Laws Against Plant Closings; H. Sennholz

Hans F. Sennholz LawsAgainst PlantClosings "Never again in Massachusetts," Governor Michael S. Dukakis re cently promised factory workers, will they "lose their livelihoods with no warning, no health insurance for their families and no chance to plan what comes next." The governor had just signed a law for the protection of workers against plant closings, imposing severance-pay require ments on employers and exacting other benefits for displaced workers. Three other states-Connecticut, Maine and Wisconsin-have similar laws. The legislatures of twenty-four states repeatedly considered plant closing bills; two cities-Philadel phia and Pittsburgh-passed ordi nances. Moreover, the courts and National Labor Relations Board are doing their part in making plantDr. Hans Sennholz heads the Department of Econom ics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and monetary affairs.

closing restrictions the law of the land. Plant closings always impose pain ful costs on the participants-owners and managers, workers, local gov ernments and local businesses. The media describe the burdens in vivid colors-the loss of jobs and liveli hood, the poverty and despair, the revenue loss and fiscal distress, the business decline and community de cay. But it is most significant that, in all their intense coverage, not a word is uttered about the tremen dous adjustment costs to the owners. In fact, all discussions and proposals for relief merely pertain to the type and magnitude of benefits to be ex acted from the owners. Typical pro visions of plant-closing laws exact owner-paid severance benefits, owner reimbursement for employee retraining, continuation of health insurance coverage for specified pe riods after termination, payments to 219 220 THE FREEMAN April government of specific proportions of the annual wage bill, reimburse ment for employee relocation ex penses, paid leave time, etc., etc.1 Need versus Greed The argument made in defense of such employer levies usually is threefold. First, the basic need of workers for work, wage and suste nance morally takes precedence over the owner quest for profits. In the language of displaced workers, worker livelihood takes precedence over employer greed. Second, em ployers are morally obliged to rein vest their profits in the plant in which they were earned so that the workers who earned the profits may benefit from them. Iflabor is a source of profit it is rightful and just that labor should be a beneficiary of profit. Third, labor legislation and National Labor Relations Board reg ulations have created unchallenge able job rights that shelter orga nized labor from the competition of independent labor. If organized la bor has job priority over competing labor, it may also have proprietary rights. If organized workers have a legal right to their jobs it must not be denied by the owners. After all, human rights are said to take pre cedence over property rights.

When presented in such contra position, which is borrowed from the stratagems of debate, the answer is as plain as the nose on one's face. Basic needs proceed from life, which is God's creation. Who would want to argue against the priority of such needs? However, most needs are not from nature, but from custom and education. The American steel worker who faces disemployment waxes about his needs that exceed greatly those of other American workers and surpass by far the sim ple wants of his foreign peers. Case studies of plant closing clearly reveal that it affects primar ily high-seniority workers. Young workers are laid off long before the closing, during periods of stagnation and decline when losses are suffered and output is reduced. They are the primary victims of unemployment. The workers who are left when the gates shut permanently usually are 40 to 55 years old, have high job sen iori ty, enjoy occupational status, have little education, and earn ex ceptionally high wages. 2 In 1982 the steel worker whose plant closed down was earning some 189 percent of wages and benefits paid in all manufactures. The automobile worker whose plant shut down was earning 165 percent of wages and benefits paid in all manufactures. 3 Both the steel worker and automo bile worker were senior members of powerful labor unions.

It is doubtful that most owners can match the incomes of steel and auto workers. There are millions of stock holders who directly and indirectly 1985 LAWS AGAINST PLANT CLOSINGS 221 invest their savings in corporate ownership. Most stockholders are middle-class Americans with aver age incomes who, for a greater and safer future, save a percentage of their incomes. They may own stock directly or through intermediaries such as pension funds, life insurance companies, investment companies and credit unions. When seen in this light, there are few Americans who do not invest in corporate produc tion; 998,000 men and women di rectly own General Motors Corpo ration, 216,000 own U.S. Steel. 4 The median earnings of American males, in 1982, were estimated at $19,292, and those of women at $12,532.5 But steel and auto workers were earning between $23 and $25 an hour, or $46,000 to $50,000 per year. It is doubtful that they earned less than most stockholders. Some 75,080 U.S.

