Opinion from a Libertarian ViewPoint

Why Empowering Organized Labor Will Definitely Not Help the Economy | Mises Wire

Posted by M. C. on April 26, 2021

The Reagan-killed-the-unions myth came about because of Reagan’s response to the air traffic controllers’ strike in 1981. The union, which had the acronym PATCO (Professional Air Traffic Controllers Organization), actually endorsed Reagan in 1980 (along with the Teamsters—because Reagan agreed to delay trucking deregulation for two years, something Krugman ignores).

William L. Anderson

Paul Krugman has a very prominent perch from the editorial page at the New York Times and he has used his influence, among other things, to shill for two things that are anathema to a strong economy: inflation and organized labor. My analysis examines what Krugman says about labor unions and explains why once again his economic prognostications are off base.

In a recent column, Krugman declares that the present political climate may reverse the long trend in private sector unionism—and that is a good thing:

The political environment that gave anti-union employers a free hand may be changing—the decline of unionization was, above all, political, not a necessary consequence of a changing economy. And America needs a union revival if we’re to have any hope of reversing spiraling inequality.

As he often does, Krugman presents a scenario of a prosperous America in which organized labor helped create a productive and happy society, although one might question his knowledge of history. He writes:

America used to have a powerful labor movement. Union membership soared between 1934 and the end of World War II. During the 1950s roughly a third of nonagricultural workers were union members. As late as 1980 unions still represented around a quarter of the work force. And strong unions had a big impact even on nonunion workers, setting pay norms and putting nonunion employers on notice that they had to treat their workers relatively well lest they face an organizing drive.

While he is partly correct in his statement, Krugman then paints an alternate picture of history, claiming, in effect, that the source of economic growth is high factor prices.

And this decline in unionization has had dire consequences. In their heyday, unions were a powerful force for equality; their influence reduced the overall inequality of wages and also reduced wage disparities associated with different levels of education and even race. Surging union membership appears to have been a key factor in the “Great Compression,” the rapid reduction in inequality that took place between the mid-1930s and 1945, turning America into a middle-class nation.

First, and most important (and maybe most shocking), the 1930s constituted the Great Depression, when unemployment was in double digits and living standards for many Americans fell from their levels a decade before. The notion that the Roosevelt administration “created” a middle class by putting people out of work is preposterous on its face.

Second, Robert Higgs forcefully destroyed the lie that the US economy during World War II brought prosperity and helped turn the country into a “middle-class nation.” Such thinking only can reflect a mindset that sees the US economy as being “managed” by the state, and that middle-class incomes are solely a function of state power to confiscate income from some and turn it over to others. To take a time when the nation was in an economic crisis and later involved in the most destructive war in history and then present it as a permanent model for society is perverse beyond words.

To better understand why Krugman would write such things, we need to understand his view of the economy, a view shared, apparently, by most political, academic, and social elites in this country. In the Krugman view—and I will try to keep from veering into presenting a caricature of his beliefs—private enterprise rests on a tenuous foundation. Like J.M. Keynes, he believes that the economy is circular in nature.

More than a decade ago, I wrote that Krugman and others see the economy as being like a “perpetual motion machine” in which individual savings actually work against economic prosperity:

If I can put the whole Keynesian set of fallacies into one statement, it would be this: the modern Keynesians believe that the economy operates like a perpetual motion machine, with government spending being the “grease” that keeps it from slowing down. The “friction” in this economic machine, according to the pundits, is private saving. Eliminate it, and the economy goes on forever, adding energy and expanding indefinitely.

I continue:

[I]f consumers save or “hoard” some of their money, then there will be a “leakage” from the system, which means that households cannot “buy back” the products they have produced. The unpurchased goods then pile up in the inventories, so businesses must then cut back production and lay off workers. This further triggers consumer uncertainty, which means they save even more money, and we are off to the downward races.

Krugman has used this analysis to explain every economic downturn, including the Great Depression, and since he left the Princeton University faculty to dedicate his academic work to examining what he calls income inequality, he has doubled down on his rhetoric. In his view, business firms create goods which people purchase, and the income ultimately flows back to business owners, making them wealthy.

As long as these wealthy business owners continue to spend all of their income either on consumption goods or new capital, the economy can move along. The likelihood of that chain of events happening, however, is near zero and, instead, the wealthy often will save (read: hoard) much of their income. Instead of buying cars, yachts, jewelry, and whatever else the rich like to purchase, and instead of putting back the rest of their income to purchase new capital or replenish existing capital, they stuff the money into nonproductive accounts and don’t spend at all.

On top of that, Krugman holds to the Thomas Piketty theme that over time wealthy people receive increasing returns to the capital they own so that we see the proverbial scenario of “the rich getting richer and the poor becoming poorer.” Once that becomes a guiding narrative, of course, everything that happens seems to fulfill the Krugman-Piketty theme.

Over time, hoarding by the rich throws sand into the gears of the perpetual motion machine, grinding the economy to a halt and throwing it into recession. While pundits like Karl Marx, Keynes, and Krugman will deviate among themselves as to the causes of economic downturns, they generally agree that the system implodes from within and only can be turned around by massive governmental involvement.

The Keynes-Krugman “solution” to this obvious problem is for government to create a system of massive wealth transfers from the wealthy to everyone else. High wages generated through labor union activism, high marginal tax rates, and a huge welfare system serve to take income away from the wealthy, give it to others who will continue to spend and keep the perpetual motion machine well oiled and moving. Thus, high taxes and high wages obtained via coercive activities by organized labor actually help everyone from the poorest people to the wealthy business owners. Lower-income people receive money, goods, and services while the wealthy find that their enterprises flourish when people have more money to spend. It is win-win for everyone.

Given his tendency to mangle economic history, it is not surprising that Krugman falsely blames Ronald Reagan for the decline of labor unions just as he falsely claims that organized labor created prosperity. He writes:

See the rest here


Contact William L. Anderson

William L. Anderson is a professor of economics at Frostburg State University in Frostburg, Maryland.

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