Mandatory Labor Union Education?

There is new legislation that is being considered in Connecticut, suggesting that primary school should include a class on labor unions. At first glance, a history lesson on an important institution in America’s history does not seem harmful or ill-advised. However, labor unions are the primary supporters of this legislation and they want to see labor unions not be a one-week lesson in 10th grade, but rather integrated in a year-long course.

 

“They believe that one of the reasons young people are not organizing in unions is because they’re not taught in schools the benefits of being in a collective workforce,” Kevin Dayton, a policy consultant to non-union construction companies in California.

This is somewhat scary. It appears that this group actually wants to educate kids on the benefits of labor unions and show the power that they hold.  Most certainly, labor unions have power… but is it good power?

Labor unions started in 1866 with the National Labor Union in America.  In 1869, the Knights of Labor emerged to fight against child labor, depressed wages, eight-hour workdays and poor working conditions. Membership rose to 700,000 workers.Fast forward to today where 14 million people are a member in a labor union, roughly 37% of all public sector employees.

A friend of mine, who is in a labor union, gets 16 days off a year for holidays plus an additional 3 weeks of vacation, which he can accrue the more he works over-time. Further, if he is asked to do a job that is not in his job title, he is required to get paid over-time for the work. The health insurance plan is ridiculously good where there are minimum out of pocket pays and most prescriptions cost less than $5.00. Instead of getting a raise in the last five years, the labor union has been arguing over contracts requiring a 3% cost-of-living-increase (COLA) along with a yearly 1.5% raise. Inflation has only been going up approximately 2% per year over the last 5 years  and the economy has not been growing as fast as the proposed raise in this industry. With the newest report of a large GDP quarterly fall of -2.9% this seems hard to justify from the employer’s perspective. So, it is a partial COLA increase, partial raise and an additional raise the labor-union is asking for.  The company refuses this contract and the labor union refuses anything but this contract. Eventually, when the economy booms again, this will retroactively be passed. This labor union has power.

So, if labor union history is going to be taught. I assume it will be taught something like this…tout about the benefits only and never mention the costs. Examples of benefits: higher way for low-wage workers/middle-tier workers, better benefit packages, better work conditions, more picketing with you do not get your way, etc.

The costs that almost certainly outweigh the benefits of labor unions in today’s society may be twiddled down to a ‘hindrance’ or not mentioned altogether if this legislation passed. Examples of costs: less employment (unions raise the price of labor, so employers will purchase less of it), a shift of power to low-skilled or low-wage workers at the expense of the higher-wage or higher-skilled workers (note, I am not saying that low-wage workers have low-skill, however in a free market economy such that each worker is paid their marginal product a low-skill worker would only garnish a low-wage).  Further, bad employees are harder to fire in a labor union as they usually have high-powered lawyers supporting against bad working conditions or mean management.

EconLib explains this quite well:

“According to Harvard economists Richard Freeman and James Medoff, who look favorably on unions, ‘Most, if not all, unions have monopoly power, which they can use to raise wages above competitive levels’ (1984, p. 6). Unions’ power to fix high prices for their members’ labor rests on legal privileges and immunities that they get from government, both by statute and by nonenforcement of other laws. The purpose of these legal privileges is to restrict others from working for lower wages. As antiunion economist Ludwig von Mises wrote in 1922, ‘The long and short of trade union rights is in fact the right to proceed against the strikebreaker with primitive violence.’ Interestingly, those who are expected to enforce the laws evenhandedly, the police, are themselves heavily unionized.”

Some people are fearful of stepping out and debating on employment contracts on their own, so they want a collective group to do it for them. Labor unions are equally scared to wither away in existence as more people in society see them as a disgruntled employees always looking for a fight. No one wants to work with the mean guy or in this case, a group of mean employees. People like to be individuals and think freely, but they also like to be taken care of.  In the matter of public school education on labor unions, I think it would be a major win for labor union supporters and collectivism. It would be a major failure on the part of a free society for the economics (and thus the costs) behind labor unions not to be explained.

 

The Nature of the ISIS Threat in Iraq

Kenneth M. Pollack over at Brookings has provided an illuminating account of the nature of the threat facing Iraq from the recent military successes of the Sunni coalition fighting under the “ISIS” banner. The report is worth reading in its entirety, but here’s a good excerpt:

These [ISIS and other Sunni militants] are Militias First and Foremost, Terrorists only a Distant Second. Here as well, Prime Minister Maliki and his apologists like to refer to the Sunni militants as terrorists. Too often, so too do American officials. Without getting into arcane and useless debates about what constitutes a “terrorist,” as a practical matter it is a mistake to think of these groups as being principally a bunch of terrorists.

