The UPS Strike, A Classic Jude Wanniski August 18, 1997

Memo To: Website fans and browsers
From: Jude Wanniski
Re: The strike in a broader context

[Normally we will not share our client letters with the Web for at least six weeks, and even then only rarely. But this one has gotten so much positive reaction, we offer it here in hopes that its message and perspective might work their way into the negotiations. If you e-mail it to your local newspaper, note that they may reprint it on their editorial or business page with my compliments.]

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THE UPS STRIKE, A CLASSIC

August 13, 1997

In the last decade, I’ve made at least a dozen attempts to persuade organized labor to support a cut in the capital gains tax, arguing that it will make capital plentiful, labor scarce, and thereby restore the utility and vitality of labor unions. On a flight to Moscow in 1991, on Forbes’ “Capitalist Tool,” I sat next to AFL-CIO President Lane Kirkland for several hours talking about nothing else. (Steve Forbes and Kirkland were on the board of Radio Free Europe, which was then inaugurating a Moscow station.) For years, I pestered Rudy Oswald, the AFL-CIO chief economist, with lunches, letters, papers and arguments. Raised in a family that swore allegiance to the United Mine Workers and the AFofL building trades, I could talk their language and keep them engaged. Jack Kemp did the same via his myriad contacts with labor. In January this year, he took Kirkland’s successor, John Sweeney, to lunch, urging him to modify his opposition to lower tax rates on capital as the surest way to lift real wages for labor. Maybe it all did some good, as organized labor gave its passive assent to President Clinton’s willingness to give a lower capgains rate to the GOP.

There is, of course, no reason why the unemployment rate, now at 4.8%, cannot go to 3%, despite the neo-Keynesian orthodoxy that solemnly proclaimed 6% as the absolute floor, below which inflation would be triggered. In today’s Wall Street Journal, Texas University economist Jamie Galbraith, son of John Kenneth, graciously acknowledges this error on the part of his profession generally. It will be a long time before the profession acknowledges the direct relation between this year’s rise in the stock market and the capgains rate being reduced to where it was in 1986 -- and with much, much less risk of inflation. Treasury Secretary Bob Rubin insists the boom is the result of the 1993 tax increase he helped engineer. But with the 20% now nailed down, there is a new floor to the stock market and the real economy. This increases the significance of the Teamster strike at United Parcel Service because it gives the Teamsters more leverage than they would otherwise have. Leverage for what? When Samuel Gompers founded the AFL in 1886, in the enormous boom that followed restoration of the gold standard in 1879, he was asked what labor wanted, and he said “More.” 

After 30 years of decline in real wages, as the interaction of inflation and tax progressivity confounded capital formation, the new era has arrived and Labor recognizes that unless it can capitalize on capital formation, it might as well hang it up. If we stand back and watch the strike develop as we would a chessgame, instead of choosing sides, we can extract more understanding of the new economy of labor scarcity into which we are moving. First, note that the chosen target of the strike is a company that employs a large number of unskilled workers who have no foreign competition. We are not going to see the kind of struggles we saw in the Depression and post-WWII years precisely because the Smoot-Hawley high tariff walls have been reduced to little ad valorem fences. Labor can’t muscle itself to higher wages within the protective tariff. They should realize their only leverage is in increasing the scarcity of labor by embracing policies that increase the abundance of capital. UPS is a good, easy place to start, to push the envelope at all points, to see where management will give. 

Management believes it has put a terrific offer on the table and labor is simply being greedy, but labor is correct in its assessment that management’s offer is really the product of its thinking prior to the stock market advance that has lifted the floor of the economy. UPS can argue that as the strike goes on, it is losing business to domestic competition and will have to lay off 15,000 workers even if the strike ends now. If Labor pushes too hard, the UPS argument will come true, because Labor wants this strike to demonstrate that it can get “More” for labor. Workers, after all, abandoned organized labor during the 1970s when unions struck for higher wages and there was nothing in management’s cupboard to give. The bleeding at the margin took place as workers opted for lower non-union wages with jobs attached rather than higher union wages with no jobs attached, except for the favored few. 

The issues on the table are wages, hours and pensions. Clearly, UPS most wants a new pension deal, to replace the one it got stuck with during the long economic decline. Instead of contributing to the Teamster fund, as it has in the past, it wants its contributions to go to its own fund. This is because the Teamsters have been using the UPS contribution to finance handsome pensions of members not so fortunate to have worked for UPS. It is as if a man named UPS needed money a decade ago and agreed to pay interest on the loan by giving blood, in amounts to be determined by the creditor. The man knows the creditor will only take so much blood or kill his source. But now, with business booming, the creditor is draining blood to support all his bad loans. The Teamster pension fund remains in the red because the union keeps it that way on purpose. UPS wants to buy out of its contract by paying the Teamster fund $700 million -- reckoning it will otherwise be bled for an extra $5 billion in 2002. The Teamsters will not allow its UPS members to vote on this deal separately, because it is such a good deal for UPS workers. UPS, which has $4.5 billion in cash, may have to offer $701 million, or “More.”

Labor surely knows that this form of pension communism becomes less attractive in an expanding capitalistic economy, and that some transition toward the UPS position is inevitable. On the other hand, UPS has been hiring part time workers to do heavy lifting because workers can work harder handling packages in bursts of four hours instead of over eight. This was possible and desirable when the unemployment rate was 6 or 7 or 8%, with an army of unemployed. As long as Alan Greenspan does not slow the economy in order to push up the unemployment rate, UPS will find it harder to find these workers anyway. As revenues flow into the federal Treasury and the Republicans find ways to reward further capital formation that pushes unemployment toward 4% and below, UPS will be able to replace the heavy lifting by part-time workers with technology that can work in short bursts or at length.

Hourly wages are also on the table, of course, and “More” here or “More” there can bridge otherwise impossible divides. UPS workers all get the same health benefits, which offset a lot of the heavy lifting among the part-timers. The company is very good about elevating part-timers who want to work full-time, when jobs open up. This whole issue would be more easily settled by increasing the hourly rate in the package -- in essence gambling on the economy expanding as smartly as the stock market suggests it will. If you look hard enough at these components, a reasonable deal will be suggested. The hardest part, though, is the bet by management and by labor on what the future holds. UPS has to be extremely careful because if there is a deflationary downturn, it would be chewed up by its commitment to pay more than the market will support. The gamble by Labor is just as great. If it pushes too hard in the wrong places in its Contract with UPS, like Newt Gingrich in his Contract with America, it will become extremely unpopular for a long time. We kibbitz freely on both sides of this chessgame, with a rooting interest on both sides for a successful conclusion. You should too.

Jude Wanniski