Steel stockholders were women; it is unlikely that many earned more than steelworkers. Plant closi~g makes the loss of the job definite and final. Disemployed workers may encounter great diffi culties finding comparable posi tions. But stockholders may be able to salvage all or most of their in vestments; they may gather their profits and desert the ship-at least, this is how many workers are view ing the situation. If it were actually true that plant closings are so prof itable to owners, thousands of fac tories and workshops would be closing every day of the week. Why should there be any production if shutdowns are more profitable? In fact, a shutdown is a desperate mea sure designed to minimize losses and taken in frustration and despair about a hopeless situation. It usu ally inflicts severe losses on owners. When production stops, both wages and capital income grind to a halt.

The owner may lose not only his in come but also his savings, that is, his capital substance, which may have taken many years to accumulate. Two particular situations short of bankruptcy may induce an owner to call a halt to production. When his plant or workshop is expected to suf fer losses that in time are bound to consume his capital, he can be ex pected to order the shutdown. If he fails to give the order a bankruptcy judge will give it in the end. Or cred itors may call a halt by refusing to grant any more credits and demand ing repayment. To avoid losses is to protect not only one's material sub stance but also the jobs of fellow workers. It safeguards the appara tus of production that generates both capital yield and labor income and preserves labor productivity and lev els of living. If these are moral ob jectives it follows that avoidance of loss is a moral task. The owner may rightfully and morally consider a shutdown when his plant or workshop is expected to earn net returns that are consis222 THE FREEMAN April tently lower than the market rate. It is a basic principle of the private property order that the rate of re turn indicates the urgency of human wants and the efficiency with which they are served. A twenty percent return, for instance, may indicate service of a relatively urgent want, a two percent return a low-priQrity want. A twenty percent return may be a reward for a job well done and an inducement for reinvestment; a two percent return may signal con sumer reluctance or withdrawal. To serve the latter is to ignore the for mer and allocate scarce resources to the satisfaction of less important wants. It impairs the economic well being of consumers, prevents the for mation of capital, and renders expansion and modernization most difficult. Where would we be today if our forebears had consistently pur sued least urgent wants and ne glected to create productive capital?

Many factors enter into the own er's decision to halt production. He must weigh the anticipated losses from continuing production against the particular losses resulting from shutdown. Valuable fixed assets may be reduced to uselessness, specific tools and equipment to scrap iron, materials and supplies to surplus merchandise to be' sold at bargain prices. Labor costs of a shutdown may be staggering as a result of the w·aste and unproductiveness of labor during the shutdown process, the contractual obligations for pension and severance pay, moving expenses in case some activities and employ ees are transferred to other company facilities. Undoubtedly there will be legal defense costs from claims and charges lodged by labor, regulators and tax collectors. If all these costs constitute the lesser evil, the owner may choose to close his plant. The Obligation to Reinvest Where economic life is free, plants open and close in an unending pro cess of adjustment and readjust ment. Ever catering to the wishes and choices of consumers, business men make capital investments, change them, withdraw them, or re place them by more productive in vestments. They respond contin ually to changes in consumer choices, to changing techniques of production, changing labor costs, en vironmental costs, government lev ies, and many other factors that af fect productivity. Uninhibited flow of scarce capital from firm to firm, industry to industry, and location to location, leads to highest productiv ity not only for the owners of capital but also for other people as workers and consumers. Working and living conditions improved when the black smith shop gave way to the auto re pair shop, and the buggy factory to the auto assembly line.