The problem there is that that implies that what these guys mostly want to do is to blow up building or planes elsewhere around the world, and particularly American buildings and planes. While I have no doubt that there are some among the Sunni militants who want to blow up American buildings and planes right now, and many others who would like to do so later, that is not their principal motivation.

Instead, this is a traditional ethno-sectarian militia waging an intercommunal civil war. (They are also not an insurgency.) They are looking to conquer territory. They will do so using guerrilla tactics or conventional tactics—and they have been principally using conventional tactics since the seizure of Fallujah over six months ago. Their entire advance south over the past week has been a conventional, motorized light-infantry offensive; not a terrorist campaign, not a guerrilla warfare campaign. [emphasis original]

Read the full report here. Thanks to Jason Sorens over at Pileusblog for calling attention to this report!

Here is recent map of the situation from The Economist:

ISIS Offensive Map

A.K.

One Map Says it All

The Wall Street Journal ran this map of the situation in Iraq, with an ISIS offensive having taken Mosul and Tikrit and moving toward Baghdad. Meanwhile, Kurds have seized the city of Kirkuk:

Iraq Map of ISIS OffensivePresident Obama spoke live from the Rose Garden today but had little to add to what the White House has already said. He reiterated that the U.S. would respond but without troops on the ground and only once it is clear that the Iraqi government had a plan to govern more inclusively. Meanwhile, Politico is reporting on what some of the told-you-so’s are saying:

Sen. John McCain (R-Ariz.), the White House’s most persistent foreign policy critic, headed to the Senate floor to lead the charge Thursday, quoting himself from years past to say he’s been right all along.

“Could all of this have been avoided? The answer is absolutely yes,” McCain said, calling for the president’s entire national security team to be fired and warning of Obama, “he’s about to make the same mistake in Afghanistan he made in Iraq.”

“This is the education of Barack Obama, but it’s coming at a very high cost to the Syrian people to the Iraqi people [and] to the American national interest,” said Doug Feith, a top Pentagon official during the George W. Bush administration.

“They were pretty blasé,” Feith said of the Obama team. “The president didn’t take seriously the warnings of what would happen if we withdrew and he liked the political benefits of being able to say that we’re completely out.”

Read more: http://www.politico.com/story/2014/06/president-obama-iraq-107800.html#ixzz34XQRYqjO

 

A.K.

The NFL…a Charity?

As mind-boggling as this sounds, the NFL has a non-profit status. What does that mean? Below, I detail more about the law and what can be expected to occur in the future of the NFL holding such a status.

 

What is the Law?

The IRC, Internal Revenue Code, 501 (c), which details which organizations are exempt from Federal income tax, in rule (6) states that:

“IRC 501(c)(6) provides for exemption of business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues (whether or not administering a pension fund for football players), which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.” (emphasis added)

This means that the NFL does not make a profit and therefore cannot be taxed by the federal government. Although individual teams make money, the league itself does not.

 

In even simpler terms what does this mean?

  1. If NFL employees, like Commissioner Roger Goodell, stay at a hotel Saturday night before a Sunday morning game–they cannot be charged tax.

 

  1. Even though the NFL has a revenue stream of an estimated $20 billion, it makes no profit. After paying the executives, lawyers and donating money to other charities there are no profits. Yes, The NFL’s commissioner was paid $44.2 million in 2012. But, no business income taxes were paid on that money.

 

  1. The $35.9 million for the NFL headquarter office in Manhattan was paid for from league revenues and that money was never taxed.

 

To be clear, the NFL is not the only beneficiary from the professional sports clause of the non-profit law. The NHL and some pro-golfers also enjoy the benefits of no federal income taxes. The NBA never had non-profit status and the MLB gave it up in 2007 in what they claim was a tax-neutral move. I highlight the NFL here due to its increasing popularity.

Background behind the Law

Without the legal jargon, the IRC 501(c) code further states that the professional football league was added to the described non-profit organizations on November 8, 1966 and the NFL should not fear an antitrust challenge by the Clayton Antitrust Act or the Federal Trade Commissions Act.

These two acts prohibit business practices that deprive consumers of the benefits of competition, often resulting in higher prices for products and services. When the American Football League and National Football League combined to form what is now known as the NFL, in 1966 (note the year), lawyers for the NFL feared that the Clayton Act would prohibit them from merging to form one league. More specifically, the Clayton Act prohibits mergers and acquisitions that lessen competition and increase prices to consumers. To successfully avoid this law, the NFL filed for non-profit status, which exempt them from any antitrust challenges by the Clayton Act.  They were allowed to file under non-profit status  since the NFL serves more as a “trade association”, which means it promotes the interests of clubs. For example, they create industry standards, develop benchmarks for companies to use, lobby the government etc.

