Competition is Good, Cartels are Bad, and so too are Unions

As a lifelong liberal, I’m firmly of the opinion that America needs to do more to shore up its middle class. I’m strongly in favor of taxing the rich, cutting taxes on the middle class, increasing the EITC (or at the very least increasing the minimum wage), and beefing up social services such as public healthcare, education, and childcare. And yet, one area I part ways with my fellow liberals, is on the topic of unions. They terrify me.

To explain why, we need to look at a very different topic that has far more to contribute to this conversation – antitrust legislation. Overruling libertarian objections and passing antitrust legislation is one of the best things to happen in recent economic history. Competition brings out the best in companies. They are forced to operate at the best of their ability, at the highest possible level of quality, and be the most productive they can be.

And conversely, this is exactly why monopolies and cartels are so bad for both the economy, and for anyone unfortunate enough to deal with them. Without any external competitors to worry about, monopolies and cartels are free to gouge their customers. To offer subpar quality. And subpar customer service. If not immediately, then certainly over time. 

This is exactly why monopolies and cartels are bad and should be actively broken up by the government. Under recent administrations, particularly under the Republicans, antitrust legislation has been increasingly watered down and made toothless. For the sake of our economic vitality, I pray that the FTC will once again be made into a force to be reckoned with. But I digress.

People often assume that a monopoly refers only to corporations, but that’s not the case. Unions too are monopolies. A monopoly of labor services. Or if you prefer a different framing, a cartel“a group of independent market participants who collude with each other and act as if they were a single producer and thus can regulate or manipulate prices without competition”. Their immediate customer is the company that depends on their labor. And ultimately, their bill is paid by society as a whole.

Despite the above, some curious differences exist. While laws exist to actively prevent corporate monopolies and cartels, no such laws exist to actively prevent unions. In fact, the laws go a step further and prevent corporations from avoiding cartels. 

For example, suppose you as a consumer weren’t happy with your internet service provider, and so, decided to never do business with them again. In fact, you go a step further, and resolve where possible to avoid all companies that are part of a cartel. Nobody would bat an eye. But suppose you as a manager or business owner weren’t happy with the union’s demands and behaviors, and so, decide to lay off your union workers and work only with non-union workers. You would actually be in breach of current laws, which state that you can never enforce a “I don’t work with unions” policy.

In fact, the laws even go one step further. Suppose as a consumer, your ISP demands a drastic increase in your monthly bill. You refuse to accept this increase in prices. Your ISP responds by cutting off your internet service. And you respond in kind by ending your contract with them and signing up for a different ISP. All perfectly reasonable. 

But suppose as a business owner, your union employees demand changes in the way you hire, fire or promote people. You refuse their demands, and they respond by going on strike and not coming to work. You contemplate firing them, and keeping on your payroll only people who are regularly working. Once again, your lawyer tells you that you aren’t allowed to do any such thing. Where union strikes are involved, American laws literally make it illegal to fire employees who are refusing to work.

In any other context, we would use antitrust legislation to break up anti-competitive behaviors such as price-fixing or market-allocation. In any other context, our legal system would at least pay lip service to enforcing a free market with vigorous competition. And yet, in the context of unions, we do the exact opposite. We rig the deck in favor of creating cartels and reducing competition.

Where Unions Do and Don’t Make Sense

In certain contexts, I can perfectly understand the rationale behind such a policy. If you’re living in a steel town with a single steel mill, unionizing all the workers would provide an appropriate bulwark against the incredible power wielded by the single employer. The company needs its workers and its workers need the company. Neither side can thrive without the other, neither side has much in the way of other options, and both sides are forcefully locked in with the other. Given the lack of competition that defines this small mining town, having two monopolists facing off against each other might be the best balance we can hope for.

But consider if you’re living near a city and working as a programmer. There are tens of companies that you could potentially work for. If any of them don’t treat you with the respect you’d like, you are free to leave and work for any of the other companies. This is why companies like Google and Facebook and Netflix offer such lavish perks and compensation packages. They certainly aren’t doing it out of the goodness of their heart. They are doing it by necessity of competing against each other for the best talent.

Sidenote: Between 2005 and 2009, many tech companies including Google and Apple were accused of colluding to not recruit one another’s employees. This limited competition and suppressed worker wages. Their behavior was ruled to be illegal, and the companies ended up settling with the Department of Justice, and agreeing to end their practice. It is a travesty however that they were let off with a slap on the wrist.

In a normal situation, the companies too have a similar choice with their employees. If any of their employees are doing a sub-par job, the company has the choice of replacing them with someone else. This is why grossly unproductive employees are the exception, not the norm, at well-run companies – they know that they are competing against each other for the best jobs and wages.

Unfortunately with a union, this dynamic is flipped. Once a significant majority of workers are unionized, the union leadership can make almost any demands they like, and the company has minimal ability to resist it. Replacing performance evaluations with tenure-based promotions and wage raises. Preventing workers from getting fired even if their performance is subpar, or if their role has been made redundant. Restricting competition for new job openings. You name it, it will happen.

Sounds hard to believe? Surely most people in any profession are good honest people who care about doing a good job? And surely their unions would hold similar values, and wouldn’t get in the way of creating a high-functioning workplace? Here’s some real life data, featuring 2 unions in completely different professions, that says otherwise.

Police Unions in America

A court in 2009 convicted Washington DC police officer Michael Sugg-Edwards of sexually assaulting a teenage woman in his squad car. After conducting its own internal investigation, the department quickly fired the then 35-year-old officer.

