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Archive for November, 2012

Hostess Brands, makers of Twinkies, Wonder Bread and many other relatively “junkie” foods, filed Chapter 7 bankruptcy liquidation papers recently. The company had revenues of nearly $3 billion, and was bought and sold by private equity funds twice in the last 10 years. After loading the company up with debt, Hostess twice filed for Chapter 11 bankruptcy in order to restructure. Six different management teams in the last eight years, each presumably more highly compensated than its predecessor, failed to change the company’s product offerings to respond to the market’s demand for healthier products.

The liquidation was triggered by a nationwide strike by the 5,600 employees who were members of the Bakery, Confectionery, Tobacco Workers and Grain Millers Union (BCTWG). 92% of that union’s employees rejected a new collective-bargaining proposal in September. The company’s offer included an 8% wage cut in the first year, a 17% increase in employee health-care costs and changes to workers’ pension plans that could have reduced payouts. Hostess long had said it couldn’t survive without cutting labor costs, even as it enraged workers by increasing top executives’ pay by 60% earlier this year. In a move reminiscent of Russian Roulette, the bakers union workers essentially pulled the trigger for all of the company’s workers…and lost.

Teamsters, which with 6800 employee members was the company’s largest union, narrowly voted to accept the company’s proposed deal. Teamster President Jimmy Hoffa said his team “switched gears” from trying to preserve all 18,000 Hostess jobs, a prospect he viewed as “off the table,” and instead was trying to drum up buyers for “bits and pieces” of the business.  Average pay for union workers was $16 an hour for the bakers and $20 an hour for the Teamsters. Frank Hurt, President of the BCTWG, called the company’s proposed 8% wage cuts “draconian” even as his members received 100% wage cuts from loss of their jobs. For this inspired leadership, he is paid about $250,000/year.

Hostess Chief Executive Gregory Rayburn had a different vision of how the bankruptcy auction process would play out. “Nobody wants to have anything to do with these old plants or these unions or these contracts,” Mr. Rayburn said. The company had hunted for buyers for the last several years as it tried to avoid a second trip into bankruptcy, but no buyer came forward. Potential buyers have made clear that their interest partly is because a liquidated Hostess would be free of its collective-bargaining agreements. A buyer might yet pick up a few of Hostess’s plants. Alternatively, the union(s) can now buy the assets in bankruptcy and reconstitute the company as a workers paradise without management sucking out all the benefits.

At the time of this bankruptcy, Hostess, with dozens of plants, had 372 collective bargaining pacts, 80 health and benefits plans, 40 pension plans and $100 million in retiree health benefits. The company had asked the unions to take the pay cuts and increase in benefits costs in exchange for a 25% share in the company and an interest-bearing $100 million note.

It appears that the bakers were operating with relative efficiency, and it is possible that some of the 33 plants producing the Hostess products will be purchased and their workers reemployed. The Teamsters, who were on average better compensated, had tied logistics into knots for years with negotiated work rules. As an example, Twinkies and Wonder Bread that were produced in the same facility and destined for the same customer had to be delivered by separate trucks, and put into warehouse or store shelves by different union workers.

18,000 workers are a large group of people. Unfortunately for these workers, they are strategically unimportant to the US economy. Hostess plants were scattered around the country and the shutdowns will not inordinately affect any one state or section of the country. With average annual wages of less than $40,000/worker these were jobs held by relatively unskilled laborers. Unlike autoworkers who are cogs in a complicated supply chain, other industrial workers do not heavily depend upon the Hostess products output. Most of the forgone Hostess products will be quickly and easily substituted with the output of Hostess’s many competitors.

What is the lesson to be learned here? Is this a case of unionism run amok? Was it a case of internecine union warfare with the bakers tired of getting a worse deal than the Teamsters? Were the workers justified in finally pulling the plug on a company whose management(s) repeatedly failed them? Or was it but another example of “creative destruction“? Diogenes suspects it is all of the above. It remains a tragedy in human terms. Many, if not most of those workers will likely face an extended period of unemployment. If and when they do find new jobs, that work will likely pay less and offer fewer benefits. The union operation was a success. Unfortunately, the patient died.

Americans are rightfully proud of the right to express their political opinions at the ballot box and expect a peaceful transition of government leadership to whoever wins a general election. Nevertheless, in most election cycles, substantial numbers of Americans are more motivated to vote against one candidate than wholeheartedly in favor of the other. Why don’t we have more, and better choices for our leaders?

Who Are Democratic Party Members and Primary Voters?

