Ivan Osorio

Yes, Pensions Did Help Push American Airlines into Bankruptcy

by Ivan Osorio on February 6, 2012 · 0 comments

in Economy, Employment, Labor

I generally hold John Tamny’s analysis of economic matters in high regard, so I was surprised to find his take on the American Airlines bankruptcy to be oddly lacking.

In his latest Forbes column, Tamny argues that it wasn’t its pension obligations, but monetary policy, specifically the weak dollar, that pushed American Airlines into bankruptcy.

The immediate reason he cites is high fuel prices, which are caused by the fact that oil is priced in dollars in the global market. High fuel prices have hit nearly all airlines hard, not just American. As Tamny himself notes, “Southwest Airlines was one of the few carriers that properly hedged its exposure to fuel prices that were set to go through the roof.”

What does set American Airlines apart is its pension and labor costs.

American’s pension liabilities are so enormous, at $10 billion, that to deny they were a major factor in the airline’s bankruptcy is contrarian to the point of absurdity. Tamny argues that those liabilities didn’t drive American to bankruptcy based on the notion that they would have been reflected in the airline’s stock price. However, that argument fails in the face of the dodgy accounting which many unionized companies with defined benefit pensions apply to those pensions. Information cannot get out into the market when it is suppressed or obscured.

Then there are labor costs, on which American spends $800 million more a year than its main competitors.

Finally, there’s the problem of management decisions that simply go awry. In that regard, last weekend’s interview of Alaska Airlines CEO Bill Ayer in The Wall Street Journal is worth reading. All too often, airlines place too much focus on gaining greater market share—usually through debt-fueled growth—and not enough on common sense strategies such as working to reduce per-mile costs.

U.S. Economic Freedom Declines as Regulations Increase

by Ivan Osorio on January 12, 2012

in Deregulate to Stimulate, Economy

Economic Freedom in the United States declined over the past year, according to the newly released 2012 edition of the Heritage Foundation/Wall Street Journal global Index of Economic Freedom. It’s not hard to find the culprit.

As Nick Schulz points out at the Enterprise Blog, “regulation is a growing problem for small companies.” He cites the Dismal Scientist (at Moody’s), which point out, “The most small firms since the late 1990s have begun citing regulation as their biggest problem. Regulation is poised to surpass taxes in the survey, which is rare.”

One major source of regulatory anxiety for businesses is the Affordable Care Act (ACA), better known as Obamacare. Implementation of Obamacare will entail a major regulatory enterprise, and it’s being done badly, according to new Mercatus Center study. The study’s authors, Christopher Conver Jerry Ellig, studied eight key Obamacare rules. They found “that the regulatory impact analyses (RIAs) for these regulations were seriously incomplete, often omitting significant benefits, costs, or regulatory alternatives. Analysis of equity was cursory at best.”

While distressing, that shouldn’t be surprising. As CEI’s Wayne Crews notes in his annual survey of the federal regulatory state, Ten Thousand Commandments: “[A] problem with cost-benefit analysis is that it largely amounts to agency self-policing. Agencies that perform ‘audits’ of their own rules would rarely admit that a rule’s benefits do not justify the costs involved.”

We are stuck in a regulatory recession. Getting out of it will require pushing up our economic freedom ranking. Unfortunately, the current administration shows no intention of doing that. As Wayne also likes to say, you don’t need to teach the grass to grow; you just need to take the rocks off of it. (Thanks to Iain Murray for the Heritage and Enterprise Blog links.)

Rules for Dictators

by Ivan Osorio on January 10, 2012

in Economy, Personal Liberty, Politics as Usual

What makes for a successful dictator? In their new book, The Dictator’s Handbook: Why Bad Behavior Is Almost Always Good Politics, Alastair Smith and Bruce Bueno de Mesquita, both professors of politics at New York University, offer some basic guideposts on how to gain and maintain power — though not necessarily in a despotic setting. Seeking loyal aides, for example, can also serve politicians in democracies pursuing liberal ends. Gaining and maintaining power, however, requires illiberal measures that clearly don’t belong in a free society. In a recent online interview in The Economist, Smith outlines one such tactic: the denial of economic freedom.