Therefore, the NFL not only avoided (and still avoids) paying federal income tax, while also being allowed to merge together with the AFL to form one powerhouse organization.

Why the General Public should be Upset

If the AFL and NFL still existed, they would compete for good football players (and more importantly, fans/consumers). Assuming that both leagues had the same product (i.e. equally good football players and football operations), teams would have to compete for the same fans based upon the prices of tickets. If there are the same products being offered by two different companies, where would you chose to buy from? Usually, if not always, you would choose the cheaper product.

In other words, the non-profit law allowed the merger between the AFL and NFL to occur, which exempt them from antitrust regulations, thus eliminating the incentive for firms to keep costs (including ticket prices) down.

Further, most of the revenue of the NFL comes from annual dues each team pays to cover operating expenses and salaries. The money is generated by teams who benefit from playing in the NFL framework. Without the NFL stamp of approval, a stand-alone professional football team stands little chance to make money, today. But, it gets even worse. The teams write off these dues as “charitable donations.” Although each individual NFL team pays taxes, their tax burden is greatly reduced by paying their parent organization, the NFL, dues.

Not to mention, most of these “dues” that the 32 NFL teams pay to the NFL organization are given back to teams through low-interest loans (lower than what a private bank would give) for stadium improvement. So, this untaxed money is not for “profit”, yet it certainly helps private individuals (NFL team owners). Doesn’t that violate the non-profit law? Lastly, the public pays for stadium improvements through local taxes that are earmarked for professional sports or through additional tax breaks.

Why the NFL believes it should have non-profit status

Alternatively, a point that the NFL’s team of intelligent and skillful lawyers make is that the 32 teams in the league are all competitive and that the team markets overlap, therefore the NFL does not violate antitrust laws. For example, the New York Giants and New York Jets play in the same stadium and therefore, have the same fans to compete for. Competing for consumers will bid down the prices of tickets and merchandise. This is one unique part of the New York market, but one can even imagine Charlotte and Atlanta, although four hours apart, compete for the fan base that is directly two hours away. (Not only do firms compete for fans in the immediate geographic region, but with Internet and cable expansion firms compete across regional boundaries as well.)

 

Further, the NFL believes that it does function as a trade association—it creates intellectual property, licensing logos and merchandise as well as negotiation for television contracts.  However, don’t all private businesses that make “profit” create intellectual property, logos or merchandise as well as negotiate successful media contracts?

 

What is the future for this law?

Senator Coburn from Oklahoma first brought the PRO Sports Act, which is the Property Reducing Overexemptions for Sports Act, to Congress in September 2013. His report suggests that this tax loophole is worth $10 million a year and over $109 a decade. There is a simultaneous bill on the table from January 2014 in the House of Representatives by Representative Chaffetz from Utah. However, the NFL pays major money each year to lobby Congress on the non-profit status of the NFL and thus this bill has been stalled.

 

Phillip Hackney, a former IRS lawyer and now LSU law professor believes that pro sports leagues violate the tax code:

“If there is a justification for providing tax exemption to business leagues, it would be they operate for the public purpose of aiding commerce for all within a broad segment of some type of business or business in general. Commerce is important to our country, and we should encourage those who are working on it in a rather publicly minded manner. These (sports) organizations, in my opinion, are anything but public-minded in their profit interest. They are focused on the profits of their franchises.” (emphasis added)

However, I believe that Ken Berger, the president and CEO of Charity Navigator, a company that evaluates charities, sums the NFL non-profit status up perfect:

“Nonprofit status is typically given to groups that deliver services that private-sector companies are unwilling or unable to provide. The NFL stretches that definition.”

So, is it a stretch to say that the NFL is a charity?

 

Obamacare Trend = One Big National HC Exchange?

Politico is reporting an ironic trend in the U.S. health care market. What was intended to be 50 individual state-based health care exchanges is increasing trending toward one federally-run health care exchange. Thirty-six out of 50 states are already in the federal exchange and Politico reports that more states are considering dropping their own efforts and jumping into Healthcare.gov. This is a strange turn of events given that the federal exchange was meant to be a back-stop for states which could not or would not do the work of establishing their own exchanges.

