Sunday, February 27, 2011

Unions' real impact has been to impede progress

Published in The Tennessean, Sunday, February 27, 2011

Unions' real impact has been to impede progress

by Richard J. Grant

When consumers have a choice, they prefer to buy products that are produced by companies that are not held back by a unionized workforce. It's not that consumers inquire as to the company's relationship to a union, but they do select their purchases on the basis of lower price and higher quality. Companies that wish to please their customers will gravitate toward those jurisdictions that best allow them to do this.

The purpose claimed for trade unions is to increase the wages and improve the working conditions of union members. They can never do this for every worker, but only for a few. This is because they can raise wages only by restricting the supply of labor to a particular employer; and that they can do only in the short-term. The real long-term effect of trade unions has been to jump out in front of the parade of economic progress and pretend that they are leading while they are, in fact, merely slowing it down.

The big increases in American wages over the past 200 years have been due to the use of savings as capital and its transformation into tools, machinery, and technological improvements. It has also been due to improvements in management, worker training, and increased knowledge. But most of all, the improvements have been due to the constitutionally protected liberty of Americans to associate freely and to defend themselves against coercion, particularly from government interference.

It is a long-held myth that “employers” hold a power advantage over “workers.” The truth is that labor is scarce, good workers are scarcer still, and employers must compete with one another for the best workers available. This will be true as long as we have unfulfilled desires and entrepreneurs who work long hours seeking ways to fulfill them.

The employment relationship is an exchange, ultimately between free individuals. If two or more individuals decide that the best way to provide a service is to work together, either as a partnership or under the leadership of one individual, then they are free to do so. They choose how to organize their firm, what to produce, and how to produce it. If their customers are willing to pay enough to cover all the firm's costs, then the firm will survive. If not, then they will have to change the way they do things.

In a free society, those who see themselves as employees rather than owners would also be free to form an association to help market their services to the owners of companies. The leaders of the association could also negotiate the terms of employment with the employers on behalf of the association's members. But the employers would accept this arrangement only if it contributed to their efficiency in the service of their customers. No individual could be forced into such an arrangement.

Implicit in the natural right to associate is the right to disassociate. In a free society, workers would always have the right to bargain collectively. What they cannot have is the right to force anyone else to bargain with them. When governments created such an artificial right they did so by trampling on the natural rights of employers.

No civil relationship can survive the arbitrary use of legislative coercion. Modern unions must learn to live without that which they never should have had in the first place.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Sunday, February 20, 2011

Obama's promised "budget cuts" actually increase deficit

Published in The Tennessean, Sunday, February 20, 2011

Obama's promised "budget cuts" actually increase deficit

by Richard J. Grant

The total US national debt has now surpassed $14.1 trillion, which is about 95 percent of annual US economic output. The debt seems to be one of the few things that President Barack Obama is able to make grow, so he is going at it with gusto. His recently proposed budget calls for record spending and is projected to produce a deficit of more than $1.6 trillion. That will increase the total debt by more than 10 percent per year. Expect it to crack $15 trillion just in time for Labor Day.

Before the budget was released, we were told that the “tough choices” had been made and to expect significant spending cuts. The storytellers wanted us to believe that the president had accepted fiscal conservatism, had moved to the center, and was now a well-triangulated moderate.

Then the real news came out: The proposed budget would be greater than $3.7 trillion. So what happened to the budget cuts?

The president has proposed cutting a few programs, but he has also proposed some newly created programs along with increases in others. Politics is full of such dual realities, each designed to please or appease some constituent. During the next election campaign, the president will honestly be able to say that he did propose some cuts, and to another group he can say that he increased funding for their favorite program.

Clearly the president is more predisposed to do the latter. Whatever words he uses, his actions have always been toward a bigger role for government in people's lives. At budget time, this translates into government taking control of a bigger share of people's wealth. That means that we will all spend a greater part of next year working to support some government program.

When predicting the cost of a government program that provides a service that could also be provided privately, a reliable rule of thumb is that the total cost of the government program will be at least double the cost of a private service. Sometimes the government steps in to provide a service that is either not wanted by enough people to be profitable or that has been made unprofitable by other government interventions.

As an example, President Obama seems to have hitched his wagon to high-speed rail. Apparently Amtrak was not losing money fast enough, so the president decided to innovate and build a high-speed rail service to nowhere. Not only does this proposal show irresponsible leadership at the federal level, it would also trap the state governments in the subsidization of this folly.

In a large and prosperous economy, we might not worry very much about the occasional creation of such wasteful showcase projects. But when such projects become the norm rather than the exception, the economy either does not become large and prosperous or ceases to be. The uncontrolled growth of entitlement programs is another sign of squandered potential and a leading indicator of decline.

Government budget deficits add to the debt and push much of the burden of current spending onto our future selves and future generations. This shifting of the burden makes government services appear to be less expensive than they really are. When something appears to be cheaper, we tend to choose more of it.

