DRI-204 for week of 3-8-15: The West-Coast Port Lockout: Causes and Consequences

An Access Advertising EconBrief:

The West-Coast Port Lockout: Causes and Consequences

When unions make news in the U.S. these days, chances are they are public-employee unions. The days of high-profile strikes, high-visibility picket lines and high voltage tension between labor and corporate management are long gone. Or so we thought until the last nine months, when 29 ports in California, Oregon and Washington were crippled by a maritime lockout staged by the Pacific Maritime Association (PMA) against the International Longshore Warehouse Union (ILWU). As the lockout lengthened, unloaded cargo ships dotted the coastline of cities like Long Beach and Los Angeles. Predictably, President Obama eventually intervened by dispatching Secretary of Labor Thomas Perez westward with a threatening message to the principals.

The lockout ended with a settlement on Friday evening, February 21, 2015. The lockout may be over, but we are left to make sense of it. In an age when private-sector unionism is dying on the vine, why is one specimen healthy enough to produce this job action? What actual role – if any – did the President play in settling the dispute? And, as always, what general principles of economic logic emerge to enlighten us?

In this case, the background to the dispute is voluminous and wide-ranging in history and subject. But it is vital to understanding.

The Economic Importance of the West Coast Trade

The West Coast ports host the Trans-Pacific trade between China and the United States. This international trade connection, linking ports like Shanghai and Los Angeles, is by far the most lucrative of the nine major global trade routes. In value terms, about half of all U.S. maritime cargo docks there. It is the jewel in the crown of globalism.

The U.S. is the world’s leading consumer nation. China is the world’s leading supplier of human labor and, consequently, a contender with the U.S. for the world lead in production of goods and services. As the U.S. has increasingly developed a comparative advantage in services – particularly finance – China has produced an increasing share of the world’s manufactured goods. These goods are shipped to their ultimate consumers primarily by sea.

The vessels carrying Chinese manufactured goods are highly specialized for this purpose. They resemble nautical skyscrapers much more than oceangoing vessels of old. The goods are mostly held in gigantic containers. A standard container’s dimensions are twenty feet long, eight-foot six-inches high and eight feet wide. That is 6.09 meters by 2.6 meters by 2.4 meters. These containers are stacked in the mammoth cargo hold of the ship – seven or eight high and fourteen across. That is not all. Cargo is even placed on the top deck of the vessel in 45-foot, 48-foot and 53-foot boxes. The size and tonnage of one of these modern-day arks is wondrous to behold. Each ship holds roughly three warehouses full of goods. Of course, bulkier and more specialized merchandise like cars, trucks and agricultural machinery is carried in vessels specifically tailored to the purpose – but still mind-numbingly capacious.

Now envision the ports of Los Angeles and Long Beach shortly after settlement of the lockout. Some 29 of these ships were still bobbing at anchor, unloaded, in those waters. The value of the merchandise being stalled by this dispute was enormous – undoubtedly larger than the GDP of many a country.

So far, we have posited a commercial dispute that has slowed and frustrated business affecting roughly half of international trade traveling by sea in the U.S. Given the zeitgeist, it is not hard to anticipate the next chapter in the story. It is government intervention – and given the nature of the current political administration, can Presidential interference be far behind?

Presidential Intervention

The Taft-Hartley law was passed in 1947 by the overwhelmingly Republican-dominated Congress in response to countless pro-labor, big-government measures adopted by Franklin Roosevelt’s New Deal. These included the Wagner Act. Taft-Hartley was widely viewed as a re-balancing of the scales back toward “business” in the field of labor negotiations. Among its provisions was a clause allowing the U.S. President to intervene in strikes or lockouts that adversely affected the “national interest.” The intervention could take various forms, including a call for compulsory arbitration as a means of breaking a negotiating deadlock. The general philosophy behind the provision was something like this: Each side in the negotiations is selfishly pursuing its own interests while consumers are being harmed by the goods and services not produced and work not performed as the strike lingered on. So, the President – who, it is presumed, has only the “national interest” at heart, will nobly step in and discipline the selfish adults who are acting like unruly children.

Readers should take special note of the overarching logic here: Market participants are selfish, immature and short-sighted, while the government in general and the President in particular are far-sighted, benevolent and noble. We, the general public, are dumb. The government is smart and must rule us for our own good. Of course, the government patiently allows us the freedom to live our own lives for a while – but when we get out of hand, the government steps in firmly and decisively, in no uncertain terms and corrects our foolish and careless mistakes.

As noted above, the lockout was resolved with a settlement between PMA and ILWU on February 21, 2015. At the eleventh hour, President Barack Obama intervened in the dispute by sending his Secretary of Labor, Thomas Perez, to California. Perez’s mandate was as follows: “Get this done now – if necessary, in Washington.” Was this the decisive measure in achieving resolution of the dispute?