There is no obligation, economic or moral, to reinvest profits in the plant 1985 LAWS AGAINST PLANT CLOSINGS 223 in which they were earned "so that the workers who earned the profits may benefit from them." For the blacksmith, to reinvest his dwin dling returns in better tools of pro duction would not have altered the outcome. But he could have earned a handsome profit and simultane ously benefited society by investing his funds in automobile production and service. He would not have served the true interests of his work ers by keeping them on the payroll. Labor, like capital, is under constant pressure to adjust. It, too, receives its market value and price from the services it renders to consumers who, through buying or abstention from buying, issue the production orders. The worker who quickly learns a new technology, seeks employment in a new industry, or moves to a new location where jobs abound, is re warded for his effort. The worker who for any reason refuses to adjust to new situations, may cease to serve ·other people.

Consumers Allocate Returns It is erroneous to conclude that capitalists owe their profits to the ef forts and labors of workingmen, who thereby earn a residual right to prof its. Workers have no better claim to the interest earned by capitalists or the profits collected by entrepre neurs than these have valid claims to workers' wages. Production is co operation in which each production factor receives income according to the value ascribed to its services by the supreme directors-consumers. Labor receives its full wages ac cording to inexorable value princi ples, the providers of capital receive the market rate of interest, and en trepreneurs may earn profits or suf fer losses. They -all are paid in full. For labor to claim a right to invest ment capital is to claim the right to command someone's savings, for the bricklayer who pours the foundation and lays the bricks to claim owner ship rights to the house, and the steelworker earning 189 percent of average industrial wages to press his claim to the steel mill. If govern ment were to enforce such claims, there would be few houses and even fewer steel mills.

The notion of workers' rights to the plant is rooted in popular doctrines of Marx and other socialistic writers. They are making the point that the efforts and labors of workingmen generate a "surplus" over and above the wages they are getting, and that this surplus goes first into profits and other property incomes, then in large part into new investments, in creasing the quantity of capital and reducing the demand for labor. To them, unemployment primarily is an investment phenomenon that brings forth a substitution of capital goods for labor. It permits capitalists to ex ploit labor and invest their felonious gains in ever more capital and power.

224 THE FREEMAN April There is no need for a detailed re futation of Marxism and other ver sions of socialism. Other writers have elaborated and articulated the errors in great detai1.6 But it should be pointed out again that workers do not generate surpluses over and above the wages they are getting. They engender no profits. If it were so profitable to be an employer of men, there would be no business fail ures, no bankruptcies, and above all, no unemployment. Employers would be bidding feverishly for more labor and reaping profits in direct propor tion to their payrolls. All such no tions contradict both themselves and economic reality. Job Rights versus Property Rights Under the influence of exploita tion thought, legislators and regu lators have created unchallengeable job rights for organized labor. Roscoe Pound, the eminent legal philoso pher and Dean of Harvard School of Law, called them legal immunities and privileges for labor unions, their members and their officials. Orga nized labor is free to commit wrongs to person and property, and deprive nonmembers of the means of earn ing a livelihood-things which no one else can do with impunity. It en joys special privileges as a result of certain features of American labor law, such as the elimination of proven methods of law enforcement, fail ure to distinguish unlawful action by labor organizations, their leaders and their members, done outside of the employer-employee re lation, from practice in that relation, and the practice of committing all matters affecting labor organization to administrative agencies instead of courts oflaw. 7 The legal privileges and immunities of organized labor clearly reveal great political power that is brought to bear on legisla tors. This power now is put to use for new favors in the form of plant-clos ing laws.

