politically acceptable for overseers to tinker with employment agreements

TO BE NOTED: From the NY Times:

"Contracts Now Seen as Being Rewritable

By MARY WILLIAMS WALSH and JONATHAN GLATER

Contracts everywhere are under assault.

The depth of the recession and the use of taxpayer dollars to bail out companies have made it politically acceptable for overseers to tinker with employment agreements.

So federal and local governments are looking for ways to pare payouts, endangering the promises made before the financial storm to people like Wall Street traders, automobile workers and garbage collectors.

“We run roughshod over some contracts and not over others,” said David A. Skeel, a law professor at the University of Pennsylvania, about economic downturns. “Right now, employment contracts seem to be the type of contract that is viewed as eminently rewritable.”

The Treasury Department is seeking broad powers to seize troubled companies and rewrite contracts like the ones promising bonuses at the American International Group. Some A.I.G. employees, meanwhile, have been pressured by officials into repaying their bonuses to the giant insurance company rescued by the government.

Across the country, Vallejo, Calif., just got permission in bankruptcy court to tear up its contracts with firefighters and other workers. In Stockton, the city manager is studying whether to follow Vallejo’s lead.

In Michigan, Gov. Jennifer M. Granholm just ordered the city of Pontiac put under emergency financial management, after it failed, among other things, to rein in the cost of police, fire and trash collection services.

And President Obama’s auto task force, after replacing the top management at General Motors, is looking for ways to overhaul the contracts that G.M. and Chrysler have signed with unionized workers.

Honoring any type of contract can be hard in a down economy, but financial agreements, like the ones between A.I.G. and its derivatives counterparties, are so far faring better.

The possible ripple effects of not keeping those financial contracts, or defaulting, have raised alarms and prompted arguments that it would be too dangerous to void them. After all, the collapse of Lehman Brothers is widely blamed for paralyzing the credit markets last fall, which may in turn have prompted the Federal Reserve to stand behind A.I.G.’s derivatives contracts, making its trading partners whole.

Employment agreements have enjoyed no such help. In the past, the belief that voters would make their disdain known has at least discouraged politicians from using a heavy hand.

Now, though, officials in the Obama administration may be looking ahead to a rescue of the automakers, an enormous challenge that could be simplified, from the government’s point of view, if kept out of court and under tight administration control. That would make it easier to change the terms of contracts governing retiree benefits, said David L. Gregory, a law professor at St. John’s University in New York.

“The issue is, how can the government calibrate and contour and control the process of reorganization,” without the time, expense and compromise inherent in bankruptcy, Mr. Gregory said. “The executive branch is proposing to do what the bankruptcy courts have had the exclusive prerogative to do.”

This month, the town of Vallejo demonstrated not only that it was possible for a city to tear up its union contracts in bankruptcy, but that it was even easier for a city to do so than for a company. The precedent may matter.

Municipalities do not file for Chapter 11 bankruptcy protection; they use Chapter 9, which has different terms and a much smaller body of legal precedent. Municipal bankruptcies are so rare that until the Vallejo ruling, it was not clear whether a city could get out of its union contracts in Chapter 9.

Unions representing Vallejo’s public employees tried to argue that state labor laws protected the contracts. But the federal judge handling the bankruptcy, Michael S. McManus, wrote that federal bankruptcy law trumped the state labor law. He also observed that Congress could have set tougher standards for municipalities voiding their labor contracts — it did so for companies. But such bills died in committee.

After reaching his decision, the judge gave both sides one more chance to try to negotiate less-onerous concessions.

“The world is watching, and I don’t say that with pride, because we never wanted to file a Chapter 9,” said Marc A. Levinson, a partner with Orrick, Herrington & Sutcliffe who is representing Vallejo in the bankruptcy. The city ran out of money last year, after promising benefits that it could not afford when the recession drove down tax receipts.