No. This was classic political theater. The President was undoubtedly following the progress of the negotiations. When it seemed agreement was near, he sensed that his chance for seizing credit for ending the dispute was slipping away, so he did what politicians do – he looked as busy as possible while pretending to solve the problem. He had to act fast to get his response on the public record before the disputants settled their disagreement without him. If he did, he knew that when the two sides reached agreement, many people would assume that they were prodded into action by his tough talk.

Although President Obama’s career specialty is high-handed, unilateral, unprecedented executive action, his dispatching Secretary Perez to the West Coast does not fit into that category. Obama’s predecessor, George W. Bush, intervened in a similar manner in 2002. Indeed, the principals were the same – the PMA and the ILWU – and the basic scenario was identical – a lockout staged by the PMA. That lockout was motivated by a “work slowdown” called by the ILWU when contract negotiations between the two groups were deadlocked. President Bush threatened both groups with a court injunction that would have forced them to abandon their respective stances and reach agreement. The President’s threatened injunction would have nullified the PMA’s lockout; meanwhile, the Bush administration threatened to reclassify the dock workers as “railway workers.” This odd-seeming bureaucratic step would have had profound repercussions for the union, since railway workers were legally treated as essential to national safety and forbidden to strike. The threat had its desired effect when the parties ratified a new contract without requiring the prod of an injunction. Since Obama was not about to threaten a radical left-wing union whose members were a key voting bloc for his party, his admonition to Secretary Perez was the emptiest of threats.

Very well. If President Obama’s threat did not bring the recalcitrant disputants to heel, what did? Why was the lockout settled? And what incentives operate in these cases to persuade the parties to settle and limit the damage to consumers?

Trade-Route Competition

The true story is a familiar one. Government perennially poses as the savior of first, last and customary resort for consumers. But this is just a pose; it’s for show, not for go. Government can’t help consumers because government doesn’t organize resources to produce output, doesn’t possess entrepreneurial skills necessary to find out what consumers want, doesn’t possess the incentives and motivation imparted by the profit motive and lacks the information necessary to utilize the price system the way market participants do.

In other words, government lacks just about every concrete attribute necessary to actually help consumers. Where can that help be found? In competitive markets, that’s where. 

Let’s apply that generalization to the West Coast port lockout. For over nine months, roughly half of the tangible cargo entering the United States has been funneled through the 29 bottlenecked West Coast ports, producing costly time delays and increasingly frustrated transporters, wholesalers and retailers. Do all these frustrated people have to suffer in silence?

No. There is more than one way to move goods from China to North America. The Trans-Pacific route from Shanghai to the West Coast is the shortest route, taking 12-14 days. But the port lockout has encouraged shippers to experiment with alternative routes. These alternatives may be longer – up to twice as long, in fact – but the cargo can be unloaded immediately upon arrival rather than waiting in the West Coast queue for an indeterminate time. The most common of these alternatives is to circle around the West Coast and continue southward down the California coast and past the Mexican Panhandle. The ships can stop off at a Mexican port, or reach Central America and cross the Panama Canal before turning north towards the Atlantic Coast, reaching New York City in 25 days.

The travel itinerary of any particular ship will depend on the composition of its freight. As reported by The Wall Street Journal (“Ports Gridlock Reshapes Trade,” 03/06/2015, by Laura Stevens and Paul Ziobro), “the biggest shippers, including Wal-Mart Stores, Inc., Home Depot Inc. and Target Corp., have employed for years what is known in the industry as a four-corner strategy, in which networks are expanded to include warehouses at northern and southern ports on both coasts and the Gulf of Mexico. Now even smaller companies are diversifying.” A Journal survey found that 65% of U.S. shippers planned to reduce shipments routed through the West Coast during the remainder of this year and next year. Inevitably, some of those re-routing decisions will become permanent.

A shorthand way of describing this changeover is to say that the Trans-Pacific trade route faces competition from the alternative route to the East Coast – which is really a combination of multiple routes with a terminal route ending in New York City. More precisely, each of the 29 ports served by the Trans-Pacific route competes with the many port-terminal facilities in Mexico, the Gulf Coast, the Atlantic Coast and New York City. In January, according to the Journal, the port of Oakland suffered a 32% drop in volume while the port of Virginia picked up a 15% increase. Toymaker Hasbro stopped splitting its shipments between coasts and routed its full, lucrative complement of toys to Savannah, GA by way of the Panama Canal. It was the hot breath of this kind of competitive pressure that the members of the PMA felt on their necks during negotiations with ILWU. It was the threat of losing business to other ports that finally drove them to settle with ILWU. (As it happens, the final matter at issue was the details of an arbitration agreement between the two bodies, rather than wages or working conditions.)

