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Where the Rubber Meets the Road - Why Wisconsin Matters

The biggest domestic political story of the last couple of weeks has undoubtedly been the impasse in Wisconsin between public labor unions and Gov. Scott Walker (R).  In a nutshell, Walker created a budget deficit almost immediately, through tax breaks and industry givebacks, the shortfall of which he wants make up through cuts to public employee wages and benefits, and most controversially, the abolition of collective bargaining (“CB”) rights.  The net effect of the latter is not only a tactical issue; in combination with bans against compulsory deduction of union dues, it would almost certainly result in the eventual dissolution of those unions.

Given that the CB rights do not have an immediate impact on the budget shortfall, its fairly obvious that the dissolution of the unions is the larger goal being advanced here.  While removing CB rights would also have some impact on future wage advances and budgets, there’s plenty of reasons to believe that this is largely a political act by Walker.  Unions represent the biggest political counterweight to corporate lobbying power in the country, with unions typically on the Democratic side, corporations on the Republicans’.  So its obviously in their political interest to defang the Democrat’s largest lobby, which extends not only to campaign finance, but supplying warm bodies at the retail level, as well as election day logistics, etc.  Without it, the overwhelming wealth and concentrated power of corporations as well as the top 1% would tip the balance heavily in Republicans’ favor.

The flipside argument is that its fairly easy to sell to taxpayers the idea that their taxes are high because they’re forced to negotiate against a single monopolistic provider of labor, rather than force labor providers to negotiate individually.  While this makes some intuitive sense, its not borne out by empirical statistics, which show that gov’t employees typically make less on a salary basis than their private market counterparts, but make it up in benefits and pensions, the latter of which has become a bigger issue in both the private and public markets over time.  While the mismanagement of pension liability is its own subject, its probably fair to say that poor accounting practices have had a surprisingly dramatic impact on their viability, an issue which distracts somewhat from the core notion of whether employees should or shouldn’t bear the risk of their retirement assets.  Either way, they represent a promise and binding contract between them and the state.

Its probably a good idea at this point to step back and put all of this in historical context.

Since 1980, we’ve seen fairly dramatic drops in tax rates, especially in the top brackets.  Simultaneously, we’ve also seen tax burden, including payroll taxes, capital gains, and dividends, shift from the top 1% to the bottom 90%.  The net effect, unsurprisingly, has been a strong shift in overall wealth and income towards the top 10%, especially towards the top 1%.  Let’s look at some graphs, courtesy of Mother Jones.

Aevrage Household income before taxes.

A millionaire's atx rate, now and then. Share of Federal Tax revenue

What is this telling us?  While correlation isn’t causation, it can be pretty damn convincing - in this case, its telling us that top tax rates have dropped, the wealthy have seen their incomes and wealth skyrocket, while their share of the overall tax burden remains the same, despite increased wealth and income.  The implication of this is also obvious - that the difference is made up by the middle and lower classes.  Intuitively this makes sense - if you tax the wealthy less (who are more likely to have considerable disposable income), then they are more likely to accumulate wealth.  Once again, these are the statistics, absent any value judgment at this point.

The other data point to consider is that of globalization.  The world markets are clearly more liquid and trade across the planet has never been more unencumbered, between more open governments, greater resource availability, broader manufacturing capabilities, the Internet, and more efficient transportation.  National borders aren’t irrelevant, but are perhaps considered today to be opportunities rather than challenges.  That this is broadly beneficial is by and large and article of faith today.

Enough academic and empirical work has been done on international trade to show that it is clearly a net gain to the countries involved. Given that, very little seems to be said, at least in public discourse, regarding the effects of trade on particular groups being affected.

Put another way, if I’m a shareholder or owner of a corporation, and its cheaper to source my production in Mexico or China, notwithstanding any security, intellectual property or other concerns, then I will do so simply because it increases my profits, which is unambiguously positive for me, at least in the short-term.  It may also help create markets for my products in the country of production, but we’ll set that aside for now.  For the producing country, its also positive because they now have utilized manufacturing capability, jobs, income, further developing human resource capability, and all the economic benefits associated.  Domestic customers of said company benefit because, since costs are lower, the company can afford to be more competitive and potentially price products lower, creating more surplus for the consumer.

The question is, if these are the winners, then who loses?  Well obviously, those workers whose jobs have just been outsourced to foreign countries are immediately disemployed, making them losers, as well as burdens on the state.  However, in a larger sense, as consumers, the goods they buy are cheaper than before.  So their losses are not universally negative, but obviously if you’re unemployed, the facts that your socks and underwear is cheaper is probably not your biggest concern.  The point of this is to clarify that while the net result of trade is positive, it is not on a factor basis unambiguously so.  That is, gains come at the expense of other losses.  

The question that seems less contemplated is, knowing this, what does it mean?

