Wednesday, January 28, 2009

Only "Card Check" Can Restore Prosperity and Save the Middle Class?

On Monday, January 26th in the LA Times, Robert Reich the former Secretary of Labor in the Clinton Administration uses a false premise and circular reasoning to support the idea that salvation for the middle class, and thus the economy, can only be achieved by a re-unionization of America. He wants you to believe that only Card Check can make that happen.

Starting an opinion piece with a false premise tends to make one's argument suspect. Using circular reasoning to buttress it simply betrays how weak the argument truly is.The very first line in his article is this question, " Why is this recession so deep, and what can be done to reverse it?".

The answer is, IT'S NOT THAT DEEP, and card Check won't help at all. As a matter of fact, the current recession is no more severe at this point than the average of the 10 post-World War II recessions. Apparently Mr. Reich rightly feels that if he started with the premise that today's recession is not nearly as bad as most, it would get in the way of his solution. No crisis, no dramatic solution needed. After all, he is a politician, and this is right out of the political playbook. In order to offer a "solution" that people don't want, you need to create a crisis to make the situation appear dire, in order to marshal support to advance your agenda. Starting with a false claim makes me wonder about the validity of other claims that he makes in the piece as well.

The needle on my Ludite Detection Device nearly went off the scale when he talked of going back 50 years for the solution: Yes, if only we had more union members. Evidently progress in the eyes of progressives is all about turning back the clock. I would like to join Robert in his trip down memory lane, but it would not be in search of Big Labor's glory days. Instead, I'd be looking fondly for Smaller Government and the time when Social Security tax rates were 2.5% percent, not 15.3%, a time when limited government and personal responsibility were the order of the day.

The Mark Twain in me says I've got to call him out on this next quote where he tells us that the rich got richer at the expense of the middle-class and cites a study.
Figures don't lie, but liars figure. - Samuel Clemens (alias Mark Twain)
Here it is:
"It's no wonder middle-class incomes were dropping even before the recession. As our economy grew between 2001 and the start of 2007, most Americans didn't share in the prosperity. By the time the recession began last year, according to an Economic Policy Institute study, the median income of households headed by those under age 65 was below what it was in 2000."

Above, he tries to use a study on median income by the Economic Policy Institute to to say that middle-class income is down. I suppose this is so he can infer it has happened as a result of the reduction in union membership. and the income loss the middle class has supposedly experienced can only be halted by increased union membership. The problem is the statistics don't back up this premise either. Here is what Terry J. Fitzgerald, Senior Economist with the Federal Reserve, says about median household income in a report from September of 2008 : see the full report here

Average household size declined substantially during the past 30 years, so household income is being spread across fewer people. The mix of household types—married versus single, young versus old—also changed considerably, so the “median household” in 2006 looks quite different from the “median household” in 1976. Finally, the measure of income used by the Census Bureau to compute household income excludes some rapidly growing sources of income. The main finding is that—after adjusting the Census Bureau data for three key factors—inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006. The only household types with substantially lower growth were “working-age male householder without spouse present” and “male householder with children but without spouse,” but these types constitute just 10 percent of all households. Household income inequality increased notably over this period; nonetheless, middle American households had substantial income gains."

Here are the factors Fitzgerald cites:
  1. The price index used by the Census Bureau overstates inflation, and thus understates income gains, relative to a preferred price index.

  2. A changing mix of household types leads the overall median increase to understate the median increase of most household types.

  3. The Census Bureau measure of household income understates income growth by excluding some rapidly growing sources of income.

His Conclusion

The claim that the standard of living of middle Americans has stagnated over the past generation is common. An accompanying assertion is that virtually all income growth over the past three decades bypassed middle America and accrued almost entirely to the rich.

The findings reported here—and summarized in Chart 8—refute those claims. Careful analysis shows that the incomes of most types of middle American households have increased substantially over the past three decades. These results are consistent with recent research showing that the largest income increases occurred at the top end of the income distribution. But the outsized gains of the rich do not mean that middle America stagnated.

About the only point I can find agreement with Mr. Reich on is his assertion that tax rebates don't work. He is right about this one issue. He is, however, totally wrong on his support for the "Tax cuts for working families, as President Obama intends, can do more to help because they extend over time." My understanding is that these are not tax cuts, but tax rebates. Rebates do not provide any incentive to work more, and will only apply for the next two years, not permanently.

His idea that only unions can permanently raise wages is patently false. Permanent wage increases can only come about through increases in productivity. Artificially raising wages, through the threat of force, which is what unions do, has a tendency to reduce employment over time. How else can you account for the massive loss of union jobs in the private sector? Employees understand this, and it is the reason that unions are having so much trouble trying to organize workers. It's not as Heir Reich would have you believe: the work of evil employers and their intimidation of the workforce.

He claims there are abundant examples of the power of unions to raise wages, and then trots out two weak examples . Buttressing his claim of the wonders of Unions and their ability to increase wages, he tells of the 12,000 janitors that were organized in New England recently, and how they are now being paid $16 per hour plus benefits. If I were them, I'd be concerned. Have a look at these folks who also won a increase in wages, and see how much better off they are as a result. His other example is of the 65,000 Verizion workers who received an 11% wage increase. That's a big increase. and I was almost buying his power of Unions line until I checked to see that he had forgotten to mention that it was over a three year time frame. That makes it a raise of about 3.5% per year, which is better than a sharp stick in the eye, but not enough to make me run out and join a union today.

Terry Fitzgerald's research shows Middle American households did indeed have substantial income gains, and the opinion piece by Mr. Riech clearly shows the dramatic fall in union membership from a high of over 33% to below 8% in the private sector occurred over the same time frame. I not saying the decline in union membership is the cause of increases in income for the middle class. I'm just saying that both things happening, at the same time, has got to make you wonder just a little bit.


Jeff Lehner said...
This comment has been removed by the author.
Jeff Lehner said...

Well said, Dave.

This entitlement stuff is dangerous. Workers feel entitled to wealth, tax-eaters as well, and so forth.

Seems to me our greatest, most important challenge is reversing this trend.