The Fracturing of the AFL-CIO Jude Wanniski August 3, 2005

Memo To: Workers of the World
From: Jude Wanniski
Re: The Future of Labor Unions

The reason I had not commented earlier on the fracturing of the AFL-CIO in the last two weeks was that I really had not much to say, given the fact that organized labor has been in steady decline over the past three decades. At its peak, unions represented a third of the private work force, now the number is down to 8%. There was a time not long ago when I thought of myself as “a union man,” at least in the sense my heart was with organized labor. In recent years, while I’ve never thought of myself as “anti-labor,” I could see why unions were becoming marginalized by the evolution of the U.S. and world economy.

Although I’m now thought of as a Wall Streeter, supply-side economist and Reagan Republican, I came from a union family and belonged to unions when I was a young man. My father and both grandfathers were anthracite coal miners in Minersville, Pa., and were lifelong union men. In the summers when I was at UCLA, I worked as a wire-lath laborer in NY City and belonged to their union. My Master’s paper at UCLA’s school of journalism in 1959 was a report on the press coverage of the San Francisco general strike of 1934 that shut down most of the city. It was a beautiful event in American economic history, with Harry Bridges, the head of the Longshoreman’s Union, inspiring all of San Francisco’s workers, public and private, to join in support of his union. The aim was directed at ending the hiring practices on the docks much more than winning a few cents more per hour in wages. Unions, after all, were about “wages, hours and working conditions.”

The history of unions in the U.S. goes back to the formation of the Knights of Labor in 1869, in the post-Civil War years, but it was the monetary deflation of the 1870s that produced the American Federation of Labor. When the U.S. went off the gold standard in 1862 during the Civil War, the “Greenback” era saw the dollar/gold price rise from $20.67 to roughly $50. The general inflation that followed saw wheat climb to 50 cents a bushel from 25 cents, and the price of labor rise to $2 a day from $1. When the decision was made to return to the gold standard in 1873, the legislation phased in a return to the pre-war price of $20.67. This meant that farmers who had borrowed capital thinking they could repay with 50-cent wheat found the price falling back to 25 cents. And workers who had borrowed against their future labor thinking they would continue to earn $2 a day, found their wages falling by corporate dictate back to $1. You can see how workingmen would find it in their interests to band together to get a better shake.

For the most part, organized labor thrived during the century that followed the founding of the AF of L in 1886. These were the years of dramatic increases in capital formation and labor productivity, and corporate America largely resisted sharing those productivity gains in full with the work force. The Republican Party stood with business interests and the Democratic Party aligned itself with organized labor. Labors laws were passed and amended year after year to reflect the electorate’s sense of fairness on one side or the other, and while there were a great many days lost to strikes in the 1940s until the late 1960s, the system seemed to work pretty well. Productivity gains were divided in such a way as to keep the economy humming.

This sense of balance ended when Nixon took the U.S. dollar off the Bretton Woods gold standard in 1971. That’s because the inflation that followed, which in turn warped the tax system through “bracket creep,” caused the U.S. economy to stop growing. Yes, nominal Gross National Product kept growing, but when the numbers are deflated by the dollar/gold price, you can see why there have been no productivity gains to divide between management and labor. My colleague at Polyconomics, Paul Hoffmeister, finds that with the deflation adjustment, the U.S. economy grew by an average of 4% annually between 1945 and 1971, but by a trifling 0.3% per year since then. This is why it takes two breadwinners to make ends meet.

Over the years, I’ve tried to explain all this to AF of L economists, but no matter how much agreement I’d get over a pleasant lunch or exchange of letters, Labor has been unable to break loose from the New Deal Coalition it has been part and parcel of for 75 years. And that Coalition, although temporarily embracing supply-side economic ideas in the administration of John F. Kennedy, has been unwilling to break with the Keynesian demand-side ideas that have taken over since JFK’s passing. As a result, organized labor has not had much it could do to improve the wages, hours and working conditions of its members except insofar as they could be successful at zero-sum politics.

The annual push for increases in the minimum wage is a case in point. The idea behind the federal minimum wage when it first became law in the Great Depression was that there were not enough jobs to go around, and young people entering the work force or minorities were willing to work cheaper than union wages. AF of L economists know full well this has continued to be their rationale for higher minimums. And they could win in Congress over the past 35 years with almost no real gains in productivity because Big Business would support Labor. After all, if mature, major corporations had to pay wages higher than the minimum, why allow new companies who would be in competition pay wages at the existing minimum. It is a zero-sum game.

The same is true of the arguments for currency devaluation that started the problem for Labor in the first place. In 1971, Nixon was told a cheaper dollar vis a vis Japan would mean we would buy fewer Japanese goods and Japan would buy more American goods. Thus, we would need more workers to make the extra export goods and we would also need more workers to make the import goods we would not be buying from Japan. It is truly a dopey idea to a classical economist, as it means we are purposely arguing in favor of an adverse change in the terms of trade for Americans, but if you are looking for ideas on why organized labor is vanishing, that’s a good place to start. As long as the Democratic Party clings to the worst demand-side economic theories of the Keynesians and monetarists, the AF of L is stuck in stagnancy. The Institute for Policy Innovation noted yesterday:

Much of the press focused on how the unions differed in their approach to rebuilding. The AFL-CIO wanted to keep spending its money on political races to help elect Democrats — and we saw how well that worked. The breakaway unions — the Service Employees International Union and the Teamsters — wanted to devote their time and funds to recruiting new members. But the best-kept secret around is that neither approach is likely to reverse the decline of unions because they no longer speak to the needs of employees.

What employees need, after all, is not higher and higher GNP numbers, when the numbers are bloated by inefficiencies, the lawyers and accountants and the government bureaucrats that are counted in the “growth” numbers although we know they only subtract from economic efficiencies. Most of the two million men in the federal/state prison system, mostly minorities, would not have resorted to crime if the economy had enjoyed real growth these past three decades.

In that sense, the splintering of the AFL-CIO should be a good thing for Labor and for the U.S. economy, if one or more of the breakaway unions – perhaps the Teamsters – will no longer go along with the obsolete economic ideas embedded in the platforms of the Democratic Party. I certainly hope so. There’s nothing I’d rather see than great increases in national productivity, and organized labor thriving as it once again is called upon by the working men and women to negotiate the divisions with other stakeholders.