Not So Fast With That Trillion For Infrastructure

With the tax reform law under their belt, all the talk is that President Trump and the Republicans in Congress are now going to pivot to "infrastructure."  This is the ultimate proposal that could get truly universal popular support.  After all, everyone knows that our infrastructure is "crumbling."  Trump campaigned on a promise to fix that with a trillion dollar program.  Infrastructure spending "creates jobs" (it must -- you can see the people working!), and, when completed, the projects are tangible and surely seem to be adding something to the economy.  This is a win, win!  Who could possibly be against it?

Well, that's why we have contrarians around here.  Government dispensing the infinite pile of free money at these levels creates irresistible incentives for graft and corruption on a gargantuan scale.  In the world of infrastructure spending, it's one thing when the government first identifies a project believed likely to enhance the welfare of the people, and then funds it gradually as money becomes available.  Infrastructure funded on this model could well become a net enhancer of the people's welfare.  The Interstate Highway System would be an example of this model.  But that's not what we're talking about here.  What we're currently talking about is the government first deciding, with no specific projects in mind, that the trillion dollars is going to be spent; and then soliciting ideas from people who want to get in on the largesse.  The prospects that most of the money will be well spent are very slim.  

Even in the best of circumstances, involving desirable and even badly needed projects, the incentives of government processes can lead to tremendously negative results.  Let's consider today what is going on in subway and tunnel construction in New York.

First, there is a legitimate need for additional subway and tunnel construction in New York.  On the East Side of Manhattan, there once was an elevated train line that stretched the length of the island along Third Avenue.  In 1955 they tore it down, with the promise that it would shortly be replaced with a new subway running along roughly the same route one block East, under Second Avenue.  Sixty-three years later, only about a mile and a half of the Second Avenue line has been built.  The other subway on Manhattan's East Side, the Lexington Avenue line, is crowded much of the time to the point of being unusable.  Build-out of the Second Avenue line would greatly ease congestion and improve mobility.  As a second example, there is only one tunnel under the Hudson River to carry all of the Amtrak trains plus all of the New Jersey Transit commuter trains.  That tunnel is used at capacity (at least on weekdays) and needs major repairs, which cannot be done while scores of trains are running through the tunnel every day.  So a new trans-Hudson tunnel is widely agreed to be a priority infrastructure project for the region.  

But if these projects are so necessary and important, why haven't they already been built?  The answer is that, with coercive government assistance, a small number of labor unions have gotten themselves into a monopoly position where they can demand enormous sums for themselves and their members, absent which they have the ability to block these projects.  As a result, prospective costs of construction of these and similar projects are wildly, wildly out of line.  Every time somebody puts a number on how much one of these things will cost to build, it's good enough to kill the project for another few years.

Note that the issue is not that it is inherently too expensive to construct subway and railroad tunnels.  Rather, the issue is that our costs are not twenty or fifty percent too high, but five to ten times international norms.  With costs that wildly out of line, nothing gets built.

I first covered this subject three years ago, in November 2014.  At that time, one of those gubernatorial "blue ribbon panels," the MTA Reinvention Commission, had just come out with a big report on how to solve the MTA's problems.  My take was that they had (as usual) missed "the elephant in the room" -- the elephant being the wildly out-of-control construction costs.  The "Reinvention Commission" devoted all of its time and energy to finding "new funding streams" to pay for projects (in opaque and unaccountable ways), without ever considering whether something needed to be done about the out-of-control costs:

[E]very time some project gets proposed, a price tag gets attached to it that is so enormous that next to nothing can or does get built.           

My post built on the invaluable work of Alon Levy of Pedestrian Observations, who has single-handedly compiled international cost comparisons, for example between New York and places like London, Paris and Milan.  Levy's work has shown that tunneling for trains and subways that can be done for $300 - 400 million per mile in those cities somehow costs $1.5 billion to $3 billion per mile in New York.  Wow!

And now, three years late to the game (but we'll take it) the New York Times finally weighs in yesterday with a big front page article by Brian Rosenthal headlined "The Most Expensive Mile of Subway Track on Earth."  I spend enough time bashing the Times that this time I should give them some real credit for putting in the effort to identify the reasons that New York's costs are so crazily out-of-line.

Some excerpts from the Times article:

Trade unions, which have closely aligned themselves with Gov. Andrew M. Cuomo and other politicians, have secured deals requiring underground construction work to be staffed by as many as four times more laborers than elsewhere in the world, documents show. . . .  