Socialist doctrine clothes labor in come with the sacrosanctity of "hu man rights" and vilifies other in comes as the evil effects of "unearned property rights." The for mer is said to be anchored in the in alienable right to life and liberty; the latter is said to be a product of con vention and tradition, a creature of capitalism. This is why the rights of steelworkers who earn nearly twice the average American industrial in come are to take precedence over the rights of stockholders no matter what their earnings should be. This is why a teacher's claim to income from a few shares of common stock, owned directly or by her pension fund, is to yield to a steelworker's claim for plant closing benefits. "Human rights" income is denied not only to owners but also to un organized labor. After all, the basic method of unionism is restriction of labor competition; the basic effect is 1985 LAWS AGAINST PLANT CLOSINGS 225 unemployment. Union bargaining is collective bargaining by a select group, which means the denial of the right to bargaining by outsiders.

Unions claim. the right to strike, which is the right to force other peo ple to join the strike. Unions claim "human rights," which include the privilege to deny "human rights" to others. The fate of excluded people is of no concern to the union. When, de spite the legal protection from com petition, it finally prices most of its members out of the market, and turns a profitable company into a hopeless undertaking, it calls for plant-closing laws and government bailouts. Restrictions on Closings Are Restrictions on Openings There is a striking resemblance between plant-closing laws in the U.S. and "economic development laws" in many undeveloped coun tries. Foreign governments often welcome the immediate investment of American funds for purposes of productivity and employment, and simultaneously give many reasons for blocking and seizing the funds when the owner seeks to repatriate his property. They construct com plex traps for capital and then won der why, despite all the noisy entice ments, little capital is venturing in.

Similarly, the sponsors of plant-clos ing laws are demanding plant in vestments and reinvestments, but when owners seek to withdraw their funds, or merely liquidate the left overs, plant-closing laws are to seize their assets and distribute them among the workers. It takes great courage and irrepressible optimism to launch an enterprise in a state with a plant-closing law. Many entrepreneurs are optimis tic by nature, which may lead them to ignore plant-closing laws, refus ing to contemplate business failure. In old, established concerns facing minimal danger of closure and liq uidation, closure benefits and exac tions may indeed be discounted. However, for new enterprises the risk of failure is considerably greater, which makes plant-closing laws especially onerous to them. Where business mortality is high the laws may help to reduce it by dis couraging businessmen from even trying. In industries that are subject to great variations in demand or changes in technology, the laws may erect serious obstacles to new in vestment. In unionized industries that are stagnating or contracting, they may render new investment ut terly prohibitive. In every case the closure laws reduce the demand for labor and depress wage rates. When organized labor resists the down ward pressure it causes mass un employment. In the end, the law that means to prevent unemployment by order of politicians, judges and po licemen, actually creates it.

226 THE FREEMAN April Plant-closing benefits must be viewed as just another brand of fringe benefits that may raise the cost of labor and reduce the demand for labor. To employers, they are just another levy similar to those exact ing unemployment compensation, workers' compensation, Social Se curity contribution, and all the other mandated exactions. In the long run, they tend to reduce take-home pay by forcing employers to allocate more of a worker's earnings to his fringe benefits. Take-home pay must fall when fringe benefits rise. But this adjustment process, which takes time, is strenuously resisted by or ganized labor. It refuses to learn that inability to cover labor costs by labor productivity brings forth more un employment. It is so difficult to ad mit that unemployment is a cost phenomenon that purges loss-inflict ing labor. Plant-closing laws give employers a powerful incentive to build plants and facilities in states that do not have closing restrictions. And if companies are located in such states they have an incentive to substitute capital for labor wherever possible, which reduces the demand for par ticular labor and depresses its wage rates. In situations of wage rigidity and labor resistance it causes un employment. In the end, economic principle always prevails over the power of legislators, tax collectors and policemen.