It is virtually impossible to find any example where leaders are not acting in their own self interest. If you are a democrat you want to gerrymander districts and have an electoral college. This vastly reduces the number of votes a president needs to win an election.  Then tax very highly. It’s much better to decide who gets to eat than to let the people feed themselves. If you lower taxes people will do more work, but then people will get rewards that aren’t coming through you. Everything good must come through you. Look at African farm subsidies. The government buys crops at below market price by force. This is a tax on farmers who then can’t make a profit. So, how do you reward people? The government subsidises fertilisers and hands it back that way. In Tanzania vouchers for fertilisers are handed out not to the most productive areas but to the party loyalist areas. This is always subject to the constraint that if you tax too highly people won’t work. This is the big debate in the US. The Republicans are saying that the Democrats have too many taxes and want to suppress workers. But when they were in power five years ago they had no problem with taxing and spending policies, but now it’s taxing their supporters to reward Democrats.

Some people might react to Smith’s litany of statist outrages, saying, “I would never do things like that if I ran for office.” The problem is that many who have done such things while in office probably thought that once, too. As public choice theory makes clear, government officials, whatever their pretenses, don’t check their self-interest at their office’s door. Thus, economically insane policies may actually benefit somebody: those who enact them.

New York MTA Contract Negotiations Show Dangers of Binding Arbitration

by Ivan Osorio on January 10, 2012

in Economy, Labor

In most jurisdictions, government employees responsible for public safety and other essential government services are not allowed to strike. In exchange for unions giving up the strike weapon, states and localities have agreed to submit such union contract negotiations to a third party arbitrator in case of an impasse.

This has proven a bad deal for taxpayers, as government employee unions have used the binding arbitration process to gain ever more generous pay and benefits. That’s because an arbitrator will never give anything less than management’s final offer. So, even when local elected officials do not agree to more generous compensation, the union comes out ahead.

This scenario now threatens New York City’s Metropolitan Transit Authority (MTA), whose contract with Transport Workers Union Local 100, covering 38,000 bus and subway workers, expires on Sunday. New York, like other localities in the current struggling economy, needs to find savings, and labor costs account for 70 percent of the budget. So what is the union to do?

The Manhattan Institute’s Nicole Gelinas presents a possible scenario in The New York Post:

A walk-out like that of December 2005 would be illegal. Last time around, as punishment, the union lost its right to automatically collect dues from workers’ paychecks, which crippled union finances. A repeat offense so soon makes it less likely the courts would restore those privileges after just a couple of years, as they did last time. And public support is hardly assured.

Yet the MTA might still snatch defeat from the closing doors of victory.

How? By agreeing with the TWU to disagree, and sending the whole thing to an independent “arbitration” panel. That’s how the last contract came to pass — which allowed for 11.4 percent raises over three years, even though inflation has been less than half that.

Binding arbitration essentially gives union negotiators a backup tool for maintaining the upward ratchet effect on wages that government unions generally create. As long as it remains an option, state and local governments will continue to face needless difficulties in bringing their finances into order. (Thanks to Iain Murray for the NY Post link.)

For more on public sector unions, see here and here.

Judge Upholds Michigan Union Power Grab

by Ivan Osorio on January 5, 2012

in Economy, Employment, Labor

A federal judge in Michigan has denied class action status to a lawsuit brought by a group of independent child care workers who objected to be forced into paying union dues. The Associated Press reports:

A federal judge in Grand Rapids has issued two key rulings, including a recent decision that said there simply are too many conflicts to make it a class-action case. Judge Robert Jonker (YONK-er) says there may be child-care providers who had no objection to paying dues.

Well, there are undoubtedly child care providers who do very much object to paying union dues, so much so that they filed suit — a common interest if there ever was one. Yet under Judge Jonker’s reasoning, apparently the willingness of some union members to pay union dues is enough to force others to do so.

Unfortunately, we can expect to see more efforts to corral government contractors into unions, as unionization shifts away from the private sector into government employment. Two years ago this month, the number of union members who work for government entities surpassed that of union members for private businesses. With good reason, a lot of labor leaders see the public sector as key to their unions’ future.

However, the huge budget problems that now beset governments in the United States at all levels make expand the government workforce more difficult. So what to do? Expand the definition of public to include anybody who receives any sort of state aid in the provision of social services such as home care for children or seniors. Thus, home care providers who work as independent contractors get reclassified as “public” employees and get union “dues” taken out of their state checks before they get them.

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Rhode Island’s Bold Pension Reforms Point the Way Forward

by Ivan Osorio on January 5, 2012 · 2 comments

in Bailout Watch, Economy, Employment, Labor

To describe pension reform, Utah State Senator Dan Liljenquist put it best: “This is not a conservative-versus-liberal issue, this is a reality issue.” Liljenquist helped his state face up to the reality of its underfunded public employee pensions by leading a successful reform effort. Utah is a fairly conservative state, but some far more liberal states are also tackling their pension problems — and not just to prove Liljenquist’s point.

