How public sector unions exploit the taxpayer and lead to economic catastrophe

Below is a blog article by economics professor Steven Suranovic that explains clearly the irrationality and injustice of public sector unions. In the private sector, unions with collective bargaining rights make sense (or at least they did in the past), as a way of equalizing the workers’ power with that of the owners, since an individual worker has no power and can only get some by belonging to a union which stands up for his interests. Also, in owner-worker negotiations, each party is trying to get the best deal it can for itself. The owner is looking out for his own interests, and will not go along with excessive union demands. But with public sector unions, there is no such salutary balance of forces. The unions are negotiating, not with their actual employers, the taxpayers, but with elected officials who have no direct interest in keeping down workers’ benefits, especially when those benefits are scheduled for future years an dthe officials will never bear any responsibility for them.

We should add further that in many cases the government officials were elected by the public sector unions and with the help of the unions’ campaign donations, which are extorted from the workers in the form of compulsory union dues, which come out of workers’ salaries, which in turn are paid by the taxpayers. Thus, far from the owners—the taxpayers—being in a position to resist excessive union demands, the owners are subsidizing the unions’ ongoing effort to put in place the elected officials who will automatically yield to every union demand.

The upshot is that the public sector unions, in cooperation with their creatures, the elected officials, enjoy an effective monopoly over their own pay and benefits, with the owners—the taxpayers—having no effective voice in the process. Far from the taxpayers exploiting the workers, the workers are unrestrainedly exploiting the taxpayers, leading ultimately to the total bankruptcy of the state.

Here is Suranovic’s blog entry, which clarified many of these points for me:

Friday, February 18, 2011

How Public Sector Unions Can Exploit the Taxpayers

The recent protests in Wisconsin by public sector employees against the proposed increases in employee pension and health care contributions may just be the first of the budget battles we will soon see spreading across the US. The news event also offers an opportunity to reconsider the advisability of public sector unions.

A standard argument for the right to form unions is that they provide protection to workers who may be exploited by business owners. That exploitation may include racial discrimination, low wages, inadequate benefit packages and insufficient health and safety precautions. Firms might be expected to mistreat workers in their attempt to reduce costs and achieve higher profits for themselves.

However, a public sector union presumably does not face an exploitative employer. The employer is the government itself, which is at the same time the regulator of potentially harmful business practices. The government’s aim is not to generate higher profit and therefore it should not have the business incentives that might inspire exploitation.

In a democracy, the government is really the agent of the people. The people pay for government services via their taxes. The people are the true employers of the public sector workers.

Interestingly though, when public sector workers use their collective bargaining rights to negotiate for higher wages and more generous health care benefits and pensions, they do not negotiate directly with their employer (the people), but rather with the people’s agent (the government). In contrast, a private sector union negotiates with the owners of the firm, whose own profits are negatively affected by any concessions to the union.

In the public sector though, the elected officials are not often negatively affected when concessions are made. Indeed the effects may be the opposite because elected officials receive campaign contributions and electoral support from the public sector unions. That means that the more generous elected officials are to the unions, the greater their own gain will be as well.

This process gives public sector unions the ability to “exploit” the taxpayers. A prime example of this is overly generous defined benefit pension plans for public workers. When elected officials make promises of future benefits to current public sectors employees it does not impact the current budget balance. Public employees receive generous lifetime income guarantees while elected officials get contributions that help them stay in office. The only losers are the “future” taxpayers, some of whom may not even be born yet. It is an ingenious scheme.

By virtue of the recent recession, government budgets from Greece to Wisconsin, New Jersey and California, have been thrust into deficits, revealing the long-term unsustainability of the numerous promises that have been made. Governments will go bankrupt if changes are not made. The sooner the better since the longer we wait the more difficult will be the adjustment. Concessions will have to be made, not only by public sector workers, but also at the national level by social security, Medicare and Medicaid recipients. I suspect most people don’t realize this now, …. but when they do we can expect many more marches of discontent.

Posted by Lawrence Auster at February 21, 2011 10:14 AM | Send