Friday, November 23, 2012

Bargaining, How It Really Works

Unions bargain for their workers. One thing not really appreciated is the theory of how this is done. Normally the two sides sit down and reach a compromise. In today’s world it is a little different.

When a union sits down to the bargaining table, it is on this premise, “What’s mine is mine, and what’s yours, is up for negotiation. It’s a little like watching a foreigner haggle over the price for a basket of strawberries. Once they settle on price, the customer proceeds to cherry pick the strawberries that go in the basket they are buying—nothing but the biggest and the most colorful.

Many of the best union deals that could have been made are now coming apart. Retirement benefits seem to be a common denominator. In all of the bargaining in the past, the threat of a strike got concessions from management. Now, it looks like thing have changed somewhat. Hostess Brands decides to go into bankruptcy liquidation rather than deal with unions that had it all their way. It’s kind of humorous to watch unions balk at wage cuts. Their reasoning, “Why should the worker have to pay for the screw-ups of management?” Or, “We need a decent working wage.” The union got deal after deal and management was the frog in the pan of water on the stove, getting hotter and hotter. Management acquiesced too many times and all it took was a bad economy, to see how bad the deal was. Any way you look at it, the union leaders look like Ding Dongs and there will be no Ho Ho’s this Christmas. Of course, the Twinkie murder defense will be a thing of the past.

Illinois and California will be the poster children of the new state governments that claim, “We can have it all.” State governments haven’t figured out one simply principle. Raising tax rates does not in turn increase tax revenues. It only implies more revenue. It does however determine where and when people choose to spend their dollars. Can the consumer justify a new car every 5 years when the sales tax is 10 percent?-- Maybe now it will be every 8 years. A company car instead of a wage increase?-- The list goes on.

During the Great Depression many localities raised taxes and all they got were the taxpayer’s keys to their home. Increased taxes were the last straw. Of course it will be different this time. At times I wonder, are we smarter than those people back in the 1930’s or incredibly more stupid? The jury is still out on this one.

The real drain for the states will be retirement funds for state workers, and of course we aren’t even discussing the Federal programs of Social Security, and Medicare.

The California State retirement fund (CalPER's), among others, can only pay 65 cents on the dollar in benefits to everyone in the plan. The way the legislature looks at it is, everyone gets full benefits for the next 10 years and then we have a problem.

FDR even said that government employees should never be unionized, and they are now. Business profits determine if a pay raise is warranted. In a government job, the guiding hand of profits is not there to determine a realistic wage. What our state governments have contracted us to pay as benefits, border on the absurd in some cases. The unions took advantage of our political system, to get benefits that could never be realistically paid on a long term basis. Where does it go from here?

Hostess Brands had a slow death. They couldn’t make a profit and the company folded. In good times the unions asked for more and always got it. This time they asked for more, thinking it was a poker game they could bluff their way through. How many of those 18,000 employees will even find a job? Of those that do, what will be their starting wage?

It’s time for the taxpayers to realize that they have been ripped by these government unions on a more intense level than private industry. We need state employees that will be underpaid and with training, will find better jobs in the private sector. Government is inherently inefficient, let’s reward this inefficiency with lousy wages and low retirement plans.

Where I grew up as a kid, we had volunteer firemen with no 100k retirement plans at age 50. The argument isn’t over whether or not these firemen or police or teachers are worthy of these wages, the argument is over whether or not we can justifiably pay private sector rates for jobs that could be filled for one third of their present cost. There is no problem filling the jobs, it’s the turnover rate that has to be dealt with, that is the trade-off with higher wages. Government unions always want more, Ronald Regan once said no, and meant it.

Of course in California, who runs the government, the unions or the legislature? Do you get the feeling that the unions can run the state into the ground? Of course, maybe they already have, and are keeping quiet--no need to panic anyone.

Copyright 2012 by Jim Brubaker


I've Been Thinking... said...

Most of the time unions do get too much but that was not the case with hostest. The went through 2 bankruptcies in the past 10 years. In the last one, the CEO tripled his salary and everyone from SVP up doubled their salary. As a condition of getting out of BK, the workers gave concessions meant to free up $110 MILLION for the purpose of helping the company catch up on pension obligations and invest in production automation and new product development. The Management didn't do any of it. They spent the money on themselves. Management killed Hostess, not the workers.

Jim in San Marcos said...

Hi I've Been Thinking

If you research into it, it is a little more complex. The first BK didn't solve the company's problems with retirement benefits, it only repackaged it. The CEO and the other 18 employees did try to increase their salary's as you suggested, but the BK judge reduced their pay to a dollar a year. so they never got the raises. They did get about 1.75 million total in raises before this new raise.

With 850 million in debts, the retirement union is second in line for settlement behind creditors.

When times were good, and interest rates were 8% the retirement funds were in stable shape. At the present one percent interest, no fund is in stable shape.

In a bankruptcy of this sort, the retirement agreement for future benefits as I understand it, is unenforceable. There will be benefits paid out of what is already there in the fund, the company is not required to make the retirement fund whole.

I remember when US Airways went BK. A pilot wrote me about his retirement being cut in half. He had just bought a home at age 65 and lost it, that 50K cut was his house payment.

What really killed Hostess was the one percent interest rates and the bad economy. Their retirment plan was severely underfunded at present interest rates.

