A frequent and I think sound criticism of the Obama Administration’s economic policy is that it supports programs that promote economic recovery from the severe recession that began in December 2007 and programs that retard that recovery, thus sending a mixed signal that by unsettling the business environment retards recovery. This mixed message is no surprise, however, because a President is a politician. Has there ever been a President who consistently pursued sound economic theory? Criticism of politicians must be tempered by recognition of political reality.
You don’t have to be a conservative to think it a bad idea to promote unionism in an economy struggling to climb out of a deep economic hole; you can be a Keynesian. A principal goal of unions of course is to raise wages, though in doing so it causes employment to fall by raising the cost of labor relative to the cost of capital. Keynes emphasized (though the point was not original with him) that workers strongly resist cuts in their nominal wages, where “nominal” means the dollar amount of the wages and is contrasted with “real,” which means the purchasing power of the wage. In an economic downturn, an employer who thinks it infeasible to reduce the nominal wages of his employees will have to lay off workers so that his costs of production are not excessive in relation to the diminished demand for his product. Therefore the higher the nominal wages of employees, the more unemployment will be generated by an economic downturn. Keynes thought moderate inflation should be part of a strategy of recovery from an economic downturn, because nominal wages tend to be sticky on the upside as well as on the downside (though less so), and so the employer’s real wage bill would fall in an inflation, though only initially—until the workers caught on to the fall in the purchasing power of their wages and demanded a raise. (This theory of “profit inflation” is no longer accepted by most economists.)
Against all this it might be argued that if employers cut wages rather than laying off workers, the reduction in wages would reduce the amount of money that the workers could spend on consumption; and economic recovery depends on increased spending on consumption (plus investment). But the stickiness of wages, which makes employers prefer layoffs (with the result in the Great Depression, which involved severe deflation, that many workers who retained their jobs experienced a substantial increase in their real wage), is not primarily a result of unionism, or even of worker pressures. Employers don’t like to make steep across-the-board wage reductions in an economic downturn, because the reductions frighten and distract the workers. Layoffs, in contrast, enable reductions in overhead as well as in wages and concentrate unhappiness on former workers (those who are laid off), whereas an across the board wage reduction demoralizes current workers.
Collective bargaining agreements, which are contracts between a union and an employer, usually forbid the employer to reduce wages during the contract’s term (usually three years). But the main reason why unions make it more difficult to recover from a recession or depression is that by raising an employer’s labor costs they cause the employer to lay off more workers in an economic downturn than if those costs were lower. Think of how the United Auto Workers had swollen the labor costs of the
Almost at the bottom of the economic plunge—July 2009—the federal minimum wage rose, pursuant to legislation passed by the Democratic-controlled Congress in 2007, to $7.25 an hour. That is just the sort of thing one doesn’t want to happen in a recession. Unions strongly support the minimum wage in order to reduce competition from nonunion workers, but raising the wage retards recovery by increasing sellers’ labor costs.
Unions are weak in the private sector; only about 7 percent of private workers are unionized. But unions are powerful in the public sector—about 30 percent of public employees are unionized—and have contributed to the high wages of such employees. By swelling the labor costs of cities and states, these high wages have forced them to raise taxes and cut benefits in the midst of the most severe economic downturn since the Great Depression.
Even in the private sector, though unions are weak, employers are concerned that the pro-union policies of the Obama Administration will result in greater unionization and hence higher labor costs. This concern is a source of uncertainty, which slows economic activity. Under uncertainty consumers increase their savings (much of which may not get invested productively, at least without a considerable lag) and producers increase their cash balances.
The Administration is not uniformly pro-union. It rightly cares more about education than about unionism, and as a result has clashed with the teachers’ unions; this is one of the Administration’s most laudable endeavors. It has not pushed hard for (though it supports) enactment of the Employee Free Choice Act, which by abolishing the secret ballot in elections for collective bargaining representative and instituting compulsory arbitration of union-management disputes would significantly shift the balance of power from management to labor. It did condition the bailout of the
The Administration has, however, under union pressure dragged on signing free-trade agreements that have been negotiated with
Worse, the Administration has required that all projects funded by the $787 (now $862) billion stimulus enacted in February 2009 comply with the Davis-Bacon Act, which requires payment of union wages. Recently the President signed an executive order requesting all federal agencies to consider requiring all federal construction contractors to sign labor agreements. And he has said silly things like “labor is not part of the problem. Labor is part of the solution.” These are just words, but they worry business by creating the impression that the President is hostile to it, and they increase the uncertainty of an already uncertain business environment. The pro-union policies of the Roosevelt Administration, notably the National Labor Relations Act (the Wagner Act), are generally believed to have made the Great Depression worse than it would have been without those policies. The Obama Administration’s pro-union policies will in all likelihood worsen our current economic situation.