Less Dumb Investing

I should begin this article by stating that I’m not anti-union. I believe unions, like any structure that manages a large group of individuals, have both benefits and drawbacks.

Today marks the last day of Q3 2024, and dockworkers across the United States are considering going on strike. Starting tomorrow, October 1st, 2024, we may see strikes nationwide. The International Longshoremen’s Association, representing approximately 45,000 dockworkers, is demanding a 77% pay increase over six years. The goal for the ILA is to first cover wages, and then thornier issues like automation.

This year’s strike is one of several union strikes over the past two years that have pushed for significantly higher wages. In August 2023, the Teamsters and UPS reached a landmark agreement that significantly increased compensation for UPS employees. These events usually follow a waterfall pattern; one negotiation leads to another. Today, we are seeing several labor unions pushing for higher wages. It seems the UAW is in perpetual strikes and negotiations with its American manufacturers, while powerhouses like Boeing are slowing production due to active negotiations with its workforce. As one pin falls, others are lined up.

My concern with unions is that they are starting to have significant economic influence over the U.S., not just within local businesses but across the entire grid. In the case of the International Longshoremen’s Association, they control 14 ports across the U.S.: Boston, New York/New Jersey, Philadelphia, Baltimore, Norfolk, Wilmington, Charleston, Savannah, Jacksonville, Miami, Tampa, Mobile, New Orleans, and Houston. The ports cover a wide berth of east-coast inlets for goods so there’s somewhat of a geographic monopoly.

Thus, the ILA can begin to loosely strangle the U.S. economy.

Unions absolutely serve a purpose. They are models of individual gains combined with systemic losses. There is no denying the value of having higher-paid teachers, dockworkers, and drivers. However, the concern arises from unions that have widespread geographical presence.

To put it into perspective, let’s focus on a teacher’s union. I grew up in Virginia, where all teachers are required to join a union. If teachers in Virginia choose to go on strike, then students in Virginia aren’t taught. It’s a simple impact: there is a regional effect on the students, faculty, and parents of Virginia, but there isn’t much broader national impact except for potentially a few dumber kids down the line.

But the conflict arises when unions hold broad national power. There are different stratifications among unions and their regional versus national authority. The United Auto Workers work with, and sometimes against, car manufacturers in the U.S. However, if they choose to strike, there is generally a stable backlog of vehicles to tide things over until the strikes are resolved. UPS drivers can choose not to drive, but there is some excess capacity within DHL, USPS, FedEx, and other freight and mail operators. Teachers can strike in regional locations, but their strikes don’t disrupt national economies. But the ILA combines the worst qualities: they affect just-in-time economics, control a wide geographic region with high barriers to entry and exit, and have the ability to halt a critical section of the economy.

What concerns me is not so much the dollar impact of a union’s demands. The ILA is asking for a 77% raise over six years, arguing that inflation was 11% last year. However, barring unexpected outcomes, the U.S. is likely to see 2-5% inflation in the medium term. It seems like an unreasonable request, and it is. But that’s not what bothers me.

How are these unions allowed to have such wide geographic power? In economic theory, they are somewhat like monopolies. Sure, there are competitors via other ports, but national unions share certain characteristics of monopolies:

1. High barriers to entry and exit (good luck getting additional port capacity on short notice)
2. Price makers
3. Single seller (or in the case of unions, wide reach)
4. Price discrimination

The solution is simple: allow unions to exist, but create regional unions. A national union of 45,000 members should not be allowed to control imports and exports for 330 million Americans. Their activities, while permitted, wield remarkable power. If they truly deserve the wage increases they are demanding, then market forces should respond organically by raising wages due to the limited availability of ports.