Vallejo’s bankruptcy is being closely watched because its problems mirror those in many communities that have promised benefits that now look unsustainable. In many places the benefits have been locked in with statutory and constitutional guarantees.

“That’s why Vallejo is so important,” said James E. Spiotto, a Chapter 9 specialist with the firm of Chapman & Cutler in Chicago. “Chapter 9 and bankruptcy is the land of broken promises.” He said unions were better off negotiating concessions now than landing in bankruptcy court and ending up with no contract at all.

But entirely different rules apply to bonded debt, and to a related problem plaguing some communities: derivatives. Chapter 9 was never meant to be a place where governments could get out of their bonded debt, Mr. Spiotto said.

Derivatives are largely untested, but the issue may reach a decisive point in Jefferson County, Ala., which is entangled in interest-rate swaps. The swaps were intended to shield the county from rising interest rates after it issued a large amount of variable-rate debt to pay for a new sewer system.

The swap arrangements broke down amid last year’s turmoil in the credit markets, leaving Jefferson County with $3.2 billion in debt that it can neither pay nor refinance. Some officials are now calling for a Chapter 9 filing; others are against it.

Alabama’s governor, Bob Riley, has written to the Treasury secretary and the Federal Reserve chairman, asking for help in stretching out Alabama’s financial obligations, rather than repudiating them.

The Treasury secretary, meanwhile, is working on a much broader initiative to give the federal government the power to modify the contracts of the financial institutions it takes over. The proposal raises several new issues, because it would eliminate the judicial oversight of bankruptcy proceedings and the opportunity for affected parties to challenge the changes.

The goal is to speed up reaction time to crises, said Lisa Hill Fenning, a retired bankruptcy judge who now practices at Dewey & LeBoeuf in Los Angeles. “Traditional ways of dealing with these problems are too complicated and would take too long,” Ms. Fenning said. “They’re trying to cut through red tape.”

The executive order "has the unfortunate potential to limit contractors' ability to compete for projects"

From David Henderson:

"In a recent post, I said that whatever other mistakes Obama was making, at least he was repeating only 1 of 4 mistakes that Hoover/FDR (I think I'll start calling them Herbert Delano Roosevelt) made. Commenters pointed out correctly that Obama might be repeating a second mistake: the protectionist (I call it "barrierist") mistake that Hoover made.

Well, now Obama is going for the trifecta. According to the WaPost:

Obama issued an executive order Friday requiring federal agencies to consider putting in place agreements that set wages, work rules and other benefits when awarding major construction contracts.

In other words, Obama is trying to maintain wage rates on construction projects at an artificially high level. That's, of course, something Hoover and FDR did with wage rates generally, with devastating effects.

The Post continues:

The executive order "has the unfortunate potential to limit contractors' ability to compete for projects" at a time when 1 million construction workers have been laid off, Stephen Sandherr, chief executive of the Associated General Contractors of America, said in a statement.

Also:

"If the purpose of these projects is to get Americans back to work, why would we pick an approach that would allow only a small percentage of the construction workforce to participate?" asked Jerry Gorski, national chairman of the Associated Builders and Contractors. The industry group says 84 percent of the country's construction workers are not in labor unions.

How does Obama justify this? Here's the following from Obama spokesman Tommy Vietor:

"We think it will make procurement dollars more efficient so taxpayer dollars aren't wasted," he said. "It creates a more smooth and efficient process that protects workers and employers before the project begins."

Get it? Adding a constraint makes things smoother and more efficient."

Me:

Don the libertarian Democrat writes:

"The executive order "has the unfortunate potential to limit contractors' ability to compete for projects"

I'm puzzled by this. If everyone has the same minimum wage constraint, it means that the bids will have to rely on other factors than wages.I can see that this costs the taxpayers more, but it only rules out a bidder using lower wages to win his bid.

Now, if an employer has a union contract, he might not be able to lower his wages in such a competition. If that's true, we can at least see politically why this is anathema to President Obama.