There is still another maritime trade route from China to North America. It is less important for the U.S. because the route passes through Southeast Asia, Africa and Europe via the South China Sea, the Indian Ocean, the Mediterranean, the Suez Canal and Gibraltar. Ships will drop off cargo in all these locations and only the residual will remain to continue across the Atlantic to the East Coast. But the ports lockout has redirected some cargo to this route as well.

Like many economic questions, trade-route optimality becomes more complicated the closer it is examined. Larger companies are more apt to change their route, either temporarily or permanently, because they have the resources and flexibility to take advantage of any potential advantage. They can utilize economies of scale, size and time beyond the reach of smaller companies.

The West Coast ports are not the only ones grappling with the problem of bottlenecks. The Panama Canal has been a key trade connection for over a century. It was constructed at the dawn of the 20th century and wasn’t built for the supersized vessels that careen across today’s maritime superhighways. It is now undergoing enlargement, a process scheduled for completion in 2016. The anticipation of this upgrade was a factor influencing the PMA to hold out longer rather than settle with the ILWU. Why? The port owners knew that they were bound to lose some business to the East Coast next year, when the Panama Canal revamp was complete. Thus, if that business switched early – this year instead of next year – only this year’s lost business would be attributable to their negotiating stance, not the full discounted present value of all future business lost, because future business was slated to transfer away anyway.

It is evident that competition from other trade routes – that is, from other ports – was the real motivation for settlement of the West Coast port lockout. The PMA faced a complicated tradeoff – weighing the gains from further negotiation against the net loss of business to other ports. Having disposed of the shibboleth that Presidential intervention under Taft-Hartley was the instrument of salvation, we should next turn the argument around. Why were port operators intent on locking out the ILWU in the first place? What did the PMA have to gain?

The Gains from the Lockout

The most fruitful way to examine the issue of gains from the lockout ordered by PMA is to look backward to the previous lockout in 2002. This was the one in which President George Bush intervened, after the PMA ordered a lockout in response to the ILWU’s work slowdown. The key issue from PMA’s standpoint, on which they finally prevailed, was the employment of new technology. The technique of “containerization” as outlined above was becoming the efficient production technique for transporting ocean cargo. In order to move and stack large containers inside gigantic ships, port personnel had to use the latest mechanized technology. The ILWU resisted this strenuously, but finally conceded.

For a century and a half, labor unions have portrayed technology as the enemy of labor. That is ironic. Machines make labor more productive, thereby increasing the marginal-value product of labor, which is defined as the amount of output produced by an additional increment of labor multiplied by the price of that output. The increase in marginal-value product increases the demand for labor by business firms, thereby driving up wages. Essentially, this is the process by which wages have increased in America ever since colonial times. These increases have been broad-based across industries ranging from agriculture to manufacturing to extractive industries to service industries like warehousing.

Unions have instead painted technology as the enemy of labor because it substitutes for labor instead of complementing it. It should be obvious that this process of substitution has severe limits. Indeed, it is only now, after a few centuries of technological progress, that we are reaching the point where robots can really substitute for people to any significant degree. While this does have the effect of actually eliminating some jobs, its effect on productivity is so tremendous that remaining jobholders – those whose work is complemented by the machines – see huge increases in income.

Unions must provide gains to their members that cannot be had without union participation. Obviously, workers can have the benefits of technology without joining a union, since employers are willing and even anxious to adopt technological innovations that promise to increase the rate of output per unit of input expended. That is why unions have always sought to force workers to join unions. Next, unions must find a way to raise the wage of members higher than that prevailing in the marketplace. Once unions have forced workers to join unions, they then restrict union membership in order to restrict the supply of labor to the marketplace. The restriction in supply doesn’t restrict the number of workers willing to work, only the number able to work. This increases wages by creating an artificial surplus of labor. That labor surplus is what we call unemployment. Various sources estimate that thousands of people occupy waiting lists for membership in the ILWU. Tens of thousands of applicants apply whenever a union vacancy pops up.

Labor unions are cartels. In many ways, they are analogous to business cartels organized to raise prices paid by consumers above the prevailing market price. (Unlike labor cartels, business cartels don’t produce surpluses of goods; instead, the business combination reduces output in accordance with the higher price contrived by the cartel. The essential difference between the two cases is that business cartels theoretically control the total supply of output to the market but unions do not control the total supply of labor to the labor market.) But while business cartels have been forbidden by the antitrust laws, labor cartels are actively encouraged by government labor laws like the Wagner Act. In particular, government encourages labor unions to compel membership and compel payment of dues by workers who do not belong to unions.

The 14,000 members of ILWU who work in the West Coast ports have been described by the San Francisco Chronicle as “the aristocrat[s] of the working class,” who “can earn well over $100,000 a year with excellent benefits.” Partly, this is owed to the decades of exclusionary policies followed by ILWU, which has studiously restricted membership in the union. The union employs the ancient “hiring hall” method of allocating the drastically restricted number of jobs. Union members – including thousands of part-time “casual” workers – show up at hiring halls where bosses inform them what work is available for them. Movie fans recall the Oscar-winning film On the Waterfront, which graphically portrayed this system.