Rhode Island lawmakers have been especially bold. Thus, the Manhattan Institute’s awarding of its Urban Innovator award to Rhode Island State Treasurer Gina Raimondo is well deserved. As the Manhattan Institute’s Josh Barro explains in the Washington Examiner:

Before reform, Rhode Island had one of the largest pension funding gaps in the country, relative to its size. Absent reform, the state would see required pension contributions double in two years. While other states could kick the can down the road, Rhode Island had no choice but to clean up the mess.

Raimondo put forward a plan that would get the state’s pension costs under control and reduce the risk that further funding gaps would appear in the future. In order to do this, her plan had to differ in a few ways from those seen in most states.

First, reforms apply to future earnings by existing employees, not just to new workers. Unlike in states that have limited pension reforms to new or non-vested employees, this means that Rhode Island will start realizing substantial savings immediately because of the lower cost of the new system.

Second, investment risks in the reformed pension plan will be shared between employees and the government. In a traditional defined-benefit plan, employee benefits are fixed and taxpayers bear all investment risk, which is how states have ended up with such large unfunded liabilities.

In Rhode Island, new pension benefits will be split between a defined-benefit plan and a 401(k). Additionally, the defined benefit will include a cost of living adjustment mechanism that exposes workers to a portion of the pension fund’s over- or underperformance.

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Public Pensions Fuel Government Growth

by Ivan Osorio on January 4, 2012 · 1 comment

in Bailout Watch, Economy, Employment, Labor

The straitened finances afflicting state and local governments across the nation have brought unprecedented scrutiny to government employees’ compensation, particularly pensions. As pro-market critics have pointed out how generous many public pensions are, government union representatives have pleaded poverty in response.

Today in The Wall Street Journal, Andrew Biggs of the American Enterprise Institute and Jason Richwine of The Heritage Foundation, say, “Not so” to such pleas of poverty. They do so by comparing defined benefit pensions to defined contribution retirement plans, such as 401(k) accounts.

Complex formulas obscure the fact that public pensions typically are much more generous than 401(k)s, making the situation ripe for misleading claims.

A case in point is the Illinois Teachers Retirement System (TRS), which insists that, because Illinois teachers don’t participate in Social Security, the average teacher’s pension of almost $43,000 “cannot qualify as ‘too generous.’” One might assume from such a statement that the typical Illinois teacher who retires this year after a full career will collect $43,000 per year. Not so. That average figure reflects the pensions of employees who retired years or decades ago, as well as individuals who worked only part of their careers in public schools.

The 2010 annual report for the TRS actually shows that the average teacher who retires today after 30 to 34 years of service had final earnings of $84,466 and collects a pension of $60,756 a year, plus annual cost-of-living adjustments, providing an income higher than 95% of retirees in Illinois.

These sums — and the strain they put on government finances — need to inform the debate over public pensions. But reformers need also to keep in mind the political implications of overly generous government pensions.

Generous pensions allow union-friendly politicians to satisfy their labor supporters’ demands while pushing those demands’ costs well into the future. Taxpayer resistance to increased spending is less powerful when politicians hide the spending through years-long delay. And that delay is one of the tools that have allowed government employee unions to become the permanent lobby for ever expanding government that they are today.

For more on pensions, see here.

NLRB Drops Case against Boeing – Finally

by Ivan Osorio on December 9, 2011 · 1 comment

in Deregulate to Stimulate, Economy, Employment, Labor, Regulation

Today, the National Labor Relations Board (NLRB) announced that it has decided to drop its case against Boeing, over the airplane manufacturer’s opening of a plant in South Carolina, a right to work state. The International Association of Machinists and Aerospace Workers (IAM), which originally brought the complaint, asked the NLRB to drop the case after an overwhelming majority of its members approved a contract that increases production in Seattle.

While the NLRB’s announcement today is good news for Boeing workers in South Carolina who saw their jobs threatened, this case should never have gotten as far as it did. By agreeing to pursue the IAM’s complaint over the South Carolina plant, the NLRB set a destructive precedent. The Board functioned as a negotiating weapon for the union to pressure the employer, over a matter on which labor law has no bearing: where to locate.

Unless Congress reins in this agency, unions will now have every reason to take their disputes with employers to the NLRB, which, by taking on the IAM’s complaint over a plant’s location, has signaled that just about anything is fair game.

For more on labor, see here.