The reasons for the M.T.A.’s high costs start with the sheer number of people employed.  Mike Roach noticed it immediately upon entering the No. 7 line work site a few years ago. Mr. Roach, a California-based tunneling contractor, was not involved in the project but was invited to see it. He was stunned by how many people were operating the machine churning through soil to create the tunnel.  “I actually started counting because I was so surprised, and I counted 25 or 26 people,” he said. “That’s three times what I’m used to.”

The unions and vendors declined to release the labor deals, but The Times obtained them. Along with interviews with contractors, the documents reveal a dizzying maze of jobs, many of which do not exist on projects elsewhere. . . .  

There are “nippers” to watch material being moved around and “hog house tenders” to supervise the break room. Each crane must have an “oiler,” a relic of a time when they needed frequent lubrication. Standby electricians and plumbers are to be on hand at all times, as is at least one “master mechanic.” Generators and elevators must have their own operators, even though they are automatic. An extra person is required to be present for all concrete pumping, steam fitting, sheet metal work and other tasks.

In New York, “underground construction employs approximately four times the number of personnel as in similar jobs in Asia, Australia, or Europe,” according to an internal report by Arup, a consulting firm that worked on the Second Avenue subway and many similar projects around the world.

Now we're going to have a fresh trillion dollars to pay for such projects.  So what if the Hudson River tunnel will cost $20 billion instead of the $3 - 4 billion that it might cost in another city?  So what if the Second Avenue subway build-out will cost $20 billion instead of $3 - 4 billion that it might cost somewhere else?  Shouldn't we just go for it?

Actually, this is important.  The fact that these union practices are government-sanctioned does not mean that they are not an extreme form of graft and corruption.  No matter how badly needed, these projects cannot and should not be built until either the unions bring the costs under control or a way is found around the union blockade. 

A trillion dollars of infrastructure spending?  It will all disappear with almost nothing to show for it if we are not careful.                

Sometimes The Adverse Results Of Unionization Occur Rather Suddenly

At my tag for Unions (located under the Archive tab) you will find many tales of heavily unionized industries undergoing long and steady decline.  These are industries like steel, automobiles, tires, supermarkets, and the Postal Service.  All of them have experienced gradual job losses in the hundreds of thousands over the course of several decades among unionized workers, although in most of the examples non-unionized competitors have arisen and thrived.  The job losses have come as the unionized firms have gradually downsized or, in many cases, gone bankrupt.  As I put it in this post back in June 2015, "Gradually, the unions put their employers out of business."   

Sometimes it's not so gradual.

Which brings me to the tale of the DNAInfo and Gothamist websites.  DNAInfo was founded in 2009 by entrepreneur Joe Ricketts as a site for in-depth reporting of local news in the New York City area.  Ricketts is also known as the lead owner of the Chicago Cubs.  I have read DNAInfo often, and linked to it many times.  It frequently had local stories not available elsewhere.  (In case I haven't mentioned it, the coverage of local stories by the New York Times is terrible.)  Earlier this year, DNAInfo acquired another NYC-oriented site called Gothamist, and the two merged.  Around the time of the acquisition and merger, there were some layoffs.  Even after the layoffs, neither of the two sites was profitable; but they were carried by capital infusions from Ricketts, even as he tried to work toward profitability.

In April the editorial employees of the combined businesses announced their intention to join a union, the Writers Guild of America, East.  Ricketts refused to recognize the union, and tried to dissuade the employees from pressing forward with a letter on April 19.  Excerpt:

I always thought of DNAinfo as a united team doing something that no one else has figured out how to do: building a viable business around neighborhood news. . . .  I want you to know that I still believe we are [on the same side]. We’re either going to make this business successful together or we won’t. And, frankly, I’m not interested in a company with an “us” versus “them” dynamic.    

The employees insisted on pressing forward, so the NLRB called a vote.  The vote was held a week ago, October 26.  The union won handily, 25-2.

The next day, it was euphoria among the union and the newly-organized employees.  Hollywood Reporter reported the story on October 27.  From Lowell Peterson, Executive Director of the WGAE:

“The people who write and produce content for digital news companies have made it crystal clear that they believe collective bargaining is essential to building sustainable careers,” said WGAE executive director Lowell Peterson. “The employees at DNAinfo and Gothamist have joined more than 700 of their colleagues in winning a voice on the job. We will form a strong, engaged bargaining committee to negotiate a contract that addresses their concerns and meets their needs.”

