I love studying Economics. At times I wish I would have found the subject in 1968 when I first started college. But alas, I was not very mature in 1968, decided to quit college, and start my business career. Not too smart! I did go back to school and finish my degrees, and eventually became a manager and now a professor. I am fine with my choices.
During class today we will be discussing the impact of inflation on our economy. As a side note, it will be interesting to see how many students show up due to the four-day weekend. In the past I have given quizzes on this day, but this year I didn’t. But today’s conversation should be very interesting.
The section of the chapter that stood out to me this morning involved the relationship between the velocity of money in our economy and the actions of labor. The example starts by discussing a large union negotiating a new wage package with a corporation. A large union would be the teamsters. “If the union negotiates a large nominal wage increase, other unions will likely follow, negotiating an winning higher wages.” This will not necessarily happen in a down economy, so the assumption is the economy in this example is fairly robust.
If this is an aggregate event, meaning that all companies and employees are impacted by higher wages, then the businesses will pass on the higher labor cost, at least part of it, to the customer. This means higher prices, and a greater demand for money. If the Fed does not provide more money to economy, then demand for money is higher than the supply of money, creating higher prices and less demand, thus pushing the economy into recession.
If the Fed adjusts the money supply by providing more money to the economy, the aggregate supply curve for money shifts to the right, providing more cash to the economy, but maintains the economy at full employment. This will result in higher prices.
Now we apply this to Hostess. The company is described as declaring bankruptcy as a result of the Baker’s union demanding an 8% wage increase. The Baker’s union, a branch of the AFL-CIO, are being presented as the culprits, along with a healthier customer which does not want to eat food with preservatives, responsible for the demise of our beloved cupcakes. The Baker’s union being depicted as the evil empire may not accurate.
The WSJ painted a different story this morning involving the two main unions of Hostess. The Bakers and the Teamsters. “The Teamsters reluctantly agreed to givebacks to finance the company’s latest turnaround attempt. The Bakers went out on strike.” The WSJ then writes that even the liberal media went Tsk, Tsk “assuming that union bloody-mindedness must be at work.”
The truth is there are two union players, one that has become efficient, and the other that has maintained a highly inefficient process costing Hostess millions of dollars. Many of us have assumed that the baking process must be antiquated and riddled with inefficiencies. The fact is that most of the baking operations have been improved and are relatively efficient. However, it is the distribution process that seems to be the issue, which involves the Teamsters.
“Under the latest turnaround plan, the sticking point was Hostess’s distribution operations. Union imposed work rules stopped drivers from helping to load their trucks. A separate worker, arriving at the store in a separate vehicle, had to be employed to shift goods from a storage area to a retailer’s shelf. Wonder Bread and Twinkies could not be delivered in the same truck.” So the Teamsters come off as being the altruistic partner in the fiasco, and the Bakers look bad. The fact is the Teamsters have not allowed efficiencies to occur that could reduce operational costs for Hostess. According to the WSJ, production costs for Hostess “were neither excessive nor out of line with the market, but its distributions costs were – in the tune of $80 million and $130 million annually.” So don’t blame the bakers on this one.
I had the opportunity to work with two unions. One is working without a contract now, and is trying to work with Boeing to save its pension. The other, the International Association of Machinists (IAM), has had issues with the company, but has negotiated a new contract and is now producing many airplanes. So much so the company will increase its dividend by 9.1%.
I will say this about the IAM. I found its leaders to be reasonable and willing to work creative solutions to the tension between labor and management. One of the best agreements involves Joint Programs. Within this program you have labor and management working together to improve the skills of Boeing employees. It is a great strategy, one that is working well.
There are many examples of labor and management working together, I hope there are many more. It is good for the economy.
And that is my thought for the day!