Back when the ACA first began to go into effect, it looked as though some state-run exchanges were doing well and the federal exchange was floundering. It seemed that all anti-Obamacare politicians needed to do was let the feds handle the exchanges required under the law–and fail. For now anyway, the roles have reversed: states that opted to do their own exchanges are experiencing trouble as the federally-run exchange shows progress. Politico reports that:

Nevada in mid-May became the latest to scrap its system and opt into HealthCare.gov. A few days earlier, Oregon had bailed on its $250 million exchange. Massachusetts is still trying to salvage its exchange, but it’s also laying the groundwork to join HealthCare.gov.

Hawaii and Minnesota both insist they are moving ahead with their underperforming exchanges; skeptics predict they’ll have to jettison them and join the federal system sooner rather than later. And some small states with high-performing exchanges may have trouble keeping them over the long haul as federal financial support ends.

Connecticut’s exchange performed so well that Maryland wants to buy it and graft it onto its own broken one, but even the director of Connecticut’s exchange, Kevin Counihan, doubts that all the small states will be viable. “There’s going to be some consolidation there, some going to the federal exchange,” he predicted. “We don’t need 50 of these. And having this really functional federal exchange is really very, very desirable.”

Read more: http://www.politico.com/story/2014/06/republicans-obamacare-states-healthcare-gov-107290.html#ixzz33WzRLGLY

California and New York still appear to be on track. But could we end up with one national exchange + California + New York? That’s still not a single-payer system, but it is much more centralized than many Obamacare proponents would have dared hope for. A national exchange system could produce some considerable economies of scale (perhaps) by decreasing duplicative infrastructure. But there are costs worth considering as well. Greater centralized policy making could magnify the effects of policy error. As I said in a discussion of the Consumer Financial Protection Bureau: “Uniform [national] regulation…could impede discovery of best practices and the potential for individual state-level error could become nationwide error if (when?) regulators ‘get it wrong.’” Of course, as recent history shows, who knows what the health care landscape will look like even a year from now.

 

A.K.

Take a TIP Before They Vanish: New Minimum Wage Law

As A.K. mentioned in his earlier post, Seattle bumped up the minimum wage to $15 which has caused quite the firestorm in media.  Washington State previously had one of the highest minimum wages at $9.32/hour, much higher than the federal minimum wage of $7.25 which was last passed in 2009.

One interesting piece of this legislation is that ALL tipped and non-tipped workers will have to be paid $15/hour or more starting in 5 years! Waiters and waitresses, who approximately receive $2-$3/hour and tips to supplement their base minimum wage pay, will be included in the new law.

Minimum wage for tipped employees has been stagnate at  $2.13 since 1991, with federal legislation requiring that employers are supposed to make up the difference if tips do not equate to the legal minimum wage. Some workers will have employers boosting their wages when nights are slow (as required by law), whereas others make well over minimum wage on good nights. President Obama in his plan to change the federal minimum wage to $10.10 by 2015 also pushed for the tipped minimum wage to be 70% of the full wage. Congress has fought this legislation, but that does not mean states, like Washington, have not already started to enact these changes.

This leaves a few questions to ponder: Would people stop tipping with salaried waitresses and waiters? Will the quality of service at a restaurant decrease? Will food prices rise? Here are some potential issues that I see:

 

More Tasks Could be Automated Leading to Job Loss

Tasks like ordering could be automated to I-Pads on each table with a button to press when a server must be present for a specific question.  Bolt Burgers, in Washington D.C., already has a pretty impressive ordering system that is fully automated which allows you to choose from 25 potential toppings. However, automated tasks are also being brought to quality restaurants in Palo Alto, such as Calafia run by Rajat Suri.

“It costs about a dollar a day per table, it can even go lower depending on if you have sponsors involved because all the alcohol companies want to get involved,” Suri says. “For that, they get about $6 a day per tablet in increased sales. That’s extra desserts, appetizers, drinks. They get about another $5 in extra table turns. If you can fit in one more table per night, that’s worth a lot of money. And some restaurants, though not Calafia, get about $4, $5 extra because they choose to save labor.”

This restaurant device, called the Presto, was designed to engage younger generations who desire all things digital. With new minimum wage laws for tipped employees they may become a cheap alternative to hired labor.

presto_615

A Decrease In Hours and Quality of Food Service

Even without automated systems, jobs could be cut and workload increased at restaurants. If servers are still desired by consumers and restaurateurs cannot afford to pay 6 employees all $15/hour then perhaps only 2-3 workers will remain employed. As one restaurateur in Virginia stated, higher wages will “minimize the need for staff”.

With fewer servers, each server will take on more tables and service could slow down. The Boston Globe reports that “diners doled out some $40 billion in gratuities in 2012” which may shrink with a decline in service. Further, customers may not feel as compelled to make up for low wages with an increase in hourly pay to $15/hour.