Keeping Business in Town Numerous plant-closing bills are proposing requirements for lengthy prenotification, generous severance pay to workers and confiscatory tax ation, called community restitu tion. 8 They are seeking to keep busi ness in town by rendering closures and departures financially prohibi tive. But all the threats of confisca tion and restriction imposed on own ers cannot make business any more durable. A business that fails to compete ef fectively in the production of goods and services is bound to fail in the end. It will fail if it is found wanting in product price or quality and if, for any reason, the costs of production leave no competitive margin of re turn to the owners of capital. A pro ducer who can pay only $1 per hour for skilled labor is not competitive in the American labor market; a pro ducer who can earn only three per cent on equity capital is not compet itive in the American capital market. Both are destined to fail in the end. Threats of dire conse quences may make them contract or even discontinue all the sooner. Nor can Federal subsidies, grants and loans to workers and communities avert the ultimate consequences of business inability to compete.

Contrary to labor dogma, business profitability provides job protection. The best employer is a profitable em ployer who plans to expand his op1985 LAWS AGAINST PLANT CLOSINGS 227 erations and needs more labor. To at tract qualified labor he must effectively compete not only in wage rates and fringe benefits, but also in working conditions and steadiness of work. He must be more attractive than his competitors. Employers who for any reason suf fer losses cannot offer job protection because their bosses, the consumers, do not grant protection to them. In time, losses tend to consume busi ness capital, give rise to debt, and force business to contract and dis charge labor. Alert workers observ ing the decline and foreseeing the end seek employment elsewhere. They abandon the ship before it runs aground. Other workers with less foresight and mobility may decide to stay to the bitter end. After all, un employment compensation, sever ance pay, and other transfer benefits encourage them to wait and see.

Plant-closing laws may encourage them to cling to failing employers as long as some assets are left. In many cases workers are not just innocent bystanders and victims of business failure; they may be active parties and contributors to the di lemma. Acting in unison through a militant union, they may exact max imum pay for minimum work. Or ganized steel workers receive 189 percent of wages and benefits paid in all manufactures, automobile work ers earn 165 percent. They earn these amounts for work performed according to union work rules that reduce effort and output and signif icantly raise labor cost. And last but not least, union labor usually is an gry labor with long lists of griev 'ances. It is hostile labor that is un able and unwilling to compete. 9 AdjustingLabor Costs There are countless reasons for business decline and plant closing. But no matter what they should be, workers can nearly always ward off the decline and avert the closing. In many processes of production labor is the most important factor of pro duction inasmuch as its costs exceed all other costs. A small reduction in labor cost may make a plant profit able and competitive again. A steel mill, no matter how old-fashioned its equipment, can be made to be prof itable and competitive through a re duction in labor costs. Any automo bile plant can be made to function again through savings in labor costs.

It is utterly senseless for any plant to shut down when labor costs are far above the average and union rules remain in effect. And yet, all over the country countless mills, fac tories and workshops are abandoned with labor costs at their peak. A few concessions and "givebacks" granted in exchange for future claims and fa vors rarely make a difference. It is sad when great steel cities turn into rust cities with union pay rates and union work rules in full force. It is 228 THE·FREEMAN April tragic when jobs are lost forever and plant and mills are razed with labor costs at record levels. Nearly every plant, mill and work shop could be saved and the disaster of economic loss and unemployment be avoided through improvements in labor productivity and reductions in labor costs. How the American steel industry would prosper again if la bor costs were lowered to market productivity levels! How the auto mobile industry would thrive again if the cost of labor were determined by the free choices of car buyers!

Many a plant would become com petitive again if only the union work rules would be rescinded and man agement be permitted to direct labor again. And many a mill could be saved if workers would labor in ear nest instead of "spreading the work" or pressing grievances against hap less employers. Rusty mills and abandoned factories would come to life again if organized labor were to acquiesce in the market wage, which is the productivity wage. Labor unions never relax their pressures for maximum labor cost regardless of the pain inflicted on many workers and investors. They persevere in defense of basic union ideology and their very existence. If they would listen to the warnings of one employer they would have to lis ten to all. If they would relax their grip on one they would have to relax on all. They would be returning to market wages and conditions that are determined by labor productiv ity rather than union power. By im plication they would also be admit ting that their own policy of maximum pay for minimum work is an important cause of stagnation and unemployment. But they would rather linger in depression and call for plant-closing laws than to draw this conclusion.

