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Pro-Union, Crony-Capitalist Thinking Dooms Another Employer

Mises Daily: Wednesday, October 16, 2013 by

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It’s an old story. A manufacturing plant in a small town announces an impending closing, threatening to devastate the local economy and the many families that depend on it. Panic ensues, and politicians intervene. There’s a sense of injustice in the air. Can anything be done?

Although this scenario played itself out many dozens of times in the area now known as the Rust Belt, it was set in motion last week in Northwest Alabama with the announcement that International Paper planned to shutter its largest manufacturing facility in the world — a massive, 42-year-old paper mill in Courtland with more than 1,100 employees, including maintenance workers earning wages that range between $20 to $32 an hour. These were good jobs — if you could get into the union and if paper demand was sufficient to keep those workers productive enough to justify the union wage.

The problem is, the demand fell as communication became more electronic, causing a business model that fit the 1970s to become unworkable in the 2010s. There is much that should be learned from this event, and as much as I feel for the people in Lawrence County whose lives will be upended by it, I’m afraid the lessons will not be heeded.

The first lesson applies to the nefarious influences of the economic development offices that exist in every state and compete with each other for large manufacturing employers. This state’s plucky EDO, the Alabama Development Office, is considered by many to be the gold standard in this area, leaving states like New York and California in the dust while enabling firms like Airbus, ThyssenKrupp, Mercedes, and Hyundai to establish major operations in the state’s politically favored regions.

The trade-off is that the millions of dollars and incentives that go to these firms come from conscripted funds that would otherwise be directed privately in the form of investment or consumption. These unseen effects include investment projects foregone — perhaps in Lawrence County itself — in order to fund the EDO’s redistributive policies. Forcing taxpayers to finance economic development, as opposed to allowing savers to direct their resources to projects they believe will reflect their highest valued use, highlights the contrast between violent means of the government and the peaceful means of the market. Crony operations such as economic development offices exist at the expense of the latter.

Adding insult to injury, EDOs also create a sense of entitlement, even on the part of those entities not favored by the political players who run them. We’re seeing this in Alabama, where workers and politicians have called for the state to intervene to stop International Paper from shutting down, arguing that if conscripted capital partly financed the Honda plant in Lincoln, why can’t it also save paper jobs in Northwest Alabama? They forget, however, that International Paper does not exist to maximize employment or wages but to satisfy consumer demand, and that corporate graveyards are filled with firms that lost their focus on the latter.

The second lesson applies to the union labor force that enables their employees to earn more in wages than their individual productivity contributes in the form of revenues to the firm. When this happens, firms lose money by employing such labor, and since labor laws overwhelmingly support the worker over management, companies often have no recourse other than to shut down operations when economic forces turn against them.

Would the Courtland plant remain open if workers were allowed to accept reduced hours or wages more in line with the demand for its output? We’ll never know.

The last lesson is that any economy, and especially small local economies, should never become dependent on one or a few employers. The problem is that large, unionized operations such as International Paper’s often have the effect of scaring away capital investment over time.

As a result, economies become less diversified and provide poor work opportunities for future generations of workers. This phenomenon explains not only why International Paper’s arrival in Courtland in 1971 may have proved to be its death knell in 2013, but also why Rust Belts happen in the first place.

How different life might be for International Paper employees today if they had other work options in and around the Tennessee Valley. (The message for possible long-term effects of unionizing labor in Tuscaloosa County is obvious.)

Painful lessons like this one are avoidable when business plans and policies do not violate economic laws, when governments refrain from favoring certain forms of capital or labor over others and when firms remain free to adjust their operations in response to changes in the overall economy. When this is the case, old stories like the one coming out of Courtland will be told far less frequently.