Air China. Worker productivity is a big part of the difference.”

And in the auto industry, Miller pointed out, “Toyota, Nissan, and Honda are competing from assembly plants in our back yard, but without the crippling work rules and social costs embedded in [GM, Ford, and Chrysler’s] labor contracts.” The example of Honda is particularly relevant to any examination of Ohio’s economy. The Japanese automaker opened its first plant in Ohio in 1979, and since then it has opened three more and become one of the state’s top employers. Workers in Honda’s Ohio plants don’t belong to a union, but the company pays competitive wages and benefits and has never laid off any of its Ohio employees.

“In each case,” Miller said, “the old oligopoly has crumbled, not so much from globalization, but from upstart domestic competition.” Standard Textile’s Gary Heiman, the upstart competition in his old-line industry, couldn’t have said it any better himself....

[Heiman] wrote the sentence, “Rather than banking on high-powered lobbyists to stave off the march of globalization, we welcome the end of [import] quotas.”

That sentence can be found in an op-ed Heiman wrote for the Washington Post in 2005 titled “Innovation, Not Quotas,” in which he called on the American textile industry to stop asking the government to protect it from import competition. Compare his attitude to the one expressed by eight out of ten Ohioans who voted in the Democratic primary, and who told exit pollsters that U.S. trade with other countries “loses jobs.”

“That entire notion is nonsense,” Heiman says. Trade takes the blame when people lose their jobs because it’s an “easy target,” he says, absolving shortsighted industry leaders and labor unions when companies run into financial trouble and jobs are eliminated. Rather than take responsibility for failing to adapt, “it’s much easier to say, ‘It’s their fault. It’s China’s fault. The Chinese are taking away our jobs,’ when in fact, that’s just not the case,” he says, citing five years of consistently low U.S. unemployment rates.

While other basic industries “expected the government to protect them from foreign competition,” he says, his company embraced trade, tapped into foreign markets, and doubled the number of workers it employs, both in Ohio and in the U.S., over the past ten years. “We understood the map,” he says, “and we expanded so that today we have about 23 manufacturing facilities in 13 countries, including seven manufacturing facilities in the United States.”

Standard Textile’s U.S. manufacturing centers are not in Ohio — they are located in the southeastern United States, the traditional home of the U.S. textile industry, where Heiman bought defunct mills from bankrupt companies and refurbished them. But as his company grew its manufacturing operations in the U.S. and overseas, it added hundreds of product-development, logistics, customer-service, and finance jobs at its Ohio headquarters.

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Amazing! And I thought Ohio was losing jobs. What a rosy picture you paint. Too bad that it has only a tangential touch to the grim reality of Ohio's decimated economy. The Piper will be paid in November when those happy, satisfied and well employed Ohioans go to the polls and elect a Democratic president.

Posted by: OldTimeLefty at April 14, 2008 8:49 PM

Shhhh. we don't want to burst Pat Crowley's balloon, but just amongst ourselves, here's a little something to know: over time labor unions kill jobs.

The unions like to convince existing members that there is a "union advantage" resulting in higher pay and benefits so they'll keep compliantly paying dues (and more so prospective members, so that they'll join and increase the unions' dues stream).

There can be a "union advantage" ... for a while.

But "there is no free lunch" and eventually Mr. Market brings things back into balance.

The less competitive the environment, the longer this "union advantage" will last. But even in non-competitive environments (i.e., the public sector) eventually there is a price to pay - lost jobs.

Economics 101 tells us that as you raise the price of something, you lower the demand.

The Marxist underpinnings of organized labor supporters won't acknowledge this, preferring instead to cling to a fantasy world of "capital" and "labor" and how "collective bargaining" will result in "justice" as "labor" thereby extracts its "fair share" from the capitalists.

If there were a fixed pie of capital, and fixed costs for everything else but labor (such as materials), and with inelastic demand for output no matter the price this might hold some water. But of course it doesn't comport with how things work in the real world or the real economy that operates within it.

As you keep raising the price of labor beyond the equilibrium that would be set by the market (based upon the then prevailing conditions in a world of ever-changing conditions), eventually you start reaching the point of diminishing the demand for labor.

This can occur any number of ways.

At some point even high-priced technology becomes competitive and displaces labor (thing robots on auto assembly lines). As the employer raises prices to pay for labor and passes through the cost, consumers at the margin reduce purchases and/or market share is lost to price competitors with a lower labor cost structure ... resulting in layoffs at first, and often the company going out of business entirely.

Organized labor convinces the remaining employees that there is a "union advantage" by pointing to their higher than market pay and benefits. Sounds plausible on a superficial analysis, and most believe it. But those numbers don't include the "0" earnings attributable to those who lost their jobs due to the "union advantage."

Add the hundreds of thousands of UAW former members no longer employed into the calculation, and all the sudden that UAW "union advantage" doesn't look so good (and is probably negative), in fact for those who lost their jobs it is a definite union disadvantage.

The unions do succeed in raising wages and benefits above market for a period of time, sometimes decades in non-competitive environments. But eventually either the consumer and/or new competitors come in, and the attrition (if not extinction) of the employers workforce begins. The "union advantage" appears real to those with sufficient seniority to avoid the early rounds of reduction - and may actually benefit some for their entire careers should they retire before their employer eventually succumbs to bankruptcy reorganization or dissolution.

But, in the end, there's no free lunch. Depending upon the happenstance of age and individual timing or working years, some workers cash in on the "union advantage." Others end up picking up the tab for them - perhaps through lower wages / benefits for new hires; perhaps through the complete loss of their jobs. One thing is certain: while members of the union the winners and the losers will pay dues and so provide paychecks to the union bosses (who not coincidentally usually remain employed on the union payroll no matter the number of layoffs).

Posted by: Tom W at April 14, 2008 11:03 PM
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