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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Detroit’s Extortionists



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Unions, as Evan Soltas reminds us, derive their bargaining power from the fact that they turn labor into a cartel. This benefits the members of the cartel, but it harms non-union workers who are outside of it. At their best, unions might enhance efficiency within firms by, for example, lowering turnover. Yet it’s not at all clear that these benefits outweigh the harms associated unions. Robert J. Samuelson described the dilemma now facing organized labor in the private sector:

Unions were caught in a vise. If they pressed for higher wages and fringe benefits, they risked destroying jobs. Companies might lose sales to lower-cost rivals; or they might move to anti-union states or low-wage countries. Even protecting existing compensation levels became hard because — in extremis — companies might fail. On the other hand, if unions abandoned traditional bargaining goals, they might infuriate rank-and-file members and be accused of “selling out.”

In the past, unions were able to capture the “rents” generated by Detroit’s technological superiority and the resulting lack of competition. As Detroit faced competition from low-cost, technologically savvy competitors, these rents evaporated, thus causing the dilemma in the first place. Organized labor has thus shifted from competitive sectors to sectors in which economic outcomes are shaped first and foremost by political outcomes, e.g., direct public sector employment, in which workers are employed by governments that enjoy unchallenged monopolies, and the health sector, in which public subsidies play an outsized role, and medical providers are insulated from competition through licensing restrictions, a lack of antitrust enforcement, and more. 

I bring this up because while critics of organized labor often accuse unions of extorting concessions from firms, one of the really interesting thing about the auto industry is that while unions squeeze the Detroit Three, the management of the Detroit Three have become stunningly effective at extorting concessions from taxpayers.

Andrew Coyne, a columnist for Canada’s National Post, describes how the Detroit Three have used the threat of layoffs to to secure subsidies that essentially amount to ransom payments. Most recently, Chrysler has asked for $500 million in subsidies from Ontario’s provincial government and Canada’s federal government to keep a minivan plant in the city of Windsor, which has been battered by the automobile industry’s decline, from shutting down. Coyne argues that while the Detroit Three talk up their “contribution” to the Canadian economy, the auto giants are in fact making a claim on Canada’s productive resources; when we tax all other industries to subsidize automobile manufacturers, we keep labor and capital in the ”decrepit, declining auto sector” rather than allow it to flow into more competitive sectors, like software development or even the much-maligned leisure and hospitality sector.

Chrysler’s defenders obscure the fact that the $500 million Chrysler is demanding to keep the Windsor plant’s doors open could be used in many far more sensible ways, up to and including writing substantial checks to the workers who will be directly impacted by its closure. The Detroit Three are still collecting rents. The difference is that while these firms used to collect rents that flowed from a lack of competition (and workers tried to capture their fair share), they’re now collecting rents that flow from their superior political savvy, and their brazenness. And the fact that North American lawmakers has demonstrated a willingness to be swayed by this brand of extortion has of course emboldened other firms in other sectors to learn from Detroit’s “best practices.”



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