Why do nations fail? In their new book, economists Daron Acemoglu and James Robinson argue that countries collapse when the reigning political coalition extracts wealth rather than promotes innovation and growth. Sounds like a union, doesn’t it?
The book, Why Nations Fail, sums up Acemoglu and Robinson’s laudable academic oeuvre, focusing on the pre-industrial and developing world. They trace how nations grow rich thanks to inclusive institutions that provide economic incentives and protect property rights, and how nations suffer when “extractive elites” gather political and economic power for the purpose of rent-seeking.
In a review of the book, Buttonwood, a columnist for The Economist, argues that, given the anemic growth across the industrialized world, perhaps the West and the United States face similar problems. He fingers two possible culprits — the extractive elites of the rich world: too-big-to-fail banks, and the public sector, particularly its unionized employees.
In response, Acemoglu and Robinson essentially accept his argument about banks, noting that inflated compensation and the implicit insurance they get are unfair and unproductive privileges, extracted through use of the financial industries’ political and economic clout. One might dispute that argument, but there are much deeper flaws in their ham-fisted rejection of Buttonwood’s other suggestion, the public sector, and its unionized employees specifically. They are, in fact, far more extractive and inimical to an inclusive political economy.
The two economists agree that the power of unions, in some circumstances, can allow them to extract privileges and hinder progress in ways that restrict growth; they consider it “plausible” that unions are sometimes extractive. But this is not always the case, because “unions and workers, even if they appear politically powerful, don’t seem to be able to stop the introduction of new technologies.”
Of course, no one would suggest that unions are able to prevent the introduction of new technologies in perpetuity, but they’ve demonstrated, even in recent years, an impressive ability to retard the implementation of new technologies to the detriment of the economy as a whole.
For instance, U.S. port cities that had particularly powerful longshoremen’s unions were much slower to adopt containerization, permanently shunting business toward ports that eagerly embraced the breakthrough. Toll-booth workers — a notoriously overpaid, unskilled unionized group of public employees — have vehemently opposed the introduction of automatic tolls such as New York State’s EZ Pass and open-road systems such as Dallas’s. Teachers’ unions have fought, often successfully, against just about every form of education innovation, including charter schools, merit pay, school choice, and standardized testing.
So unions can be an impediment to progress — but can they function as extractive elites? Acemoglu and Robinson believe that organized labor in the 19th and 20th centuries was a force for greater economic and political inclusiveness (making it not extractive, but pro-growth), but admit that “unions have been in a more rent-seeking mode in the second half of the 20th century.”
Here they are essentially right: Unions have played and some still do play a key role in a productive economic system. But despite admitting that many unions are now a force for rent-seeking rather than inclusiveness, Acemoglu and Robinson won’t acknowledge their true power and label them extractive. Why? “In the U.S. today, the fear is not that unions will take over the political process, but that the rich elite — including but not limited to the banking elites — will and in fact have already done so.”
This is where their emphasis on developing countries and a broad-brush understanding of the U.S. political system have led them astray. American plutocrats do enjoy outsized amounts of political power, and they have been able to extract certain benefits from the government, such as preferential tax breaks, government contracts, and protective regulations. But they’re far from the sole political force in America that can manage to be extractive, and, without an unfree political system, there are limits on how much influence the wealthy can buy. Thus, public-employee unions, far more than the banking sector or any amorphous “rich elite,” represent a devastatingly extractive force.
Take, for example, one essentially illegal instance of political interference in the American economy: the federal government’s bailout of General Motors and Chrysler. The auto bailouts may well have served some members of the 1 percent, but they were quite clearly structured in such a way as to short-change many private creditors, ignore the non-unionized supply companies, essentially preserve pension and health-care benefits for the United Auto Workers, and hand them a significant equity stake. Who’s the extractive power here?
As if this example needed more evidence of the corrosive economic effects of overly powerful unions, it was in large part the massive retirement benefits offered to UAW workers, not extractive dividends for high-financiers, that had ruined the balance sheets of GM.
And the UAW is a private union, usually beholden to a basically level bargaining table and, therefore, the laws of capitalism. Far more pernicious, as I’ve discussed, are public-employee unions, which distort the bargain between labor and capital beyond all recognition. At the local and state level, it is manifestly obvious that, contra Acemoglu and Robinson, they have won out as the dominant unitary political force. The salaries, pensions, and health-care benefits awarded to public-employee unions are hugely wasteful in economic terms, and nothing less than a mugging of the ordinary taxpayer. Combining the political organizing power of unions with their collective-bargaining power, as Franklin Delano Roosevelt realized, leads to staggering levels of corruption.
Putting the political and financial clout of a national teachers’ union behind their local negotiating teams’ demands is precisely the kind of confluence of power that Acemoglu and Robinson know thwarts economic growth. In the developing world, politicians might simultaneously oversee a country’s export policies, manage much of the country’s primary commodity production, and personally stand to profit; here, public unions wield enormous influence over which politicians get elected, negotiate most of a state or local government’s labor contracts, and stand to profit enormously (both as individual employees and as a corporate union).
And the problem isn’t just the fiscal burden, because excessively powerful unions reduce economic competitiveness in other ways. The most unionized states are almost always the ones most unfriendly to business. Boston’s Big Dig, an entirely unionized undertaking, was a China-scale public-works project built on a banana-republic schedule. As Acemoglu and Robinson note, we’re not talking about quite the same problems here as in the developing world, because the West has durable inclusive institutions. Developing nations can actually fail, because they’ve been built on sinister bargains; big American banks or public-sector unions won’t make our nation fail — but they might lead to local or state-level stagnation or fiscal Armageddon, as, indeed, some American cities have already experienced.
So as Acemoglu and Robinson argue, public-sector unions aren’t why nations fail — but they might be why American cities and states will.
— Patrick Brennan is a 2011 William F. Buckley Fellow at the National Review Institute.