 

Cost of Food Increases and Restaurant Expansion

As Alan Greenblatt points out, “Consumers can be sensitive to price changes” and when eating out, most meals cost more when they are waited on by servers. Nancy Laird, owner of a high-end restaurant in New Jersey, stated:

“If this minimum wage is raised, we will have to raise prices. We will of course meet some customer resistance and because of customer resistance we will have fewer revenues and thus fewer employees.”

Laird’s explains how a snowball effect that can happen. If consumers stop eating at restaurants due to an increase in prices, restaurants may lower prices to encourage food sales, but supplement the increased costs with lay-offs of servers.

A New Jersey businessman from the same article, whose company owns 40 Applebees and 7 other restaurants, said an increase in tipped server wages would be “devastating” and would force his company to reconsider expanding in New Jersey. “Labor costs are huge dollars to a restaurant operator”.

 

Less “Freebies” for All

In a city like San Francisco, where there is a large restaurant scene, restaurants are choosing to skimp on the extras such as nice tablecloths and bread and butter for consumers. When asked about the new laws increasing wages for servers in San Francisco one restaurateur stated:

“It’s very, very expensive to run any sort of restaurant in San Francisco,” says Patricia Unterman, a longtime restaurateur and food critic in the city. “The cost of doing business here, especially for labor-intensive operations like restaurants, almost doesn’t pencil out.”

There are fewer benefits for servers and employees who receive the increase in wages, too. SeaTac, which is a city in Washington that already has seen the $15/hour wage increase start at the beginning of the year, has employees less than pleased at the new law. Tim Worstall from Forbes writes about a conversation one had with a SeaTac employee:

‘“Are you happy with the $15 wage?” I asked the full-time cleaning lady.

“It sounds good, but it’s not good,” the woman said.

“Why?” I asked.

“I lost my 401k, health insurance, paid holiday, and vacation,” she responded. “No more free food,” she added.

The hotel used to feed her. Now, she has to bring her own food. Also, no overtime, she said. She used to work extra hours and received overtime pay.

What else? I asked.

“I have to pay for parking,” she said.

I then asked the part-time waitress, who was part of the catering staff.

“Yes, I’ve got $15 an hour, but all my tips are now much less,” she said. Before the new wage law was implemented, her hourly wage was $7. But her tips added to more than $15 an hour. Yes, she used to receive free food and parking. Now, she has to bring her own food and pay for parking.’

 

Minimum wage laws, especially this particular law designated for servers, may have the right intent—to give workers more money, but in reality there are adverse effects that occur to offset or even outweigh any potential gain. Businesses do not just take money from top management and give it to waitresses and waiters. Instead, changes will occur in terms of employment numbers, quality of service, tips that customers willfully give, prices of food for customers, number of new restaurant job openings and amenities such as free parking or food during shifts. When a new legislation is enacted, the effect usually is less mild than imagined. There is a ripple effect that occurs that can leave workers worse off than the legislation originally intended.

Seattle’s New Minimum Wage Law

The Seattle City Council recently unanimously voted to raise the city’s minimum wage to $15 and hour, the highest in the nation. The law also contains a provision exempting minors from the new minimum. It is a stylized fact in economics that higher minimum wage mandates lead to increased unemployment as the marginal worker (the worker not quite productive enough to make such a wage cost-effective for his/her employer) is displaced. Since the marginal worker is the worker most likely to be stuck at the lowest end of the pay scale and thus the intended beneficiary of such a policy, the fact that this is the worker most likely to be out of a job following a wage rate hike is somewhat perverse.

On the other hand, many proponents of the minimum wage (and advocates for much higher minimums) argue that most workers will keep their jobs at a higher wage rate which will improve the quality of their lives. They cite studies that show that the displacement effect is minimal and eclipsed by the overall benefits of paying a “fair wage” or “living wage.”

The Seattle experiment in wage rate regulation should provide yet another opportunity to test the effects of this type of labor market policy. In the meantime, I leave you with this informative Intelligence Squared debate on the motion “Abolish the Minimum Wage”:

The first attempt at establishing a national minimum wage, a part of 1933’s sweeping National Industrial Recovery Act, was struck down by the Supreme Court in 1935. But in 1938, under the Fair Labor Standards Act, President Franklin D. Roosevelt signed into law a minimum hourly wage of 25 cents—$4.07 in today’s dollars. Three-quarters of a century later, we are still debating the merits of this cornerstone of the New Deal. Do we need government to ensure a decent paycheck, or would low-wage workers and the economy be better off without its intervention?

For: James A. Dorn
For: Russell Roberts

Against: James Bernstein
Against: Karen Kornbluh

 

A.K.