Please turn on JavaScript

Brooks Wilson's Economics Blog: March 2011

Friday, March 25, 2011

Freeman on Unions

I am under the general impression that unions are, on the whole, not good for an economy.  In “Barro on Public Employee Unions and Collective Bargaining,” I drew from Robert Barro’s article “Unions vs. the Right to Work” to express something close to my opinion.  Barro’s most significant paragraph read
There is evidence that right-to-work laws—or, more broadly, the pro-business policies offered by right-to-work states—matter for economic growth. In research published in 2000, economist Thomas Holmes of the University of Minnesota compared counties close to the border between states with and without right-to-work laws (thereby holding constant an array of factors related to geography and climate). He found that the cumulative growth of employment in manufacturing (the traditional area of union strength prior to the rise of public-employee unions) in the right-to-work states was 26 percentage points greater than that in the non-right-to-work states.
I am not a labor economist nor have I spent many hours poring over the economic literature on unions so I will my opinion with a little humility and offer a second, more favorable evidence-based opinion on the impact of unions.  Richard B. Freeman is labor economist who, with colleague James Medoff, wrote “What Do Unions Do?”  They come to the conclusion that unions are a net benefit to society.  Freeman explains their conclusions in “Richard B Freeman on Labour Unions.”
[We] looked at unions from two perspectives: first, what we called the monopoly face of union – unions acting as raisers of benefits for their members – and second, the voice face of unions, or how unions represented labour in the workplace and in the body politic, giving voice to people who otherwise wouldn’t have had much say. I think, in the long run, this is the stronger and more important face of unions.

The first thing unions do is to raise wages for working people, and that obviously benefits the working people. They also increase the kind of benefits that workers want. So, if workers want pensions, the unions negotiate for that. If workers want maternity leave, that’s what they bargain for…>

Because unions make working life better for workers, they lower turnover in unionised workplaces. Employers with unions traditionally have workers who stay longer and contribute to raising the productivity of the enterprise. Employers also get more credible information about what workers really want in the workplace, because the union representatives are democratically elected and they really speak for the workers. So a good, functioning union is a real positive…
Often, a union that exercise market power is a bad thing, but not always.  For example, professional athletes need a union to protect their interests from owners.  I might add that job protection through unions may allow union members to acquire skills that are specific to a certain employer and not easily transferable to another job.  This protection also increases productivity.  Public unions may be differently placed.  Freeman continues 
Public sector unions are different in an interesting way. Private sector unions can do very little to raise the demand for their services. But public sector unions can try to convince voters that we need more police and better education. By politicking, they can help public sector employers raise the funds to provide more and better public services. They have that unique attribute.
I might add that public officials have less incentive than private employers to limit union gains in wages, benefits and number of jobs available.

Read more!

Thursday, March 24, 2011

Consensus of Economists on the Debt?

(HT Mankiw) Economists believe that the mounting national debt threatens the long term financial stability of the United States.  Cutting waste, a solution from the right and taxing the rich, a solution from the left are inadequate; entitlement programs must be addressed.  Ten former chairmen and chairwomen of the Council of Economic Advisers, four who served Democratic presidents and six who served Republican presidents support the Bowles-Simpson report, “The Moment of Truth,” as the starting point of legislative action involving both parties (Politico, “Unsustainable budget threatens nation”).
While the actual deficit is likely to shrink over the next few years as the economy continues to recover, the aging of the baby-boom generation and rapidly rising health care costs are likely to create a large and growing gap between spending and revenues. These deficits will take a toll on private investment and economic growth. At some point, bond markets are likely to turn on the United States — leading to a crisis that could dwarf 2008…This is your teaser
“The Moment of Truth” documents that “the problem is real, and the solution will be painful.” It is tempting to act as if the long-run budget imbalance could be fixed by just cutting wasteful government spending or raising taxes on the wealthy. But the facts belie such easy answers.
Alice Rivlin, the first Director of the Congressional Budget Office, makes a similar observation (Brookings, “Address the Real Budget Issues”)
Squabbling over federal spending for the few months left in this fiscal year is a distraction from the serious deficit threats of the future. Threatening a costly, pointless government shutdown is just plain silly. Our elected leaders should turn to next year's budget and start sorting out needed government activities from lower priority ones we can live without. The president has offered cuts in long-standing programs to fund investment in future growth within a constrained total. He and Congress should work together to decide what we most want our government to do as we all tighten our belts. This will take hard work and willingness to compromise, not posturing and sound bites.