Well, let’s once again look at who gains and who loses in the case of international trade.  Shareholders, owners, and C-level managers clearly win, as they make tangible economic gains.  And that they tend (although not exclusively) to be wealthy, we can say that trade is broadly beneficial to the upper economic strata.  And once again, its the workers who lose, who largely come from the middle and lower classes (although the college-educated are quickly falling into this group, as countries such as India and China rapidly develop their human resources to be competitive).  So to be clear, trade favors the owners and managers of capital, in other words, the top 10%, while it hurts the other 90% through unemployment.  Economic theory would suggest that such workers were being underutilized in their previous positions and, with some development, can take better-paying positions in the evolving “information economy” that the country seems to be gravitating towards.  However, empirical studies indicate, unsurprisingly, that in the real world this generally doesn’t occur - studies suggest that workers who’ve lost their jobs through secular trends in outsourcing never regain their wage losses, as they shift to careers in healthcare, maintenance, etc.  This shouldn’t be surprising, as textile and autoworkers don’t have easily translatable skills, and are often well into middle-age, limiting both their ability to develop new skills, as well as their perceived attraction to potential employers.  Also in play is the fact that labor market theory typically overstates the mobility of labor, which in the real world is subject to factors like family ties, education, capital, climate, etc.  The net result is that that while the dialogue often revolves around theoretical gains and flexibility, such benefits and offsets simply don’t exist in the real world.

To bring this full circle, this comes into play with regard to the issue of unions and labor markets.  So to recap, we’ve discussed how the last 30 years have seen middle-class incomes stagnate as the wealthy have prospered wildly, while the burden of paying for civil society comes increasingly at cost to the middle-class.  You then pile on that the gains from trade, and the rapidly increasing cost of healthcare, have come at a net cost to the middle and lower classes, and phenomena like the Tea Party are less surprising (although who they blame for it is less than logical).

The kicker is that the wealthy, as one might expect, in concert with corporations and politicians “sympathetic” to their plight, now wield unprecedented political power in the form of campaign contributions, both directly to politicians, as well as to PACs and 501(c)(6) lobbying organizations, clout only expected to increase in the wake of the Citizens United SCOTUS decision.

Meanwhile, union membership has been whittled down to under 12%, down from 20% in 1983, a result of more aggressive union-busting tactics from firms like Wal-Mart, as well as the disproportionate impact of outsourcing on union laborers.  Given the increasing economic uncertainty that wage laborers find themselves experiencing, unions represent their last bastion of negotiating leverage, not only from the standpoint of wages, but also in terms of safety and working conditions.  The conservative counterpoint is that modern American labor markets don’t “need” unions, because of the assumed liquidity and mobility of the labor market.  But you only need a couple of counterexamples to put lie to that notion.  For instance, would so many people “choose” to be miners in West Virginia, especially in light of persistently dangerous working conditions and mortality odds?  Or is it simply because in the face of few local options, especially at a fair wage level, labor finds itself a price taker?  Likewise, a New York Times series on McWane Inc., a holding corporation for steel piping companies, showed how the company repeatedly ignored the deaths and maiming of its employees and continued business practices that deliberately ignored regulatory proscriptions in favor of a more productive and dangerous working environment for its workers.  In addition, the company deliberately chose operating sites based on how desperate the local populace was for jobs, knowing that it could not only have leverage over wages, but able to minimize expenses associated with safe working conditions.  For example (out of dozens), the company chose to substitute $17 safety gloves with $2 gloves that left burns on workers’ hands.  As pointed out in the NYT article, 

"The union was helpless to resist, past and current leaders agree. Organized labor had never been a potent force at Tyler Pipe, and the layoffs devastated the union’s membership. The contract barred strikes, permitted 16-hour days and let breaks be canceled."

In the absence of labor power over things like worker safety, the backstop is supposed to be regulators.  But as anybody knows, Republicans have systematically dismantled as much as regulatory power as they can get their hands on, a 30-year quest leading to such greatest hits as the 80s S&L crisis, the 2008 financial crisis, e.coli hamburgers, lead in children’s toys, and widespread fraud in the mortgage industry.

As such, while union clout has been diminished, it still remains a thorn in the side of Republicans, who would be happy to enjoy a monopoly on support from relatively monolithic political entities.  This also conveniently explains why Walker and other Republican governors are so keen to find ways to accelerate their demise, not for budgetary reasons, but as a tool to solidify political power.

The question though remains:  in the face of stagnant wages, rampant outsourcing, a tax structure that is tilted increasingly against them, increasing healthcare costs, attacks on collective bargaining as well as regulatory oversight, and a political system that seems to have passed a tipping point in terms of whose vote “really” counts, what is left for the middle and lower classes, who comprise the 60% of the population, but less than 10% of the wealth?

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