Our Extractive Elites

[Geee]

National Review:

Why do nations fail? In their new book, economists Daron Acemoglu and James Robinson argue that countries collapse when the reigning political coalition extracts wealth rather than promotes innovation and growth. Sounds like a union, doesn’t it?

The book, Why Nations Fail, sums up Acemoglu and Robinson’s laudable academic oeuvre, focusing on the pre-industrial and developing world. They trace how nations grow rich thanks to inclusive institutions that provide economic incentives and protect property rights, and how nations suffer when “extractive elites” gather political and economic power for the purpose of rent-seeking.

In a review of the book, Buttonwood, a columnist for The Economist, argues that, given the anemic growth across the industrialized world, perhaps the West and the United States face similar problems. He fingers two possible culprits — the extractive elites of the rich world: too-big-to-fail banks, and the public sector, particularly its unionized employees.

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In response, Acemoglu and Robinson essentially accept his argument about banks, noting that inflated compensation and the implicit insurance they get are unfair and unproductive privileges, extracted through use of the financial industries’ political and economic clout. One might dispute that argument, but there are much deeper flaws in their ham-fisted rejection of Buttonwood’s other suggestion, the public sector, and its unionized employees specifically. They are, in fact, far more extractive and inimical to an inclusive political economy.

The two economists agree that the power of unions, in some circumstances, can allow them to extract privileges and hinder progress in ways that restrict growth; they consider it “plausible” that unions are sometimes extractive. But this is not always the case, because “unions and workers, even if they appear politically powerful, don’t seem to be able to stop the introduction of new technologies.”

Of course, no one would suggest that unions are able to prevent the introduction of new technologies in perpetuity, but they’ve demonstrated, even in recent years, an impressive ability to retard the implementation of new technologies to the detriment of the economy as a whole.

For instance, U.S. port cities that had particularly powerful longshoremen’s unions were much slower to adopt containerization, permanently shunting business toward ports that eagerly embraced the breakthrough. Toll-booth workers — a notoriously overpaid, unskilled unionized group of public employees — have vehemently opposed the introduction of automatic tolls such as New York State’s EZ Pass and open-road systems such as Dallas’s. Teachers’ unions have fought, often successfully, against just about every form of education innovation, including charter schools, merit pay, school choice, and standardized testing.

So unions can be an impediment to progress — but can they function as extractive elites? Acemoglu and Robinson believe that organized labor in the 19th and 20th centuries was a force for greater economic and political inclusiveness (making it not extractive, but pro-growth), but admit that “unions have been in a more rent-seeking mode in the second half of the 20th century.”