By the way, since we are in a recession and ought to be able to get materials and other services cheaper now, we should probably want long term contracts on current projects.

Devil's Advocate, I agree. That's why I said it will cost the taxpayers more. But the alternative,namely, President Obama agreeing to rules that will adversely impact on unions, seems politically unreal.

I simply want us to remember that Political Economy trumps Economics. That doesn't necessarily mean that you have to give up, even if you're a Democrat, but it does mean that you're going to have to find some way to allow unions to not be at a disadvantage. Some way of splitting the difference might work. A perfect solution, probably not. But I'll take saving real money anyway I can everyday.

"the pain of the economic downturn is not being shared equally by the management and the workers.”

It's not news to me. From the FT:

"Redundancies stir threat of labour unrest

By Hal Weitzman in Chicago

Published: January 9 2009 16:46 | Last updated: January 9 2009 16:46

Manuel Robles, an electricians’ union leader in south Chicago, says that rather than seeking work, some of his unemployed members are spending their days learning English.

“Many are looking but it’s really hard to find a job right now,” he says. “About 85 per cent of the workers are from Latin America, so quite a few are spending their time in the classroom improving their English.”

EDITOR’S CHOICE

US loses most jobs since 1945 - Jan-09

Wall Street: US stocks fall on dismal jobs numbers - Jan-09

Dollar edges higher after jobs data - Jan-09

New US jobless claims decline - Jan-08

Human cost rises as recession deepens - Jan-08

In depth: US downturn - Nov-27

Mr Robles’s union drew international attention last month when it staged a sit-in at Republic Windows and Doors, a company that abruptly closed its plant in Goose Island, in central Chicago. The workers were protesting against the management’s failure to give them their statutory 60 days’ notice. The company said it had been forced to shut rapidly after Bank of America cut off its credit line.

The workers complained that Bank of America was receiving federal bail-out funds while their federally mandated legal rights were ignored. Their action drew broad political support, including from Barack Obama, president-elect, prompting a financial settlement in which each worker received a cheque for $6,000 (€4,400, £3,950).

As the US reels from the latest jobs data – non-farm payrolls showed more than half a million jobs were lost last month – the successful sit-in at Republic Windows could herald a rise in industrial unrest and civil action.( I AGREE )

“Republic Windows is the type of situation you get at the start of a downturn, when there are a lot of layoffs,” says Mike Mazzeo of the Kellogg School of Business at Northwestern University. “You are likely to see more of this in cases where there is a perception of unfair treatment or that the pain of the economic downturn is not being shared equally by the management and the workers.”( AS I KEEP SAYING. )

Although the Republic Windows case turned on the specific issue of federal bail-out money helping financial institutions rather than meeting obligations to workers, with all of the big US banks having received federal funds, it looks to have given unions a stick to beat companies with in the case of future bankruptcies.

Mr Robles’s group this week filed a charge with the National Labor Relations Board against Richard Gillman, the majority owner of Republic Windows, complaining about his transferring machinery from the Chicago plant to a factory owned by his family in Iowa.

The workers are hoping that if they can secure the equipment’s return, their factory could re-open under new ownership. Mr Gillman said he could not comment on the case.

“Union activism is going to get stepped up,” predicts Mr Robles. “We want to bring pressure on the government not to send money to other countries, to keep it here, help the economy grow and create jobs in the US.”( I EXPECT MORE OF THIS. )

Are Sticky Wages Stickier Than Sticky Buns?

Felix Salmon posts about the idea that employers don't like to reduce wages in a recession or economic downturn:

"David Leonhardt on deflation, Wednesday:

The drop in prices, which isn't over yet, will make life easier on millions of people. It's possible, in fact, that the current recession will do less harm to the typical family's income than it does to many other parts of the economy.
The reason is something called the sticky-wage theory. Economists have long been puzzled by the fact that most businesses simply will not cut their workers' pay, even in a downturn. Businesses routinely lay off 10 percent of their workers to cut costs. They almost never cut pay by 10 percent across the board.