Anonymous said...

Does anyone find it odd that an employee who saved his entire career by investing in company stock now finds the shares worthless, but the employee who stocked up on twinkies instead can make out like a bandit on ebay?

Jim in San Marcos said...

Hi Anon 12:23

You might have started a new verb--to be "twinked!" ;>)

Anonymous said...

Joseph Oppenheim said...

Of course in California, who runs the government, the unions or the legislature? <<<<<

Normally, I would have mixed feelings about unions especially with teacher's and and other public service unions, however due to the Great Recession, now is the wrong time to challenge them because overwhelmingly they represent middle-class workers, who are central to keeping the recovery going and accelerating it.

The recovery did reach, in my opinion, a self-sustaining mode, recently, led by housing which normally leads a recovery. What is new, is that now, it looks like the self-sustaining recovery has entered an acceleration phase, with the news that CA's recovery is now on solid footing, with the budget now forecast by independent sources to possibly have a surplus by 2014, plus recently released unemployment numbers showing the largest percentage decrease in over 25 years. CA has always been boom and bust, with the busts always coming back to all-time high economic highs. Since CA represents about 12% of the nation, it does look like CA will now accelerate the current slow recovery.

I am no fortune teller....I look at facts....and what is currently happening. The only thing I can see stopping this accelerated recovery is some unexpected catastrophic event......not already known risks like the "fiscal cliff, "Greece," "Gaza," etc.

Anonymous said...


You are right man! too bad Jim is so stuck to his depression thesis that he cannot look at data objectively.
I can already see it now, we will be in a full mode recovery and Jim will say, yeah but the depression is right around the corner.
well, yeah, if enough time passes, we will have a depression but the question is, will we be alive to care about it...
I see this bias thinking with so many of the doom blogs, they did well in the past five years with doom and gloom. However, a few have actually looked at the data in an objective manner(calculatedrisk to name one) and found that the economy is improving and starting to accelerate, ? Jim calls this inflation only.

Jim in San Marcos said...

Hi Anon 12:37

The Great Depression of now is here. 20 percent unemployment is unofficial, but real.

I am not suggesting gloom and doom, I am only pointing out what our government is lying about.

Are you satisfied with a bank interest rate of .5 percent? It will take you 140 years to double your savings. ---Is there any incentive to save money in the present system?

I called a Great Depression back in 2006 and we are in it now. It took a little time. Things are bad and getting worse.

Potato chips 4 dollars a bag, cigarettes $6.50 a pack--they were only a quarter when I started smoking.

If you see a recovery, where is it? --you can print food stamps, but you can't print food.

Anonymous said...

One only has to look at the pleas from food banks for donations or the number of organizations seeking help in providing needy children with a happy Xmas.

Jim - how long do you think this will last?

Jim in San Marcos said...

Hi Anon 8:46

I'm not sure. What we need to see in the market is a pricing for risk. There should be a spread of 3 to 10 percent between Treasury's and risky loans.

I can get 3 percent back on spending using my Visa card and .5 percent on my savings.

With government guarantees, there is no risk in the market. Failure is rewarded with reimbursement guarantees. Its a little like being paid to wet your bed.

The government intervention isn't going to fix this, it is the problem. How do you spend your way out of bankruptcy?

My best guess is 10 years from now, this will all be behind us.

Tyrone said...

On potato chips, yes, the prices are obscene. Money is not really a problem for me, but I find no value in them at these prices, so I no longer even look at that aisle of the store. And I should thank them; who knows what they put into the product.

I just traded an e-mail with a friend on inflation. One product in particular I mentioned...
3lb bag of Taffy purchased in Aug 2010: $6.50
Same bag today: $13.75
That is approximately %45/year.

And on Hostess, production of these products is highly automated. Yet with all that automation, the company could not, or would not, meet the demands of the human labor. The automation and delivery system probably struggled given higher energy costs. While the prices reflected higher energy costs, they were probably not high enough. I bet they tried raising them more, only to see sales fall off when they did so. It's a Catch-22.

Has automation reached the point where it can no longer hide or mask the inevitable inflation that must come?
Will highly-processed foods become too expensive for the majority of the population?

Just a few thoughts.

Anonymous said...

How can anyone say we are in a real recovery when our government has 16 trillion in debt. These posts ignore reality.

Jim in San Marcos said...

Hi Tyrone

Haven't seen you in a while, welcome back.

I've seen a lot of over the counter medications triple in price. You use to be able to buy a bottle of 300 one a day vitamins for about $2.50. Now about 80 are $5.00. I was able to buy 4 bags of chips thanksgiving for $10 for the kids--and they ate them all.

Inflation is rising as you suggest, but we have to remember that half of the work force has never had the time to experience inflation--they are too young. They have no idea what is a fair price for hamburger or anything else is. Ahhh-- to be young and stupid again--I can wish--

Thank you for your comments

Jim in San Marcos said...

Hi Anon 10:56

Your right, and the peculiar thing is that the total savings for all of the people in the US is about the same amount 17 trillion.

If your relative borrowed one million from you and spent it, you'd better hope he has a good paying job for when you reach retirement and need the dollars.

It will be interesting to see how this all plays out. No one is really trying to cash out in mass yet.