And from the DNAInfo-Gothamist Organizing Committee:

“This vote came after a long campaign for voluntary recognition, and we want to thank everyone who supported our effort to protect the workers of DNAinfo and Gothamist, which have been widely recognized as indispensable to local and neighborhood news in New York City.”

The euphoria was short-lived.  Today Ricketts announced that he was closing the sites.  All of the employees will be laid off.  Oops!  Perhaps they should have taken the time to read Ricketts's blog.  He had a post on September 12, basically forewarning what was in store.  The headline was "Why I'm Against Unions at Businesses I Create."  Excerpt:

I will . . . tell you what I know, and I know about starting and growing businesses.  I know that businesses constantly face a barrage of obstacles to survival – never mind success – and, in the face of that, everyone at the company needs to be pulling together or that company won’t make it.  I know that keeping a company growing and thriving requires focus and tireless effort by everyone.  Indeed, in my opinion, the essential esprit de corps that every successful company needs can’t exist when employees and ownership see themselves as being on opposite ends of a seesaw.  Everyone at a company – owners and employees alike – need to be sitting on the same end of the seesaw because the world is sitting on the other end.

I believe unions promote a corrosive us-against-them dynamic that destroys the esprit de corps businesses need to succeed.  And that corrosive dynamic makes no sense in my mind where an entrepreneur is staking his capital on a business that is providing jobs and promoting innovation.

Basically, amidst the daily struggle to make a business succeed, let alone facing ongoing need for large capital infusions, Ricketts was not interested in getting involved in fighting an adversarial union.  Can you blame him?

For another perspective -- otherwise known as the usual progressive talking points -- we can turn to a guy named Jake Dobkin, who was the owner of the Gothamist site before selling out to Ricketts.  A site called Splinter News points to a post written by Dobkin last year on the (then-independent) Gothamist site, with the following quote:

I would like to suggest . . . a commitment to overthrowing the tyrannical capitalist system that makes working people run ever faster to earn the same wages. Perhaps it is time for all creative comrades to stop struggling and realize they have joined the submerged working class, and to band together on that basis with other poor people to change the system which oppresses everyone.

Well, Mr. Dobkin, in your narrative, aren't you yourself the "tyrannical capitalist"?  And in the world you envision, who is supposed to fund the new higher wages of workers in a money-losing business?  The taxpayers?

You can see why unions -- or at least, unions on the adversarial Wagner Act model -- have no future in the private sector.  As to the public sector, we will have to see how the Janus case turns out in the Supreme Court.  

Labor Day Thoughts

As a starting proposition, who could be against low-paid workers getting a raise?  Especially when the bosses are rich capitalists making millions?  

On the other hand, it doesn't necessarily follow that labor unions on the Wagner Act model are the answer to those questions.  After the passage of that statute in 1935, the American manufacturing sector rapidly unionized, with union representation of workers in the U.S. reaching a peak of about 35% of the labor force in the mid-1950s.  If you looked around in the 1950s and 60s, it would have been easy to think that unionization had been a big success.  Unionized workers earned substantial premiums over the non-unionized, with additional "benefits" (pensions, healthcare) as well, and even some arguable safety improvements attributable to union efforts.

And then there started the very gradual implosion.  As I observed in this post back in 2015, "Gradually, the unions put their employers out of business."  That post focused on the steel industry, where by 2015 all of the major unionized producers had gone bankrupt with the exception of U.S. Steel, while the non-union producers survived and grew to some extent (against very tough foreign competition).  The story in many other big industries has been similar:  autos and auto parts, tires and rubber, mining, construction.  By 2016, according to the latest data from the BLS, the union percentage of the private sector labor force had fallen to only 6.4%, and was continuing to fall year after year.  Check out this piece from Oren Cass on Friday in the City Journal on the perverse incentives of adversarial Wagner Act style unionization.  It's not that the unions don't continue to organize; and they rarely get thrown out of a company once organized.  It's that the unionized companies are severely disadvantaged in a competitive marketplace, and they gradually downsize and/or go out of business.  Also, there is very little "union premium" in wages left to point to, especially after you net out union dues.