Fedex press release, Thursday:

FedEx is now implementing a number of additional cost reduction initiatives to mitigate the effects of deteriorating business conditions, including:
Base salary decreases, effective January 1, 2009:
* 20% reduction for FedEx Corp. CEO Frederick W. Smith
* 7.5%-10.0% reduction for other senior FedEx executives
* 5.0% reduction for remaining U.S. salaried exempt personnel

Fedex is largely non-union, which means that most workers are taking a pay cut. I'm not sure this is necessarily a bad thing, if it avoids layoffs and reductions in service quality, instead spreading the pain around more thinly. But it does point to the possibility that this recession will indeed be different, and that it might mark the beginning of the end of sticky wages.( COULD BE. PROACTIVE FEAR OVERRIDING EVERYTHING ELSE )

There's been a huge shift in power in recent years from labor to capital: corporate profits have been rising much faster than wages for some time now ( DON'T TELL THAT TO PEOPLE WHO BELIEVE THAT ORGANIZED LABOR IS TOO POWERFUL ). It makes sense that capital would make use of its newfound power to reduce labor costs in a deflationary environment of rising unemployment. During the boom, companies laid off workers because those workers demanded, and cost, too much money. Now that workers have lost their negotiating leverage, we might start seeing more across-the-board pay cuts." ( COULD BE )

I would say that, in the case of FedEx, my understanding is that they are fighting for their life. In a possible bankruptcy situation, cutting wages is much easier. It might well be that in this current situation many businesses will end up near bankruptcy and that wage cuts could be higher than usual. It might also be that the fear and aversion to risk has effected workers to the point that lower wages in exchange for a job seems a good deal.

However, let me raise a few points:
1) Productivity is still rising
2) Worker's morale is not something you want to help depress in an already downbeat situation
3) As I pointed out in " I Don't Work In AIG Crap", workers who have made money for the company are not going to be happy taking a pay cut for other people's losses. It is possible that such treatment will lead them to look for another job, leading to the possible loss of the best employees of the business.

It might well turn out that wages aren't as sticky as they used to be, and it might also turn out to be a very bad thing for businesses and the economy, as well as the workers.

"And Senate Republicans now run the risk of being portrayed as Marie Antoinettes with Southern accents."

William Kristol with a post that takes a perspective that I believe is more effective for the GOP:

"In 1953, the president of General Motors, Charles Wilson, was nominated by President Eisenhower to be secretary of defense. During his confirmation hearings, Wilson was asked if he’d be able, as defense secretary, to make decisions contrary to the interests of G.M. He answered yes, but added that he couldn’t imagine such a situation, because “for years I thought what was good for our country was good for General Motors, and vice versa.”

It wasn’t a ridiculous view. It was widely shared — by big-business-loving Republicans and big-union-embracing Democrats, by big-car-driving suburbanites and big-tank-occupying soldiers.

Today, G.M., Ford and Chrysler get no respect. Maybe they don’t deserve much. Detroit has many sins to answer for, and it’s been doing plenty of answering. But — and I say this as someone who grew up in non-car-driving family in New York and who is the furthest thing from an auto aficionado — there is a kind of undeserved disdain, even casual contempt, that seems to characterize the attitude of the political and media elites toward the American auto industry.

As Warren Brown, who writes about cars for The Washington Post, recently put it, “There is a feeling in this country — apparent in the often condescending, dismissive way Detroit’s automobile companies have been treated on Capitol Hill — that people who work with their hands and the companies that employ them are inferior to those who work with their minds and plow profit from information. How else to explain the clearly disparate treatment given to companies such as Citigroup and General Motors?”

Now there are other ways to explain the disparate treatment of G.M. and Citigroup. Finance is different from manufacturing, and banks from auto companies. It may be that the case for a huge bank bailout was strong, and that the case for a more modest auto package is not. Still, it seems to me true that the financial big shots haven’t been treated nearly as roughly in Congress or in the media as the auto executives, who have done nothing remotely as irresponsible as their Wall Street counterparts."