But, six years later, Sugg-Edwards was back on the force. A provision in the police union’s contract allowed him to appeal against the decision to a union-selected arbitrator who reversed the department’s firing and reinstated him – with back pay.

Such protections for officers who commit crimes are not unique to Washington. About 475 police union contracts at the nation’s largest departments hold similar arbitration provisions, according to a 2019 Loyola University study. Those are accompanied by a startling array of other complex protections that shield officers accused of often violent misconduct from accountability.

It all builds up to form a picture of how police contracts – which, like other labor contracts, govern the working conditions under which officers operate – have rendered police departments’ disciplinary and oversight processes ineffective as officers are rarely held accountable for wrongdoing. That then encourages the police violence that sparked the massive nationwide protests in the wake of George Floyd’s killing by a white police officer in Minneapolis.

“These [contract provisions] tie the hands of police chiefs and others who are trying to hold police officers accountable,” said Carl Takei, an ACLU senior staff attorney focused on police practices. “It makes it very difficult to fire or discipline officers who engage in misconduct.”

Teachers Unions in America

A teacher charged with 23 counts of lewd conduct in his classroom successfully thwarted attempts by the Los Angeles Unified School District to fire him. In the process, the teacher, who is accused of spoon-feeding his semen to blindfolded children, managed to retain lifetime health-benefits provided by the nation’s second-largest school system. 

Former Miramonte Elementary School teacher Mark Berndt also automatically receives nearly $4,000 a month in pension from the California State Teachers’ Retirement System. Investigators were a year away from filing charges against Berndt, 61, when they brought copies of disturbing photos to the school principal on Jan. 3, 2011, according to investigators. Sheriff’s investigators had pictures of boys and girls gagged with tape, blindfolded and some were being fed a milky substance from a spoon.

Building a case for dismissal is so time-consuming, costly and draining for principals and administrators that many say they don’t make the effort except in the most egregious cases. The vast majority of firings stem from blatant misconduct, including sexual abuse, other immoral or illegal behavior, insubordination or repeated violation of rules such as showing up on time.

Although districts generally press ahead with only the strongest cases, even these get knocked down more than a third of the time by the specially convened review panels, which have the discretion to restore teachers’ jobs even when grounds for dismissal are proved. Jettisoning a teacher solely because he or she can’t teach is rare. In 80% of the dismissals that were upheld, classroom performance was not even a factor. When teaching is at issue, years of effort — and thousands of dollars — sometimes go into rehabilitating the teacher as students suffer. Over the three years before he was fired, one struggling math teacher in Stockton was observed 13 times by school officials, failed three year-end evaluations, was offered a more desirable assignment and joined a mentoring program as most of his ninth-grade students flunked his courses.

For seven years, the Los Angeles Unified School District has paid Matthew Kim a teaching salary of up to $68,000 per year, plus benefits. His job is to do nothing.

Teachers unions are there to represent their members. Though they never say it out loud, bad teachers pay dues and have the right to union representation just as much as good teachers. The problem is imagining that teacher’s unions are good stewards of student interests. In fact, students and teacher interests are sometimes, but not always, aligned. The very worst dues-paying teachers union members have interests directly at odds with students. They want to stay in the classroom, which is bad for the kids.

The failure of California’s teachers union to address this problem for so many years is a revealed preference: they’re perfectly happy with existing policy on teacher tenure, layoffs, and terminations, because it’s almost impossible to fire them.

Absolute Power

Once a union is formed, companies will surely try their best to fight against it. But in truth, they have minimal power once unions become sufficiently widespread. The dirty secret behind companies like Amazon or Google – the software systems they rely on are so complex and numerous, that only a tiny handful of people know the ins and outs of any one particular sub-system. And they are so dependent on the occasional manual intervention, that they can’t be counted on to operate completely autonomously over long periods of time. And they are so interdependent that if even a fraction of them stopped working overnight, everything would come to a screeching halt.

Even the most well-run teams have a bus-factor that you can count with your two hands. If a significant majority of a company’s workforce went on strike at the same time, for multiple weeks, the entire company would be brought to its knees. Google as we know it, including Google search, Gmail, Drive, and YouTube, would simply cease to exist.

As employees, we have some choice over the companies we want to work for. But as a collective, companies have no choice whatsoever when it comes to doing business with their union. They are legally prohibited from choosing against unions, by laws that prevent them from hiring/promoting only non-union employees, as well as laws that prevent them from firing union employees even when they are on strike. And they are practically prevented from resisting a union’s demands, by the existential threat that a union strike poses. As with all things in life, this lack of competition ends up hurting the business, the consumers, and eventually, society as a whole.

A Better Solution

Unions are an imperfect solution to a very real problem. We live in a world where a handful of corporations have been allowed to become too big and too powerful. We need to break them up, and create more competition – not just for consumers, but also for employees. Google can and should be broken up into 10 independent companies, and the same applies to companies like Amazon, Facebook, JPMorgan Chase, and Goldman Sachs as well. Antitrust laws exist for a very good reason – we need to do a better job of enforcing them.

We also live in a world where the benefits of economic growth are primarily going to a minority of wealthy investors and executives. We need to further tax the wealthy, and use the revenue to both lower taxes on the middle class, fund a more robust EITC for those working in poverty, and subsidize life necessities such as healthcare and education. Unions are an attempt to solve very real problems… but in very wrong ways.

Choice and competition has always propelled our society forward. It has helped us as individuals to grow. And it has helped our free market to succeed. As consumers, we have seen how dysfunctional companies become when they no longer need to compete for our business. Without any such competition, unions too pose a mortal danger to our continued prosperity and progress.