Even more important, we must also slow the long-term growth of Medicare and Medicaid and make Social Security solvent. We must reform our absurdly complex, inefficient tax code so it raises more money at lower rates. Otherwise, we face a debt catastrophe that could destroy our prosperity and world influence. These tough decisions must involve both parties working together so that neither side can blame the other for what has to be done.

Brave young people are risking their lives in the name of democracy in far places. Can't we show that our democracy works right here right now?
The added emphasis through bolding is mine. 

Read more!

Thursday, March 17, 2011

Conceal Carry Laws on Texas Campuses

The Texas legislature is deliberating a law that would allow all citizens with concealed handgun licenses to carry handguns on college campuses.  Most debates about the impact of gun ownership on crime generate much heat but little light and this debate appears no different.  Little evidence is presented to support a position.  I have four objectives in this post.  First, I will do a very quick review of the literature on the relationship between gun ownership and crime.  Next, I will present a simple model that incorporates both positive and negative consequences of allowing concealed handguns on college campuses.  I will also present my prior beliefs about the effects of gun ownership on crime.  Finally, I will also suggested a method of phasing in laws allowing concealed weapons that could be reversed if data suggests that the laws increased rather than decreased crime on college campuses.

My review of the literature on the relationship between gun ownership and crime will of necessity be short.  I know little about it.  What I know is that the current assertion that crime decreases as gun ownership in a community increases is based on the influential work of John Lott.  His book, “More Guns, Less Crime,” neatly summarizes his empirical findings.  Before his research, the conventional wisdom held that there was a direct causal relationship between gun ownership and crime.  Controversial research sparks additional research to confirm or disprove results.  Ian Ayres and John Donohue published results that found no relationship between gun ownership and crime (“Shooting Down the ‘More Guns, Less Crime’ Hypothesis,” Sanford Law Review, Vol. 55, 1193, 2003; “The Latest Misfires in Support of the ‘More Guns, Less Crime’ Hypothesis,” Sanford Law Review, Vol. 55, 1193, 2003).  Ayres and Donohue’s position seems to represent what might be called the academic “consensus” if it exists although research showing increased gun ownership having a positive or negative effect on crime exists (See also Ayers, “Super Crunchers”).An econometric model could be applied to measure the impact of any change in the use of conceal carry laws, but I will apply it to the current legislation which would allow concealed weapons on college campuses in Texas.  A simple version of the model assumes that there are both direct and externality benefits and costs associated with increased gun ownership.  Direct benefits include a student, staff or faculty member using a concealed weapon to stop a crime on campus.  A positive externality results when someone with criminal intent reduces activities on campus out of fear that the envisioned victims might be able to protect themselves with guns.  A direct cost includes a student acquiring a concealed carry license to plan a crime against a student or faculty member.  A negative externality includes accidental shootings and crimes of passion. 

My prior belief is that the direct benefits and costs would be low and would be overwhelmed by the externality benefits and costs.  My father was a cop and provided anecdotal evidence.  He told me that he never responded to a call in which someone had successfully protected themselves or their families with a gun, but that he responded to many calls in which a person shot a friend or family member fearing that they were a criminal.  I also do not believe that the number of students or faculty who plan murderous escapades will change much with expanded rights.  The level of crime will move depending on changes in the positive and negative external effects.  If the positive effects were larger than the negative, then the law would be beneficial.  If not, the law is harmful.

But why is opinion important when the impact of this law can be measured?  A phased in law would create a natural experiment.  It might work something like this.  Twenty five percent of campuses, selected randomly, would allow faculty to carry concealed weapons.  Annual data on campus related crime would be compared to crime rates on these campuses prior to the new law, and with the crime rates of campuses without the new right.  If statistical evidence showed that the new law increased crime, the law would be rescinded.  If the law reduced crime, faculty at all campuses would be allowed to carry concealed weapons and 25 percent of campuses would be selected to expand the right to carry concealed weapons to students as well.  Annual data would again be collected.  If the expansion of conceal carry rights to students increased crime, that portion of the law would be rescinded but faculty and staff could still carry concealed weapons.  If the law reduced crime, it could be expanded to include students on all campuses.  A phased in version of conceal carry laws accompanied by measurement of impact would take the guess work and some of the heat out of the debate.