I think that this is a widely held view. It accords with the view that the Financial Bailout is a Crony Bailout.

"What’s more, in their disdain for the American auto companies, the left and right wings of the establishment agree. Of course, the particular foci of criticism are different — the left berates the auto companies’ management, the right the United Automobile Workers. But even on the left, while Democratic politicians still try to look out for the interests of the U.A.W., there’s not really that much sympathy for the workers. The ascendant environmentalists disdain (to say the least) the internal combustion engine and everyone associated with it. Most of today’s limousine liberals are embarrassed by their political alliance with the workers who built those limousines.

Meanwhile, on the right, free-market analysts have explained that our regulatory scheme of fuel-efficiency standards is counterproductive. But despite the fact that the government is partly responsible for the Big Three’s problems, the right hasn’t really been stirred to enthusiastically promote a deregulatory agenda to help the auto companies. What excites it is mobilizing to oppose bailouts for unionized workers.

Last week, Senate Republicans picked a fight with the U.A.W. on union pay scales — despite the fact that it’s the legacy benefits for retirees, not pay for current workers, that’s really hurting Detroit, and despite the additional fact that, in any case, labor amounts to only about 10 percent of the cost of a car. But the Republicans were fighting Big Labor! They were standing firm against bailouts! Some of the same conservatives who (correctly, in my view) made the case for $700 billion for Wall Street pitched a fit over $14 billion in loans for the automakers.

So Senate Republicans chose to threaten to filibuster the House-passed legislation embodying the George Bush-Nancy Pelosi deal. The bill would have allowed President Bush to name a car czar, who could have begun to force concessions from all sides. It also would have averted for now a collapse of the auto industry, and shifted difficult decisions to the Obama administration."

This is pure Interest Group Politics.

"Instead, Bush will now probably have to use the financial rescue funds to save G.M. — instead of being able to draw from sums previously authorized for the green transformation of the auto industry, a fight he had won in the negotiations with Pelosi. And Senate Republicans now run the risk of being portrayed as Marie Antoinettes with Southern accents.

Whichever party can liberate itself from its well-worn rut to propose policies that help both American businesses and workers has a great opportunity. That party’s leaders could begin by offering management and labor at the Big Three a little more sympathy, and heaping upon them a little less calumny. Where’s Charles Wilson when we need him? "

The French Revolution again. Along with Posner, Kristol makes two people considered to be on the right of our political spectrum who get the Political Economy of the situation. Perhaps we can't count them out yet.

As for the final point, he makes a case of it. However, I do believe that the UAW should make major concessions and the Management be replaced, quite simply because the Taxpayer's money is being invested. For me, it follows from Bagehot's notion of onerous conditions.

"now we know their true motivations was to let millions of workers lose their jobs for raw partisan purposes. "

This is what mainly explains the GOP position on the Big 3 Bailout, although other party aspects no doubt enter in as well. From ProGrowthLiberal on EconoSpeak:

"Countdown discussed a memo entitled "Action Alert - Auto Bailout," which was sent to Senate Republicans Wednesday morning and states:

This is the democrats first opportunity to payoff organized labor after the election. This is a precursor to card check and other items. Republicans should stand firm and take their first shot against organized labor, instead of taking their first blow from it. This rush to judgment is the same thing that happened with the TARP. Members did not have an opportunity to read or digest the legislation and therefore could not understand the consequences of it. We should not rush to pass this because Detroit says the sky is falling.

