The Tariff on Chinese Tires Comment

Becker is correct that the tariff appears to be a pay back to the unions for their strong support of Obama in the 2008 election. The significance of that support was amplified by a questionable feature of our political system. All but two states award all their electoral votes to the candidate who wins a plurality of the popular vote in the state. This makes winning, however narrowly, the popular vote in states that have a lot of electoral votes disproportionately important to a successful strategy for a presidential candidate, and in turn amplifies the effect of interest groups in those states. States in which unions, despite their modest fraction of the labor force overall, are electorally powerful include major swing states, such as Ohio.

Industry-wide unions are labor cartels, but the aggregate economic effects of unions in the American economy is probably slight. Many unions are unaggressive, being chiefly interested in union dues. Others operate primarily to protect workers against arbitrary supervisors and unsafe working conditions, and these unions may generate net benefits--may even improve labor relations by increasing employee trust. The United Auto Workers is a dying remnant of the dinosaur era of industrial unions; the UAW has done much to bring down the U.S.-owned domestic auto industry but it could not have succeeded had it faced competent management.

Unions reduce management flexibility, and that is particularly harmful in a depression or recession. Union contracts usually require that layoffs be strictly inverse to seniority, so the employer cannot use a depression-generated need to lay off workers to get rid of dead wood; for that reason and because of wage inflexibility created by union contracts, unionized firms cannot cut their costs in response to a fall in demand for their products as rapidly or deeply as nonunionized firms can, and this retards the restoration of economic equilibrium. The effect is particularly pronounced in a deflation, which in fact we are experiencing. In a deflation, constant nominal wages result in increased real wages, thus raising producers' costs and spurring layoffs.

Because unions are quite weak in the nation as a whole, the importance of union support to presidential candidates doesn't necessarily translate into strong support in Congress for pro-union policies. Congress doesn't kow-tow to presidents even when the political party to which the president belongs dominates Congress. The tariff on Chinese tires is a unilateral presidential gift to a union. One hopes it is just a matter of throwing a small bone to the union movement, because to launch a trade war against China would be playing with fire.

There was much more at stake for unions in the auto bankruptcies, but I remain sympathetic to the government's bailouts, especially the initial bailouts of last December. Because of the credit crunch, it is unlikely that bankrupt auto companies could have attracted "DIP" financing--that is, financing the operations of a company that is in bankruptcy but is continuing to operate (such a bankrupt is called a "debtor in possession" (DIP)). Without DIP financing, GM and Chrysler would have had to liquidate (that is, shut down), because they could not operate without credit. Their liquidation would have thrown hundreds of thousands of workers, perhaps more than a million, out of work at a time when the economy was in a steep downward spiral; the effect could have been catastrophic.

By the time the auto companies were allowed to declare bankruptcy, in May, they had undergone a gradual partial liquidation and the panic phase of the economic downturn had passed, so the economy could take the bankruptcy in stride. Still, without government assistance, there was a danger of liquidation and so a case for the further bailouts--though not for the government's becoming the actual owner of an auto company, namely General Motors.

I do not approve of the "Buy America" provisions of the $787 billion stimulus, which appear to be another bone thrown to the unions, because of the danger that they may provoke retaliation. However, they are at least understandable as a stimulus provision. The purpose of a stimulus program is to increase employment, and to the extent that stimulus moneys are used to buy imported goods, the purpose is thwarted--the stimulus then stimulates a foreign economy, not the U.S. economy. Much better than including "Buy America" provisions in the stimulus law, however, because much less likely to provoke retaliation, would be targeting the stimulus expenditures more carefully on the production of goods and services that involve minimum use of imported components, road building being the obvious example though another is military equipment, as emphasized by Martin Feldstein. The stimulus program was in my opinion an essential measure for fighting the looming depression, but it was poorly designed.