Over in the public sector, there is no discipline of the competitive marketplace.  State and local governments don't (and maybe can't) go out of business.  For many years after the Wagner Act, most state and local governments continued to resist unionization.  After all, in the public sector, there is no "greedy capitalist" to blame for paying substandard wages.  But the restraints on public sector unionization gradually fell off in the 1950s through 70s.  Those latest BLS data show the public sector unionization rate at 34.4%, approximately the all-time record.

But without the discipline of the marketplace, the public sector union movement has fallen into inevitable excess and abuse.  You people around the country undoubtedly have your own examples, but here are a few from the union capital of New York:

• Municipal unions are by far the largest contributors to political campaigns in New York City, and have near complete control over the City Council.  After a couple of decades of Republican mayors, the union-favored candidate (de Blasio) won the last (2013) election for mayor, and is heavily favored this time around.  Shortly after taking office in 2014 he awarded billions of dollars in retroactive raises to the major municipal unions -- raises that had been resisted for years by his predecessor.
• All the municipal unions have massively underfunded defined-benefit pensions, with costs deferred well into the future but poised to explode upon the taxpayers when least expected.
• While Google and Uber and others proceed rapidly toward the enormously complex goal of achieving the driverless car, down in the New York subway running a subway train along a completely pre-determined guideway with nothing else on it takes two people -- one to start and stop the train, and another to open and close the doors.  Discussions of automating these functions never even get started.  Nobody but the insiders knows what comparable overstaffing exists out of sight in the rest of the system.
• Unionized construction of major projects like subway and water tunnels somehow costs five to ten times comparable costs from other international cities like London, Paris and Milan.
• Teachers are almost completely insulated from serious evaluation, and literally can't be fired after a brief probationary period, no matter how incompetent or ill-suited to the job.  Unionized public schools far underperform their non-unionized competition, to the severe detriment of the many low income students trapped in the system.
• Teachers unions, with massive contributions to politicians and clear support of the mayor, fight a largely-successful and never-ending effort to slow the development of the non-union competition, such as charter schools.

And many, many more examples could be cited.

But there is a huge and little-recognized problem with public-sector unionism, which is a First Amendment issue.  In New York as in most other states, workers in unionized public sector workplaces are compelled to support the union.  Under Supreme Court precedent, workers who dissent from the union's political agenda -- almost always, support of Democratic candidates -- can get themselves exempted from having to pay their portion of the union dues that goes to explicitly political activities.  But many people in the unions have a fundamental disagreement with the entire public sector union mission, and with the many excesses and abuses (like most of those cited above) that arise from the collective bargaining efforts rather than only from the explicitly political activities.  Aren't even the collective bargaining efforts also inherently political, and don't they equally implicate First Amendment principles?  

In a case called Abood back in 1977, the Supreme Court answered that question "no," and upheld the right of public sector unions, against a First Amendment challenge, to collect from dissenting members all dues except those relating to explicitly political matters.  But those who think that public sector unions are an entirely bad idea that they shouldn't be compelled to support have continued to press the issue.  Three years ago a case potentially raising the issue called Harris v. Quinn reached the Supreme Court; but the Court ducked the issue.  However, in a concurrence, five justices (you can guess who -- Alito, Roberts, Scalia, Thomas and Kennedy) suggested that they would be willing to reconsider Abood.  Then last term a case called Friedrichs reached the Supreme Court, squarely presenting the core issue of Abood.  The court below (Seventh Circuit) had felt bound to follow Abood.  But when the case got to the Supreme Court, Justice Scalia had died.  The result was a one-line per curium affirmance:

The judgment is affirmed by an equally divided Court. 

Well, now we have Justice Gorsuch.  A new case called Janus raises the same issue as Abood and Friedrichs, and the lawyers have filed a petition for certiorari.  How serious is this?  Well, consider this article from today's New York Post titled "UFT may have to dramatically slash $182 million budget":

The United Federation of Teachers is drafting plans to dramatically slash its $182 million budget — anticipating a Supreme Court ruling that would bar mandatory deduction of union dues from government workers’ paychecks to support union activities, The Post has learned.  The ruling could deliver a severe blow to union budgets by reducing membership and revenues by millions of dollars.

That's quite a reaction, considering that the Supreme Court hasn't even yet granted cert.  However, the smart money is clearly betting that the Court will take Janus and that Abood will be reversed.  The results over a period of years could be a shrinkage of the public sector union movement by half or more.  My sympathies clearly lie with the taxpayers -- and even more importantly, with the students -- in this matter.