But didn’t many of the same Senate Republicans who filibustered the auto bailout bill vote for TARP? Jonathan Chait notes a little irony in how these Senate Republicans played their hand:

if the White House follows through on its suggestion that it might use TARP funds to stave off bankruptcy, the GOP maneuver will have been a total disaster. Remember, the Republicans have leverage because they still have 49 Senate seats and the auto companies need their loans right away.And, indeed, Republicans have used their leverage to force wage concessions and not force the auto companies to start producing low-emissions vehicles. But if they've overplayed their hand to the point where the White House floats a loan until January, then the GOP's leverage will nearly collapse. When the new Senate and White House convene, the Democrats will cut a much better deal for themselves, with fewer or no wage cuts for workers and tougher environmental standards.

In other words, their ploy may have failed and now we know their true motivations was to let millions of workers lose their jobs for raw partisan purposes."

I don't see it as a principled move to correct some flaws in labor relations, which might be a good idea. This, as politics, is a very bad move.

What's The Bother About Labor Unions?

I want to consider the following point by Sebastian Mallaby in the Washington Post:

"And, given the object lesson from the collapse of the Big Three carmakers, government should think carefully before empowering labor unions further."

Now, I understand that Labor Unions are, in general, an interest group in the US tied to the Democratic Party. I also understand that GOP Senators from Southern States where there are foreign automakers competing with Detroit wouldn't be excited about given a lending hand to Detroit, based on regional politics and the interest's of their constituents. It might be nice to know if those states used what are called "incentives" in order to lure those automakers to those states, which I call government intervention in the market. So far, I understand.

What I don't understand is the bother created by Labor Unions in general. After all, the Labor Unions represent individuals who have freely chosen this representation, and the contracts that they arrive at with their employers are also freely entered into. What's the big problem?

As to wages, I have no idea if the wages they receive are fair or not, without looking into exactly what they're making and what they do and how much the company makes. Even then, I have no exact feelings about the correct or fair wage compensation. That's up to the people involved.

I don't understand this bother created by people making good money. What's the problem? That's not a bad thing. I would hope that they make as much as they can. So would I.

I also agree with Dean Baker here:

"The Employee Free Choice Act and the Right to a Secret Ballot

Workers do not currently have the right to a secret ballot in elections deciding whether or not they will have a union. The employer has the option to recognize a union based on card check (a majority of workers sign a card indicating their desire to join a union) or to demand an election certified by the National Labor Relations Board. The Employee Free Choice Act that will be considered by Congress in the next session gives this choice to workers.

Under the legislation, workers could organize by card check, but they can also petition to have an election overseen by the NLRB. Therefore it is incorrect for the Post to assert that the bill's "intent [is] to eliminate secret ballots in union elections."

But my bottom line is that I have no opinion about Unions. If people want them, that's fine. If they don't, that's fine as well. As long as people are freely choosing to organize and freely agreeing to a contract with their employer, who is also freely agreeing, I don't have a position one way or another.

This also informs my feelings about CEO pay and Hedge Fund Managers pay. It does seem excessive and the incentives seem poorly designed, but I have no position on what they should make. Again, I'd have to see what they do and how well they do it, and how important they are to their business in general. I have no a priori figure in mind.

I also understand that if, as I said before, I worked at AIG in a division that had been making money throughout this bubble and crisis, I wouldn't be too happy about having to take a pay cut because of other's stupidity. It might well make me feel unappreciated, and I would leave AIG. So, not all of their bonuses are necessarily idiotic.

I know that there are people who have theories of justice, say, that demand certain limits to salaries and wealth and their concentration, which I have some agreement with. I certainly don't want to see concentrations of power, and, if concentrations of wealth lead to that, then that's a problem that needs to be addressed.

My main concern is for the truly needy. In that sense, I agree with Rawls and others who believe that our shared resources should aid the truly needy first. Now, who's truly needy is a matter of opinion in many cases, and whether or not people are derserving of help is another matter of opinion, but I stand by the belief that we should help the truly needy first, as in foreign policy, we should focus, in our human rights aspect of foreign policy, on where the most people are suffering and dying. What good we can do might vary, but we can at least keep our eyes on, and focus enough of our attention on, where the worst human suffering is occurring.