As they are currently constituted, both the Democratic Party and the Republican Party are dominated by the ideologically extreme ends of their memberships. On the Democratic side, union members accounted for 22% of Democratic National Convention (DNC)  delegates, and unions are major money contributors to the Democratic Party. Unions spent $1.1 billion on politics from 2005-2011 and another $3.3 billion on other activities such as lobbying, of which 92% was spent on the Democratic Party . This is so despite the fact that only 12% of workers nationally are union members, and 40% of union members are Republicans Party members or vote that way. Another 8% were “Greens” who favor much higher fossil fuel costs and more EPA Regulatory Rules which are cost multipliers for many businesses.

Who Are Republican Party Members and Primary Voters?

On the Republican side, as much as 50% of primary voters are Evangelicals and Pro-Lifers, about 10% of party members are Tea Party supporters who oppose new taxes as a means to repair the Federal fisc, and about 10% are also NRA members who believe that Americans should be able to carry assault weapons. There is considerable overlap amongst these segments.

Why Is the Composition of Political Party Members and Primary Voters a Problem?

The Democratic Party has about 30% of its membership with far left, non mainstream core beliefs. The Republican Party has about 30% of its membership comprised of those with far right non mainstream core beliefs. These extreme views are disproportionally represented in America’s political process because 30% of Americans consider themselves to be independents not allied or involved with determining policy positions in either party. Paradoxically, it is the vote of these independents that determines the outcome of general elections.

In order to incorporate the support of their extremist radical wings, each political party is forced to move away from centrist platforms that would likely appeal to the greater portion of the electorate. In particular, the Republican Party’s presidential candidate is perennially hobbled by conservative social policy declarations required to be made during the primaries to secure the nomination, only to attempt to backtrack during the general election campaign. As a result of these discrepancies between party participants and the general electorate,  the American Republican and Democratic parties are among the weakest in the world with respect to being able to present to voters a team of candidates united by coherent principles and a program for governing the country.

Why Does America Only Have Two Political Parties?

America’s founding fathers made many compromises in order the secure the approval by the states of a federally empowered central government under the Constitution. One of many checks and balances on federal power was the adoption of a bicameral legislative body with disproportional power given to smaller states in the Senate. Another was the adoption of the Electoral College. This indirect presidential election scheme is further reinforced by the congressional election methodology.

The main reason for America’s majoritarian character is the electoral system for Congress. Members of Congress are elected in single-member districts according to the “first-past-the-post” (FPTP) principle, meaning that the candidate with the plurality of votes is the winner of the congressional seat. The losing party or parties win no representation at all. The first-past-the-post election tends to produce a small number of major parties, perhaps just two…. Smaller parties are trampled in first-past-the-post elections.
—Economist Jeffrey D. Sachs, The Price of Civilization, 2011
The single member plurality of our voting system also results in the disgusting spectacle of gerrymandered districts which further distort the ability of alternative voices being heard in elections.

What Can Be Done to Fix the Problem?

In what may well be a surprise to most of the American electorate, there are two other national political parties, the Libertarian and the Green Party. While the Libertarians manged to place their candidate on every national ballot, they won no states and received no electoral votes. As I wrote in Why Do We (Still) Have the Electoral College?, a proportional voting or parliamentary system is the solution. Such systems are  inherently much more open to minority parties securing better representation than third parties do in the American system. Currently, Maine and Nebraska are the only states that proportionally split their electoral vote, but there is no legal impediment to the adoption of such policies in every other state.

What Would a Proportional Direct Vote World Look Like?

A direct proportional vote within each state would have the practical effect of making presidential elections a popular vote. It would not truly be one because votes would be sub-totaled by each states’ Electoral College votes, and there could be rounding errors. The change could be implemented without requiring a Constitutional Amendment.

Candidates would place greater efforts on larger population centers which might skew heavily toward another party, because electoral votes would be available at the margin. Voter participation would likely rise dramatically, particularly in deeply partisan states, because every vote would count. From a public policy standpoint, this would be presumed to be good for America. The following chart shows that the US election system is responsible for one of the lowest voluntary voter participation rates in the developed world.

The rise of more centrist third, fourth or even fifth parties could unleash a torrent of choices for American voters. Because each of these smaller parties would need to build governing majority coalitions, compromise would be required for political success. The current gridlock  in Washington would be history. More independents would be co-opted to participate in the system because their narrower concerns would be better addressed by smaller parties.

America is a center/center-left nation. We are ethnically and racially majority minority for the first time in our history. It’s about time that our politics and our politicians better reflected this new reality and gave new voices a chance to be truly heard.