What's the Matter with Wisconsin?

Wisconsin’s problem is public sector unions.  And it’s not just Wisconsin that is realizing the time has come to tackle these behemoths.  Indiana, Ohio, New Jersey, and others are realizing it too.  We should be praising Gov. Walker’s restraint – if it were me, I’d have moved to outlaw publicsector unions entirely.

For the last couple of weeks the news has been saturated by the union protests in Madison, Wisconsin.  They are a response to the newly elected Governor Scott Walker’s proposed budget.  In his budget, he proposes to make up part of the state’s budget shortfall by having public sector employees contribute more for pension and healthcare benefits as well as to limit their collective bargaining rights in dealing with the state (which is arguably the real hot button issue).

Currently, Wisconsin state employees pay very little “out of pocket” for their benefits.  Gov. Walker would like to see these employees contribute a greater portion of their wages to receive those benefits (but still less than their private sector counterparts on average).  It seems reasonable to expect such a concession given the current state of the economy and that these benefits (and wages) are being paid by their neighbors.  Regardless, they can’t be immune for long or reality will settle the issue for everyone.  Wisconsin must balance it’s budget according to its Constitution – and I think some of us still care about the Rule of Law around here.

That, however, is not the larger issue.  The main issue is what the ramifications will be of the elimination of “collective bargaining rights” for public sector employees (with an exception for police and firefighters as well as for wage negotiations).  Now, let me again be clear about my position – I don’t think public employees should be able to unionize at all.  The whole raison d'être for unions is as a more powerful bargaining force against an employer.  In a free market, if your goal is pecuniary, you should work where your labor is most highly valued by an employer.  Collective bargaining is a way to bring more “chips” to the bargaining table.

That’s fine and dandy.  Even if the modern economy makes unionization less necessary, the concept is sound.  But what members of a private union are wanting is a larger piece of the business profits.  They want the owner to make some amount less while they make some amount more.  That all seems fair as long as both sides can freely negotiate.

Profits are merely what is left over after a business has covered all it’s expenses, including employee salaries and taxes.  Just as wages are an employee’s compensation, profits are the owner’s compensation.  These amounts are rightly subject to negotiation.  I could offer to pay someone $20/hour to work for me but if they can get $30/hour across the street, my bargaining power is very small.  However it cuts both ways: if I offer $30/hour to match my competitor but I can’t sell my products for more than my costs, I have no profit.  Just as the employee can see he is more valued across the street in my first example, I can see that I would be more valued doing something else in my second.

This all works well in a free market.  The problem arises when the union is of public sector employees.  What are they negotiating against?  A larger share of profits?  No – they are negotiating for more of the public treasury.  Why is this a bad thing?  It is bad because the feedback mechanism that would drive a private business to either seek new markets or find ways to bring down costs to avoid bankruptcy do not exist for government.  If a business is not making ends meet, it cannot go to it’s wealthier customers and demand they purchase products at a higher price.  

Government can do this.  And its feedback mechanism is votes.  So while the business is incentivized to deliver value in exchange for dollars, the government’s incentive is to delivery value for votes.  This leads politicians to find ways to dole out more and more goodies while finding ways to pay for it that shield as many voters as possible.  Eventually reality gets in the way.

As the saying goes, “Money doesn’t grow on trees”.  It has to come from somewhere.  So as the salaries and benefits of public sector unions swell, they inevitably come into conflict with those who are not public sector – the people who are paying for it all.  In years past, one clever way to avoid this inevitable conflict has been through the use of lavish future benefits – i.e. pensions.  Politicians could offer benefit packages that included a “promise” to pay later on.    It seemed like a win-win: politicians can hand out goodies, voters don’t see any burden (yet), and the politicians are often rewarded thru re-election.

This could be said of all government employees, but what makes public sector unions so dangerous is their organization.  The citizens of Wisconsin, other states, and people in general do no organize en masse.  It’s not how people work and is always the exception rather than the rule.  Instead special interest groups arise with leadership to lobby for them.  

The conflict is clear.  Unions have a vested interest in increasing membership and dues and therefore in funding the re-election of those who will keep the dollars flowing their way.  They use the power of their organizations to solicit greater monies from the treasury in exchange for that re-election support.  These greater monies funnel right back into their wallets and coffers, which are then used – as promised – to fund the re-election of politicians who will repeat this cycle… over and over again.***  In essence, the public is funding the campaigns of those who are bankrupting them.

The veneer is starting to crack, however.  Governors and citizens across various states are coming to grips with the fact that pension liabilities are unsustainable (often because they were raided long ago to hand out more goodies), lavish public sector union healthcare benefits are out of step with the private sector, and while one neighbor is out of work another is collectively bargaining against his children’s future.  

The curtailment of collective bargaining rights is a realization that this public sector union power has driven many states to the edge of bankruptcy – and we aren’t out of the water yet.  The Union bosses and the Left can chastise Gov. Walker all they want.  In the end history will record that he took one of the first steps toward fiscal sanity.  And our children will thank him for it.

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***“BUT WAIT!”, you are thinking, “how is this any different than big business?  Don’t they also do this?”  While it may seem like they do (and certainly pork barrel spending and no-bid contracts are examples of political favoritism - left unchecked business will find ways to curry favor for themselves – nobody is an angel here), in general businesses are lobbying to do the EXACT OPPOSITE.  The vast majority of most business is impeded by government and taxes.  They want less of both.  However, one truth holds – if there is less money in the government treasury, there will be less to give out.  That’s why I always say that the best weapon against lobbyist corruption is low taxes :-)