Airs – Ian Lance Taylor

In an ordinary employer-employee relationship with a large company, the employer has most of the power. When any individual employee seeks a higher wage, he or she has no leverage; for a large company to lose a single employee makes little difference. In the U.S., unions have been a way for employees to get more leverage. The large company can not ignore the effect of many employees working together.

However, many people dislike unions, because unions are only effective when the union members work together. Many people feel that this takes away individual rights, as indeed it does.

It recently occurred to me that there is a different way to look at the issue. Think of the union as a company itself, a special sort of company which operates as a monopsony. When you join the employer, you are actually joining two companies: the employer and the company which provides employees to the employer. The union company and the regular company have a tight relationship, but this is no different from an ordinary monopsony supplier situation, such as is widely found in, e.g., the automotive business. Union companies tend to be more democratic than most companies, but this is not a fundamental difference.

One can of course have multiple union companies providing labor to the parent company. However, it is perfectly reasonable for the parent company to negotiate only with union companies for labor, rather than with individuals. After all, only in exceptional situations would a company purchase non-labor supplies from an individual. Why should labor be any different? Thus the “closed shop” has a clear support: it’s a matter of efficiency for the parent company.

This perspective may remove some of the traditional complaints against unions. They are replaced by a different issue, which is that every employee has two loyalties. However, in reality we all have multiple loyalties in our lives—to our families, our sports teams, etc.

Try thinking of the matter this way the next time you feel angry about unions. They are just doing what regular companies do.

The otherwise completely forgettable movie Larry Crowne had one scene I found quite interesting. The eponymous protagonist, played by Tom Hanks in his blandest mode, is presented as an all-around good guy. He is gentlemanly, helpful, considerate, and in fact has no flaws except for the rather minor one which starts the little action there is in the movie: he did not go to college. In college he studies, among other things, economics, in a class taught by Lt. Sulu.

Studying economics leads Larry Crowne to the one interesting scene: he abandons his mortgage and returns his house to the bank. The bank representative warns him that this will hurt his credit, but he assures her that it is the right thing for him to do, and that he has the right to do it, provided he vacates the house in 30 days.

The U.S. is a country which famously agreed to pay all its debts when it was founded—the newly created federal government assumed the debts that the various states had accumulated during and before the War of Independence. In general American culture assumes that you are required to pay all your debts. Declaring bankruptcy is a sign of personal failure.

Apparently the financial crisis, and the stagnation of middle class income compared with the increasing price of housing, has now made it acceptable for a mainstream movie character to renege on his debt. This is of course a calculation that businesses make routinely, but not individuals. Admittedly voluntary foreclosure is not quite as bad as bankruptcy. After all, the bank does get the house, which is worth something although it is clearly understood that the bank does not want it.

Given the current main news story, I just have to hope that this acceptance of foreclosure does not carry over to thinking it is OK for the entire country to go into default.

A New York Times op-ed column by Edward E. Kaufman Jr. and Carl M. Levin warns that if steps are not taken, “our stock markets will have become a casino.” It seems a bit late for that. While there may still be some predictability to the market in the long-term, in the short-term it is already a casino. Sophisticated investors hold all the power and can easily take outplay the amateurs. As far as I can see the short-term market is wholly disconnected from any underlying financial reality.

During the Reagan administration, the U.S. reduced tax rates and increased defense spending. The national debt as a percentage of overall GDP increased from 32.5% to 53.1% (Reagan called this increase in debt the “greatest disappointment” of his presidency). During the first Bush administration, it continued to rise, reaching 66.1%. During the Clinton administration, the government raised taxes, the economy grew, and defense spending was reduced somewhat; the debt decreased to 56.4% of GDP. During the second Bush administration, again taxes were reduced and defense spending was increased; the debt increased to 83.4% of GDP.

Today fiscal conservatives are arguing that the high levels of debt require that government spending be reduced. At the same time, the plan put forward by Republican representative Paul Ryan, and strongly supported by the Republican House, calls for more tax cuts and higher defense spending. While it’s understood that his plan will not be adopted, it’s hard to see how it can be a serious proposal for debt reduction.

It’s clear that the U.S. has a high level of debt due largely to past steps of reducing taxes while increasing spending. One can argue details back and forth quite a bit, but it’s also clear that the debt has increased significantly under Republican administrations. Fiscal conservatives now argue that the high level of debt shows that the U.S. can not afford social programs like Social Security and Medicare. But while one can argue about increasing health care costs, history suggests that that simply isn’t true. What is true is that the U.S. can not steadily cut taxes without cutting spending.

It’s perfectly consistent to say that the U.S. should be a low-tax, low-service country. But arguments about debt which don’t mention the possibility of tax increases are not telling the whole truth about how the U.S. got into its current situation. What has happened, intentionally or not, is that tax cuts are being leveraged to reduce spending on social programs.

Incidentally, I think most people agree that governments should use tax money to invest in infrastructure. It’s generally most efficient to let the government build and maintain roads and bridges, as they require a large investment and the payback is indirect. I think one could make a good argument that health care is another form of infrastructural investment, an investment in people, which is most efficiently done by government.

It’s interesting that the U.S. economy has moved away from manufacturing at the same time as computers have made it very easy to copy digital goods. We see the U.S. pushing China hard to enforce their copyright laws, because much of what the U.S. has to sell is easily copied. The U.S. has developed great skill at creating complex software. That skill itself is not easily copied, based as it is on many years of experience, but the end result of applying that skill is is difficult to control. Similarly, the U.S. leads the world in developing entertaining movies, but those too can not be controlled once they have been distributed. You can enforce all the copyright laws you want, but if a digital product is both expensive and desirable, it will inevitably be copied.

Software developers have reacted by increasingly tying software to some sort of service. That is a significant business advantage for offering cloud computing: your software works without requiring distribution, which means that nobody can easily copy it. If you’re going to sell virtual goods rather than manufactured ones, it’s important to not distribute them as part of using them. In other words, you have to sell a service.

Right now the U.S. is trying to push other countries to honor the agreements it needs to sell virtual goods. I don’t see how that can work in the long run. Better to focus on selling real goods or selling services. A simple service is vulnerable to competition, but there is plenty of space for selling complex services which are difficult to develop. That seems to be the likeliest trend for successful software companies going forward. It’s even if a possible path for entertainment companies if you think in terms of games.