Saturday, July 27, 2013

How Michigan Abetted Labor Cartels and Hastened Detroit's Downfall

Paved the Way for Detroit's Demise

Trying to Turn Things Around

In 1940, Detroit was the nation's fourth largest city.   By 1950, it had the highest per capita income of any major U.S. city.  With a current population of 701,000, the city now ranks 18th in the country, behind Charlotte, N.C. (17th),  Fort Worth, Texas (16th), Austin, Texas (14th), and Jacksonville, Florida (11th), none of which was in the top 20 until 1990 or more recently.   Last week the city sought to initiate what would be the largest municipal bankruptcy in the nation's history

Many pundits argue (see here and here, for instance), with some force, that Detroit's redistributive economic policies are a significant cause of the city's current economic woes and resulting inability to pay its bills.  At the same time, the State of Michigan also bears some responsibility for the city's plight.   For more than half a century, the Wolverine state encouraged the formation of labor cartels, also known as unions.  By design, such cartels exercise market power and artificially raise the price of the most important input in most enterprises, that is, human labor.  By raising the cost of doing business, in Detroit and other parts of Michigan, such cartels presumably encouraged some firms to move all or part of their operations elsewhere and deterred other firms from locating in Michigan in the first place.  It is thus no surprise that, as previously discussed on this blog, states like Michigan have stagnant or declining populations, while states such as Texas, North Carolina and Florida that discourage labor cartels are booming and attracting immigration from other states.
There was a time, of course, that states had no role in setting national labor policy.  The 1935 National Labor Relations Act ("NLRA"), also known as the Wagner Act after its chief proponent, Senator Robert F. Wagner of New York, pictured above, set uniform national labor policy.  The NLRA empowered employees to form labor cartels and prevented private enterprises from firing employees who participated.  Moreover, the NLRA did more than simply facilitate “collective bargaining.”  Instead, the Act also empowered unions and firms to negotiate so-called “union security agreements.”  As previously explained on this blog, such agreements authorized firms to force their non-union employees to pay dues to the union, with the stipulation that employees who refused would be fired.  Thus, the NLRA authorized unions to fill their coffers by taxing non-union employees, thereby further increasing the effective cost of hiring such individuals, who would of course demand higher wages to offset such compelled dues.   Presumably the prospect of  obtaining such additional dues from non-union members encouraged the formation of unions in the first place, by, for instance, reducing the cost per union member of cartel formation and subsequent "collective bargaining."
The Supreme Court upheld the NLRA in 1937, claiming that forcing firms to employ union members against their will would facilitate labor peace and thus minimize disruptions to interstate commerce.  See NLRB v. Jones and Laughlin Steel, 301 U.S. 1 (1937).    On the contrary, the number of strike days doubled between 1936 and 1937, with the automobile industry, headquartered in Detroit, experiencing more than its share of labor strife.  Moreover, and as previously explained on this blog, policies like the NLRA that artificially increased wages lengthened the Great Depression by interfering with equilibrium in labor markets and encouraging unemployment.     Responding to further such strife after World War II, Congress overwhelming enacted the Taft-Hartley Act in 1947.  As previously explained on this blog,  the Act empowered states to protect non-union employees from coercive “union security agreements” by opting to become what are colloquially known as “right to work” states.  Several states, including Texas, Florida and North Carolina, have long opted for "right to work" status, with the result that labor cartels are far less prevalent in such states than in others.
Late last year, Michigan finally became a "right to work" state, at the behest of Governor Rick Snyder, also pictured above.  Before that the state, like others in the "rust belt," declined to protect non-union employees, doubling down on the sort of pro-union policies that produced the labor strife the Taft-Hartley Act was designed to mitigate.  Indeed, Michigan once went so far as to empower public employee unions to coerce non-members to provide financial support for a union's political activities, until the Supreme Court declared this practice unconstitutional.  See Abood v. Detroit Board of Education, 431 U.S. 209 (1977). 

In the short run such pro-cartel policies made perfect sense for Michigan and many of its citizens.  During the 1940s and 1950s, the “Big Three” automakers dominated the automobile industry, with no sign of effective challenge in sight. See James M. Rubenstein, Making and Selling Cars: Innovation and Change in the U.S. Automotive Industry, 188 (2001) (reporting that the Big Three's combined market share was 94 percent in 1954, 1955 and 1959).    So long as unions negotiated for similar wage increases from each such firm, each of the Big Three could simply pass along such higher costs to consumers, the vast majority of whom were citizens of other states.  Indeed, one suspects that Detroit and surrounding suburbs derived much of their 1950s and 1960s prosperity from this combination of tight oligopoly and cartel-induced above-market wages, nearly all at the expense of citizens in other states and foreign countries.  To that extent, Detroit's vaunted prosperity during the middle of the 20th Century was in part an illusion, bought at the expense of millions of other Americans who paid excessive prices for the city's main export.  Over the long run, of course, market entry, encouraged by free trade, undermined Detroit's grip on the American auto market, so much so that General Motors could not survive without an ill-advised federal bailout and Chrysler is now a subsidiary of Fiat and thus no longer an American company, let alone a Detroit firm.  It is thus no surprise that the state still suffers an unemployment rate of 8.7 percent, significantly higher than the national average.

None of this is to say that Michigan could have maintained the complete preeminence of the Big Three by becoming a "Right to Work" state in, say, the 1950s.  Some erosion of Detroit's share of automobile production was predictable no matter what.  Still, by resisting labor cartels much sooner than it did, the state could have checked the power of some unions and prevented the emergence of others.  In this way Michigan could have made Detroit and the rest of the state more hospitable to private investment and resulting economic opportunity, countering the inevitable reduction in the Big Three's share of world-wide automobile production.  Perhaps the financial ruin of the state's largest city will encourage additional efforts to remove undue regulatory burdens and resist the imposition of new ones.   Those who hope to encourage economic growth in Michigan can start by defeating proposals to raise the state's minimum wage to a rate nearly 50 percent above the federal minimum.  Otherwise, the downfall of Detroit may prove a harbinger of the entire state's economic future.