Unfunded and seriously underfunded pensions are wrecking company after company (and local government after local government.) The Hostess Company, the company who made the iconic Twinkie and other baked treats, was brought down by unfunded pension obligations [h/t Instapundit] forced on the company by years of strikes and labor negotiations going back to before the 1950s. As matters stand now, everybody, both the venture capitalist who tried to save the company and the unionized workers, will lose their shirts. At best the union members will get to see a fraction of their pensions because the rest of us will have to pony up through the Federal government that “insures” the pensions.
All this raises the question of why the unions ever believed it a good idea to put all their pension eggs in one company basket. It seems stupid on its face not to significantly diversify. Everybody else does so, even the super wealthy. Why didn’t the unions think they needed to diversify?
They didn’t think it necessary because of a theory of corporations advanced by most left leaning Americans in the mid-20th century but best personified by economist and political theorist John Kenneth Galbraith. Galbraith looked around at the business world of 1940s, 50s and 60s and concluded that corporations had so much “power” that they could effectively set prices and maintain themselves forever. In short, Galbraith argued that corporations were eternal and would never really go out of business. At worst they would merge or buy each other out. The concept of the eternal corporation not only fully justified big compulsory unions and a big invasive government to act as “countervailing forces” but it also meant that corporations could payout almost any level of wages, benefits and pensions and do so indefinitely. Galbraith gave the unions the pretext they needed to demand high future pensions while remaining calmly assured the companies would always be able to payout.
Sounds silly today, but Galbraith was writing in the 60s at the peak of American corporatism. There was only one phone company nationwide and all power was provided by non-competing public utilities. Every transportation industry was strictly regulated and competition was minimal. Tariffs were still high and the lion’s share of American industrial might was concentrated in the states bordering the Great Lakes all of whom had compulsory union laws. American industry had little foreign competition. It took until well past 1965 for the rest of the industrial world to fully recover from WWII. Circa 1955, the US was still producing nearly 50% of the GNP for the entire planet.
The freakish conditions of the post-WWII era lured Galbraith and others to make the mistake of believing that the conditions of the span from 1945-1965 would be the conditions going forward forever. (That is a surprisingly common mistake in the history of economics.) It seemed perfectly plausible to those who had never built a business from the bottom up that big corporations would always be profitable and always be able to force consumers to pay whatever pensions the unions demanded.
Galbraith et al made a lot of mistakes but the fatal one lay in not understanding that the profit margins in any industry decline as the technology the industry provides matures. Far from being immortal and omnipotent organizations capable of setting prices and paying out any pensions forever, companies were destined to decline in profitability over the course of decades and destined to be far less capable of paying out pensions and other labor costs. Companies can only maintain high margins by constantly shifting their core business as the old business matures. Few companies can do so and no highly unionized business can. Even if they did, they would have to alter the composition of their workforce so the union members wouldn’t benefit.
When the unions bought Galbraith’s rationalization, they doomed their pensions. A union worker who started making steel or cars in 1960 was working for a much higher margin business than that same business by the time he retired in 2005. Even if none of the other major changes of the last 50 years e.g. return of foreign competition, energy crisis, containerized shipping etc, the pension levels set in 1960-65 were doomed to fail eventually as the companies margins naturally shrank and shrank.
When packaged food, especially baked goods, were a new technology in the 1950s, Hostess made good money. Today, such technology is not only old hat, but actively scorned. Today, the high margin foods are resource intensive “all natural” foods with the Twinkie sneered at by elitists as symbols of plebeian gluttony. Hostess was left with a commodity product with thin margins that had to pay for high pensions the unions forced on the company back in its glory days.
The primary fatal flaw in political decision making is that it separates the decision makers from consequences of their decisions not only financially but in space and time as well. Countries are such massive systems that the consequences of bad decisions don’t necessarily manifest until decades later, long after the decision makers have left office, public life or life itself. All too often, those not even born when the decision was made must bear the greatest portion of the cost.
John Kenneth Galbraith and the rest of his generation have almost entirely passed out of the world but their flawed ideas continue to haunt us decades later. Galbraith never paid for the consequences of his errors financially or otherwise and neither did anyone else who embraced and enacted Galbraith’s ideas 40-50 years ago. Across America, the more unionized a region, the worse its current economy and the worse its economic prospects. The massive institutional inertia of unions, the Democrats and a vast body of labor law means that John Kenneth Galbraith’s wraith is still sucking the life out company after company and union after union.
The dead hand of the past just swiped the last Twinkie.