The unions fight against economics 101

Opinion Journal:

At first glance, they seem to have little in common. But the riots in France over labor reform, the slow-motion suicide of General Motors, and the continuing decline of the New York economy all share one defining trait: entrenched and unchangeable union power.

These columns have always favored the right to collectively bargain, and any private company that allows a union to organize its workers deserves what it gets. But that doesn't mean we should fail to appreciate the consequences when unions become entrenched inside any organization. On the evidence throughout business and politics today, unions do not provide individual job or income security. On the contrary, they undermine security by contributing to broader business and economic decline.

At the national level, the French example is clear enough. While the French private sector is less unionized than America's, it must cope with mandated work rules that make it all but impossible to fire someone; so naturally companies are also reluctant to hire. The jobless rate is double America's, while youth unemployment is 23%....

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France remains a wealthy country, and its economic decline can be masked for a time as it lives off accumulated capital. But already the promises that its unions have extracted from the government seem unlikely to be kept. A growth rate of between 1% and 2% a year won't be enough to finance the pensions and health care of an aging nation. And facing up to those facts will require an increasingly painful political reckoning.

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Here in the U.S., the same burden is slowly crippling New York, once a bulwark of American industry. Power in the state capital of Albany is shared by Republicans and Democrats. But both parties bow before the public-sector unions, especially the teachers, and the health-care workers led by perhaps the most powerful man in the state, Dennis Rivera.

Thanks to his political clout, New York's Medicaid costs are higher than those of Texas and Florida combined; a health-care insurance premium for a young family of four is roughly six times what it is across the border in Connecticut; and high-deductible health-savings accounts that can help the self-employed afford insurance can't even be offered in the state. New York is also a rare state that actually taxes private health insurance, to the tune of about $2.4 billion a year.

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As for GM, its management mistakes are legion and its weak product line well-known. But the root of its problem is that it long ago became a corporate version of the welfare state, with the same entrenched union interests. Yes, as a private company it has had to answer to shareholders. But the size of its market dominance going back to its heyday 40 years ago allowed its managers to avoid confronting its uncompetitive wages, benefits and work rules even as they saw Toyota and Honda gaining in the rearview mirror.

In retrospect, GM management should have provoked a union showdown. Yet only a very brave CEO would have been willing to risk a potentially catastrophic strike on his watch for the sake of making the company more competitive after he retired. In any case, would the United Auto Workers really have budged? In 1998, young executive and future CEO Rick Wagoner endured a 54-day UAW wildcat strike at two plants in Flint, Michigan, after GM had tried to change some production rules. The strike shut down most GM production in North America and cost the company some $2 billion. In the end GM caved and the UAW escaped, having made virtually no concessions.

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