California Supreme Court Rejects Union Suit to Bar Private Contractors from Golden Gate Project

by Ivan Osorio on November 21, 2011

in Economy, Employment, Features, Labor, Mobility

Post image for California Supreme Court Rejects Union Suit to Bar Private Contractors from Golden Gate Project

Last week, the California Supreme Court rejected a suit by a government employee union, the Professional Engineers in  California Government, that sought to bar state and local transportation officials from hiring private contractors to work on the rebuilding of the northbound approach to the Golden Gate Bridge.

This decision is a welcome victory against the phenomenon known as “in-sourcing,” which involves government taking over functions that could performed by private contractors and handing them over to government employees.

Thus, in-sourcing fuels government growth directly by increasing the number of government employees. It also fuels government growth indirectly, by providing new potential members for government employee unions, which in turn can use the increased dues revenue to lobby for bigger government.

The decision is also sound because it promotes the sort of private-public partnership that makes economic sense. As CEI’s Marc Scribner notes in an Issue Analysis on the topic, not all private-public partnerships are created equal. In the real estate sector, they have led to undue government encroachment upon the market. In the transportation sector, on the other hand, they have brought market forces into government projects.

In the case of surface transportation infrastructure, innovative new private-sector ? nancing, management, and ownership regimes have much to offer in terms of minimizing taxpayer exposure, capturing user revenues, and creating an ef?cient transport network. In contrast, government’s recent expanded role in real estate development has increased taxpayer exposure to risk, socialized costs, and concentrated the bene? ts into the hands of select private developers and special interests.

For more on labor, see here and here.

For more on transportation, see here and here.

Barone is Right: Appeasing Protectionists Is a Bad Idea

by Ivan Osorio on October 5, 2011

in Deregulate to Stimulate, Economy, Labor, Politics as Usual, Trade

President Obama is finally sending three pending trade agreements — with South Korea, Colombia, and Panama — to Congress for a vote. The three trade deals were ready for this moment before Obama entered the White House. So what’s taken so long?

Quite simply, as Michael Barone notes in his Washington Examiner column today, the president wanted to avoid angering his political allies in organized labor.

[Obama] could have sent [the treaties] 985 days earlier; negotiations were completed in 2006 and 2007. Or, if he were concerned they’d be deep-sixed when his fellow Democrats controlled Congress, he could have sent them 274 days earlier when Republicans took over the House.

To be sure, they are opposed by many labor union leaders and congressional Democrats. There is a nostalgia among many union and party old-timers for the days, more than 30 years distant, when the auto and steel workers’ unions had nearly 2 million members.

Now each has less than half a million. But the old-timers seem to feel that somehow something like those olden days can be brought back if they oppose FTAs.

Indeed. In the new CEI OnPoint, “Free Trade without Apology,” CEI Adjunct Fellow Fran Smith and former CEI Research Associate Nick DeLong document how  efforts at appeasing organized labor — in the hopes of blunting union opposition to trade deals — have been not only ineffective, but harmful.

Union leaders have taken all concessions they’ve been offered only to ask for more. This has led to trade agreements becoming weighted down with provisions governing labor and environmental issues (to appease environmentalists) which have nothing to do with trade. And those provisions have only gotten longer and more onerous in each subsequent agreement.

Organized labor’s success in getting labor issues included in trade negotiations is a relatively recent phenomenon. The 1985 U.S.-Israel free trade agreement was the last American trade deal that did not include labor and environmental provisions. Since that time, the U.S. has entered into 10 free trade agreements covering 17 countries.

Eight years after the Israel agreement, the Clinton administration, as part of a deal to ratify the North American Free Trade Agreement (NAFTA), pushed Mexico and Canada to sign the North American Agreement on Labor Cooperation (NAALC) and North American Agreement on Environmental Cooperation (NAAEC) as side letters to the trade pact. That was the first time that labor and environmental objectives were directly linked to international trade negotiations. From that point onward, interest groups of various stripes have lobbied hard to include a host of irrelevant political agendas in trade negotiations. Organized labor and environmental groups have been especially active in this effort.

The NAFTA labor provisions were still not enough to satisfy Big Labor. Four years after the labor cooperation agreement was passed, the AFL-CIO stated in a public comment that the agreement had been “ineffective in promoting the concerns of workers beset by stagnant wages and job insecurity.” Rather than appease, the NAFTA labor provisions only whetted the union leaders’ appetites. To this day, unions continue to pressure Congress for more stringent labor obligations in current and future agreements.

It’s time to end this game, which only advantages protectionist lobbies.

For more on trade, see here and here.

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