This is how families get into trouble; and this is how governments get into trouble.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Sunday, February 13, 2011

Social Security system a trap foisted on public

Published in The Tennessean, Sunday, February 13, 2011

Social Security system a trap foisted on public

by Richard J. Grant

Among politicians, there is an old saying that “perception is reality.” This actually applies to any form of human action. People act upon what they believe to be true, which is not necessarily the same as what really is true. This does not protect them from unintended consequences. But from a politician's perspective, what counts is what voters believe at the time that they vote.

This helps explain why government has a tendency to grow. Political leaders and administrators, whether elected or unelected, find it easier to gain the support of those who come to depend on them for income or protection. To hold power, and whatever personal satisfaction that brings, a politician must compete not only with other politicians, but also with the empowerment that each individual finds through personal liberty and a rich array of private alternatives in the pursuit of happiness.

Many politicians have found that they can tip the balance in their favor by closing off some of those private alternatives to individuals. Direct assaults on a voter's individual rights would be as well-received as surgery without anesthesia. But with skillful application of the right political anesthesia, a politician can lead voters to purchase their own gold-plated handcuffs and to wear them gratefully.

The Social Security system did not come into being as a result of any demand from voters. In fact, given the ethic of the time, most Americans would have seen such general dependence on government as offensive – though the experience of economic depression created sympathy for narrow assistance to those who were old and poor. The real incentive to create such a dependency structure was felt by certain politicians and by the bureaucrats who would be paid to administer the system.

The president had a particular system in mind; and congressional leaders managed to put together a coalition to pass the original Social Security Act in 1935. With the act in place, next came the sales job on voters. The new Social Security Board advertised heavily, just as government agencies advertise to manage our perceptions today.

In order to pass the constitutional smell test, the Social Security taxes initially were called what they were, taxes. The portion deducted from the visible wages was called an income tax, and the portion attributed to the employer was called an excise tax on wages paid. But to ease the program's acceptance by the public, these taxes were advertised as “contributions,” as if to an old-age insurance policy. Also, the taxes were introduced gently, with each rate at 1 percent of wages (for a total of 2 percent), later rising in scheduled increments.

Voter resistance was reduced by the low starter rate and the illusion that the employer bore as much as half the tax burden. To this day, most employees do not perceive the reality that they bear virtually all the tax burden associated with Social Security. They believe that the employer's portion is like an extra gift – something for nothing. But the employer's portion of the tax is part of the cost of employing the worker. The cash paid in taxes would otherwise be available to be paid in wages or other benefits. The worker is usually unaware of what he is losing, which means that he does not perceive the full cost of Social Security. And this is only the beginning.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Link: On the burden and viability of Social Security

Sunday, February 06, 2011

Social Security deepens nation's deficit

Published in The Tennessean, Sunday, February 6, 2011

Social Security deepens nation's deficit

by Richard J. Grant

In December 2010 without a Congressional tax compromise, tax rates would have risen significantly for incomes, dividends, and especially capital gains. Those who wanted these tax rates to rise cited the need for more tax revenue and saw foregone taxes as a “cost to government.” They rejected the warnings of “supply-side” economists who suggested that increased marginal tax rates would discourage economic activity and yield little, if any, new tax revenue. But part of their compromise was to reduce the employee portion of FICA tax payments by two percentage points for one year.

The tax compromise also included an extension of unemployment benefits and increased spending on an array of special-interest projects. At a time of record-high budget deficits, support for the FICA rate reduction must have been based on political considerations, not genuine economic concerns.

The FICA payroll-tax payments are dedicated to Social Security. Until last year, the Social Security system produced surpluses that were used to offset deficits in the federal government's operating budget. Although Social Security is often spoken of as a free-standing pension plan, its surpluses have always been lent to the Treasury to be used as if part of a unified budget.

Of all the federal government’s transfer programs, Social Security is the one least likely to carry any stigma for the recipients. The dedicated tax has the appearance of a pension-plan contribution. Eligibility for benefits depends on one’s age, not on anything that might suggest some type of failure, as might be the case with unemployment. After decades of making “contributions,” new retirees feel locked-in to the system and perfectly entitled to the promised benefits.

Increasing retirements would have put the Social Security system into a structural long-term deficit by the middle of this decade. But the recent recession put the system into deficit last year, and the reduction in FICA payments will almost certainly ensure another deficit. Once a net contributor to the operating budget, the Social Security system has begun to draw down the IOUs it holds against the Treasury, thereby imposing a net burden on the general fund.

The political motive to reduce the FICA tax was to appear to be cutting the tax burden on the “little guy.” But it also suggests abandonment of a program model that would run chronic deficits and appear to be in a constant state of failure. At a time when advisers insist that the only way to save the model is either to increase the dedicated taxes or reduce benefits, it might be astute to accept that the program is part of the general fund. It was never a pension program based on saving and investment; it is a current-income transfer program based on current taxation.

Social Security spending comprises more than a quarter of the federal budget. It is larger than the entire defense budget. Sen. Bob Corker and Sen. Claire McCaskill were correct to include Social Security as well as other entitlement programs in their proposed bill to place a cap on federal spending. This bill would not necessarily cut Social Security, but it would force a prioritization of spending.

We should remember all of this when we hear Senate majority leader Harry Reid demagogue the bill by insisting that “Social Security has not contributed one penny to the deficit.” It has. All government spending programs contribute to the deficit.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011