Read more!

Wednesday, March 9, 2011

Barro on Public Employee Unions and Collective Bargaining

The dispute in Wisconsin between Governor Walker and the teachers union has brought a lot of  political heat but little economic light with both sides claiming moral high ground but offering little evidence why that ground is theirs.  In “Unions vs. the Right to Work,” published in the Wall Street Journal, Robert Barro makes four contributions to the debate:  He offers a statement of economic theory concerning unions, a brief history of state law regarding collective bargaining, evidence of the impact of collective bargaining, and future battleground states between unions and state governments trying to impose fiscal discipline.  I will summarize Barro’s first two points and use quotations to summarize the remaining two.  The article is well worth reading.

Collective bargaining through unions gives its members market power in setting wages and for this reason was considered an antitrust violation.  As time passed, unions were granted exemptions from antitrust laws by the Clayton Antitrust Act of 1914 and the National Labor Relations Act of 1935.  Currently, 38 states allow union shops and 22 recognize the right to work. 

Barro presents evidence that unions impede economic growth.
There is evidence that right-to-work laws—or, more broadly, the pro-business policies offered by right-to-work states—matter for economic growth. In research published in 2000, economist Thomas Holmes of the University of Minnesota compared counties close to the border between states with and without right-to-work laws (thereby holding constant an array of factors related to geography and climate). He found that the cumulative growth of employment in manufacturing (the traditional area of union strength prior to the rise of public-employee unions) in the right-to-work states was 26 percentage points greater than that in the non-right-to-work states.
Barro predicts states that will witness battles over collective bargaining.
In general, the most likely arenas are states in which the governor and both houses of the state legislature are Republican (often because of the 2010 elections), and in which substantial rights for collective bargaining by public employees currently exist. This group includes Indiana, which has recently been as active as Wisconsin on labor issues; ironically, Indiana enacted a right-to-work law in 1957 but repealed it in 1965. Otherwise, my tentative list includes Michigan, Pennsylvania, Maine, Florida, Tennessee, Nebraska (with a nominally nonpartisan legislature), Kansas, Idaho, North Dakota and South Dakota.  

Read more!

Tuesday, March 8, 2011

Fitzgerald on MIT Students and Economics

Deborah Fitzgerald is the Dean of the School of Humanities, Arts and Social Sciences.  At the beginning of the MIT150 Symposia, she made the following comment on MIT students and economics.

Economics is one of the 10 departments of school of Humanities Arts and Social Sciences. It is the largest department and it has the most faculties, the largest of graduates, and has the largest number of graduate students. It also has the most Nobel Prize winners of all the departments in my school. All 10 department of the school are dictated to the education of MIT students. Each student at MIT under graduate is required to take 8 classes in their fields in Humanities Arts and Social Science which is quite high by pier standards we see a lot of under graduates in our school. From all fields across the board the under MIT graduates tend to gravitate to Economics Department drawn by illustrious faculty as well as by rigor of the classes they encounter. MIT students in my experience tend to scoff at materials that are not very difficult. They find in economics more than adequate challenge to their considerable abilities.

Read more!

Tuesday, March 1, 2011

A Problem with Medicare

In “Let's Begin Obama's 'Conversation' on Entitlements,” the Wall Street Journal identifies a major problem with Medicare.

According to Eugene Steuerle of the Urban Institute, an average couple retiring last year can look forward to consuming Medicare benefits with a present value of $343,000, having paid Medicare taxes with a present value of $109,000.

And don't let that figure get your hopes up, because even that $109,000 is not available today. That money was spent long ago. The government's trust funds are a fraud. Indeed, by some large amount, society missed out over many decades on domestic savings and investment that would have taken place had workers not been relying on unfunded government promises to support them in retirement.

There are only four solutions: raise taxes, cut benefits, reform Medicare, or some combination of the other three.

Read more!