The Cost of Government Next to the cost of labor is the cost of government as the greatest bur den of business. Most corporations pay much more in taxes than they yield in dividends to their owners. In the U.S. they face painful exactions by three levels of taxing authorities: the federal, state and local govern ments. State and local levies differ greatly depending on the voters' con ception of entitlement and social jus tice. In some locations they often reach confiscatory levels at which businesses by the score are forced to close their doors; in other states and places where the levies are lower, business may prosper a:p.d expand. In international trade and com merce the combined load of federal, state and local levies and regula tions may determine the competi tiveness of enterprises. In situations of depression and un employment, government is akin to organized labor: It refuses to relax its hold on the victims. In fact, state 1985 LAWS AGAINST PLANT CLOSINGS 229 and local authorities usually in crease their tax rates when revenue declines for any reason. They re main deaf to the cries of business be cause they would have to listen to all if they were to listen to one. They keep on taxing, regulating and con trolling regardless of the deepening depression around them. Political entitlement and transfer take pre cedence over any aspect of busi ness. 10 It is sad to observe the decline of commerce and industry with tax rates at record levels. It is tragic to witness the closing of factory gates with tax collectors and union agents arguing over the possession of the gates.

Plant closings always inflict great pain on the participants. Discussion and proposals for relief usually deal with benefits to be exacted from owners, that is, more pain to be in flicted on owners. The noisiest pro ponents are politicians, tax collec tors, and labor leaders. And yet, the more pain they manage to inflict on entrepreneurs and investors, the deeper workers sink into depression and unemployment. I -FOOTNOTESIDaniel A. Littman and Myung-Hoon Lee, "Plant Closings and Worker Dislocation," Richard B. McKenzie, ed., Plant Closings: Pub lic or Private Choices?(Washington, D.C.: Cato Institute, 1984), p. 127. 2Ibid., p. 132. 3Keinin, Mordechai E., "Wage Competitive ness in the U.S. Auto and Steel Industries," Contemporary Policy Issues 4 (January 1984), pp.39-50. 4GeneralMotors Annual Report 1983 (Detroit 1984); U.S. Steel Corporation 1983 Annual Re port (Pittsburgh 1984). 5U.S. Department of Labor, Bureau of Labor Statistics, Handbook of Labor Statistics Bul letin 2175 (December 1983), p. 98.

6Two Austrian economists, Eugen von Bohm Bawerk and Ludwig von Mises, have exploded every aspect ofthe exploitation doctrine. Bohm demonstrated that it contradicts both itself and the realities of the world. Cf. Capital and In terest, 3 vQls. (South Holland, Ill.: Libertarian Press, 1960); Mises penned a comprehensive theoretical and philosophical refutation. Cf. Socialism (New Haven, Conn.: Yale University Press, 1951), also Human Action (New Haven: Yale University Press, 1949). 7Roscoe Pound, Legal Immunities of Labor Unions (Washington, D.C.: American Enter prise Association, Inc., 1957). aU.S. Representative William D. Ford, "Statements in Support of the National Em ployment Priorities Act," in Plant Closings: Public or Private Choices? ed. Richard B. McKenzie (Washington, D.C.: Cato Institute, 1984), Appendix. 9In the steel cities of Western Pennsylvania, Eastern Ohio and West Virginia, where un employment among steel workers exceeds fifty percent, labor is especially hostile and angry.

In Youngstown, Ohio, 989 angry school teach ers and other support personnel such as li brarians, counselors, and psychologists re cently voted for union representation, ninety abstained from voting, and seven voted to re main free. (Youngstown, Ohio: The Vindicator, October 19, 1984), p. 1. What can be expected of working people if their teachers long for and depend on union representation? lORobert M. Bleiberg, "Oh Albany!" Bar ron's, December 10, 1984, p. 9.