But the living standard enjoyed by ILWU members today is also the result of the contract negotiated in 2002 at the insistence of the PMA. That was the year in which the new technology was finally adopted by the West Coast ports. The result of this was that in succeeding years employment at West Coast ports increased by 32%. This was the measure of the increased productivity caused by technological innovation.

For years, the ILWU reacted to technological progress by instituting job cuts. The union watched while black union members were laid off because they were junior to their white brothers. Today, this would be called “disparate impact,” but during the ILWU Presidency of the Communist sympathizer Harry Bridges (1937-1977), his political influence precluded any criticism. Similarly, Bridges managed to exclude women from union membership without attracting attention as a sexist. The ILWU’s restrictive and exclusionary policies kept thousands from working in West Coast ports. In contrast, the PMA’s lockout won a concession for technological adoption that spurred productivity and added thousands of jobs to port payrolls.

The Real Story and Consequences of the Port Lockout, as Told by Economic Logic

Our analysis of the West Coast port lockout, using the tools of history and economic logic, paints a completely different picture than the one drawn by the news media, left-wing academics and union propagandists. The lockout was indeed the action of two sides, each pursuing their own joint interests; that much is true. But Presidential intervention was neither necessary nor sufficient to end it, either in the current instance or in the past. Market participants are not immature children governed by passions over which they have no control. They are adults who make rational choices based on the limited information at their disposal. In this case, market forces – specifically, the competition embodies in alternative global trade routes – put limits on the amount of time that the PMA would be willing to negotiate for their ends.

Presidents are not noble men governed by altruistic motives foreign to market participants. Presidents are politicians. Presidents act to achieve their political ends. Political ends typically involve persuading a bloc of people that you will provide the largest possible benefit to them at little or no cost. This is never economically logical or feasible, so political action and economics are constantly at odds. Thus, it is not surprising that neither President Bush nor President Obama would rely on market forces to handle their respective West Coast port lockouts, nor is it surprising that their tough talk designed to bring the disputants up short and break the negotiating deadlock was not meaningful.

Ending the deadlock by force majeure was not economically beneficial to American consumers because it was not required. Market forces would do that anyway. The measures ancillary to achieving that coercive end were not beneficial, either. Forcing people to do things against their will is only justified to prevent crimes and loss of rights. In this case, the PMA and ILWU were harming only themselves. Shippers have alternative ways to get their goods to consumers and were, in fact, making use of those alternatives.

The central fact of the West Coast port lockouts is illuminated by the aftermath of the 2002 agreement: The adoption of productivity-enhancing technology demanded by the PMA ushered in a 32% increase in employment on the West Coast docks. This benefitted America’s consumers, the PMA and several thousand workers who previously had been shut out of jobs by the exclusionary policies of the ILWU. The PMA’s lockout was the force working for the public good – not the actions of the President and certainly not the actions of the ILWU. The PMA was the beneficial force not because its members were inherently more noble or altruistic than everybody else, but because they were the only ones directly associated with the case who were responding to market forces. This was a contemporary instance of Adam Smith’s “invisible hand” at work. It was so invisible that nobody else has noticed it until now.

To be sure, this isn’t the way that competition is supposed to work. Firms are supposed to introduce productivity-enhancing technology as it becomes available. They shouldn’t need to ask permission from anybody – not government regulators, Presidents or labor unions. But the fact that federal-government labor policy allowed a union like the ILWU to gain a stranglehold on the maritime labor market put port owners and operators in a bind. They had to form their own organization just to negotiate with the ILWU. They had to risk losing business to other ports during negotiations in order win the right to adopt the technology that allowed them to compete successfully with those ports. This is no way to run a railroad – or a maritime cargo terminal – but that’s the hand of cards they were dealt. They played it out to the best of their ability. For their trouble, they have been vilified.

And the ILWU? In 2001, they celebrated the centenary of the founding President of their union, the Communist Harry Bridges. Fittingly, they celebrated it with a work stoppage. They shut down the port of San Pedro, CA, for eight hours.

The PMA negotiated tenaciously for the right to create jobs – and did so. The ILWU negotiated for the right to restrict employment. They celebrated the birth of their founder by organizing labor to waste of a day’s worth of work. In a nutshell, that sums up the contending sides in the West Coast port lockout. The lockout itself was not a pointless waste of time, a threat to consumers, and a danger to national welfare that demanded Presidential intervention. It was the only way that the interests of consumers could be served, given the powers placed in the hands of a labor union determined to thwart progress and benefit a small number of incumbent union members at the expense of job seekers, consumers and everybody else. In short, the reality of the West Coast port lockout is diametrically opposed to the conventional narrative.

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