Friday, May 4, 2012

Can Trade Unions be 'extractive elites'?

Acemoglu and Robinson's latest epic is sitting on my desk. They've helpfully set up a blog about the book, with comments and responses to reactions, including Francis Fukuyama's surprisingly powerful hatchet job. Anyway, their latest post comments on a review by the Economist's Buttonwood column, which suggests that present-day examples of 'extractive elites' - the key concept in Why Nations Fail - are bankers and public sector trade unionists.

Like the first one. The second one, not so much.

A & R are receptive to the first idea, on grounds that most informed opinion seems to accept by now - that super-rich bankers that brought the world economy to its knees through reckless gambling may be a good example of an extractive elite, ie one that 'extracts resources from the many for the few'. I think that is a pretty hard case to rebut, given recent experience.

What I don't get at all is how public sector unions can fall into the same category. After all, even in countries with a small public sector, we are still talking about 'many' people here. The more people that have to extract resources, the less people are left to extract resources from. Put another way, the bigger the group is, the more the group has to 'internalize' the consequences of its extractive behaviour. This is the reason why successful extractive elites have to be - well - elites.

The second point that needs making is that unions, battered by the negative press of the last 30 years or so, are ripe for a rebranding. A & R reasonably enough state that they 'don't know the answer' to the question of what role unions can play in dealing with the current problems of inequality and stagnation. Respectfully, I suggest that we in fact know quite a lot about unions. We know that the countries that have the highest union density have emerged the healthiest from the financial crisis (Germany and small Northern European states such as Sweden), whilst countries with weak unions are in a terrible mess (the UK and the Southern European countries all have small and declining union membership). We also know that union density is highly correlated with higher median earnings:

(courtesy of Think Progress)

All the evidence is that having strong unions is a big advantage in the recent period, both for equality and for overall economic performance. Of course, there could be all kinds of endogeneity problems here (eg, unions decline where they become disfunctional), but on balance higher union membership has to be a good thing, because 'encompassing' unions internalize the costs of their behaviour, incentivizing pro-growth policies.

In short, unions are the opposite of extractive elites. Even in the worst case, they can't extract that much without damaging themselves in the process. Strange that the Economist can't see the difference between unions and bankers.