Sunday, February 19, 2006

Managed competition for Houston city services?

The internationally-read Economist magazine recently noted that unions are getting traction in Houston. They also seem to be making inroads in city government. While I sympathize with people's desires to increase their compensation and benefits, doing it through monopoly power seems like a bad idea (I've never understood why it's bad for a company (i.e. "capital") to abuse monopoly power to increase profits but good for labor to do the same thing). It distorts what should be a simple supply-and-demand market of jobs and labor: the organization offers a job at a market pay rate, and you can choose to take it or look elsewhere. It seems to me that - if you want to be paid more for your services - you need to develop your skills and/or education so that your labor is worth more (like via community college nights-and-weekend classes, or studying to get a license in a trade). And the long-term effects of strong unionization on industries, states, and countries is sobering - just look at airlines, autos, Michigan (and most of the rest of the Midwest), and France. Do we really want Houston and Texas on that slippery slope? Like it or not, investment capital flows globally wherever it wants (stimulating economic growth), and it typically doesn't want to go where union monopolies drive up costs (not to mention the drain on taxpayers). That's why, for instance, foreign automakers build their U.S. factories in the right-to-work South.

Keeping that in mind, I came across this post from Otis White's Urban Notebook on the concept of managed competition by local governments providing services (no permalink). It seems like a great way to accomplish two objectives at once: better and cheaper city services in a structure that is far less fertile for unionization. I know Mayor White is a Democrat - which tends to be a pro-union party - but he has to realize this system would be far healthier for Houston in the long-run. How about giving it a try?

San Diego Shakeup - Competing over Potholes

San Diego has a new mayor, Jerry Sanders, and (at last!) a plan for getting the city government out of the worst financial hole in its history. As you might expect, there’s a lot of castor oil in Sanders’ plan. But there’s a spoonful of sugar, too: a way of delivering services that, if it works in San Diego, could be coming to a city near you.


Now, about the management changes: Sanders wants to bring “managed competition” to San Diego. What’s that? It’s the management system Stephen Goldsmith pioneered when he was mayor of Indianapolis in the 1990s. (Goldsmith wrote about his experiences in a book titled “The Twenty-First Century City: Resurrecting Urban America.” You can find an outline of his ideas, from a 2001 New York Times op-ed piece, by clicking here.

As mayor, Goldsmith championed two ideas, privatization and competition. Privatization alone didn’t work, Goldsmith wrote, because private monopolies weren’t that much more efficient than public ones. So simply turning the water department over to a private company wouldn’t accomplish much. But if you could carve up the city into zones and let a number of providers (including city workers themselves) compete to haul garbage, tow abandoned cars, fix potholes and so on, wonderful and surprising things happened, Goldsmith found. Services improved, work processes were streamlined, productivity soared and costs declined dramatically.

Amazingly, city workers often turned out to be the high-quality, low-cost providers, once they were allowed to compete. “The problem,” Goldsmith wrote in his book, “is that [municipal employees] have been trapped in a system that punishes initiative, ignores efficiency and rewards big spenders.” A system ... well, like San Diego city government.

Goldsmith has spent the last few years preaching his ideas from a teaching position at Harvard's Kennedy School of Government with limited success. (Managed competition has been used in Charlotte and Durham, N.C., and a few other places.) But with San Diego in such desperate straits — and a mayor elected to shake things up — the time may have come for a test of the managed competition system in a big city. And if it works in San Diego, look for hundreds of other places to try it.

Footnote: And who doesn’t like managed competition? Not surprisingly, labor unions. One union consultant interviewed by the Union-Tribune called managed competition “insane” and added that it was likely little more than “a gravy train for contractors and campaign contributors.”


At 12:54 AM, February 20, 2006, Blogger John Whiteside said...

Managed competition is an interesting idea, if it's applied to services where competition actually makes sense, and provides the benefits that have failed to materialize under most privatization schemes. I do think, though, that your take on unions is a bit simplistic; labor is not a highly mobile commodity that can be looked at as a pure free market item. If you're a transit worker and you live in Houston and you don't like the way Metro treats you, switching jobs is not as simple as a consumer choosing a different brand of milk. Remember also that a lot of what led to the rise of unions is non-pay issues like job safety, reasonable hours, handling grievances, and the like. The people writing the paychecks have a lot of power in those situations.

Of course, power does corrupt, so we see the excesses of unions once they're established.

Again, no disagreement with your basic point, I just think your comparison of unions to a monopoly power is a bit facile.

At 9:27 AM, February 20, 2006, Blogger Tory Gattis said...

Yes, there will always be low-end jobs, but they can also always be stepping stones to higher wage ones - something a person only does while they are young before they acquire higher-level skills (esp. common with waiting tables). I personally know an immigrant from South America who was a house maid for many years before getting her real estate license, and is now doing extremely well as a bilingual broker.

And, of course, if we are overwhelmingly successful with training and education, and not enough people want to be janitors or maids anymore, salaries will have to rise to attract them. That extra cost then incents businesses to find ways to increase productivity, usually through technology.

As an example, "we'll always need garbage men" has been a common statement I've heard, but because of the automated lifting trucks, we now need a whole lot fewer of them, and the job is much less back-breaking and more productive.

Where the market breaks down is when unions drive up wages for low skill jobs. As an example, operating cranes at the Port of LA and Long Beach pays well into six-figures, so they get tens of thousands of applications for positions. It's like winning the lottery (and I'm sure there's plenty of corruption going on to get those jobs). It's a complete disincentive to education/training, because "all I have to do is score one of those port jobs." And on top of that, the union goes on strike at any mention of productivity increasing technologies that might cut these lucrative jobs. Is this the incentive system we want in society?

The market works all the way around: low pay incents training/education so people can move on to a higher paying job, and high pay incents productivity technology and additional people seeking that skill-set to earn that pay.

At 9:41 AM, February 20, 2006, Anonymous Anonymous said...

Houston Strategies gets it. Privitization alone is just a way to hand money over to political cronies.

-Ubu Roi

At 12:23 PM, February 20, 2006, Anonymous Anonymous said...

- "low pay incents training/education so people can move on to a higher paying job" -

or, low pay incents people to have to take on additional jobs to make ends meet, often at the expense of their families. And if that wage earner gets sick, because they probably don't have any benefits, they run the risk of their family being put out on the streets when the money runs out. This is one reason why providing fair living wages is so important, and if it takes a union to get them, then so be it.

At 12:41 PM, February 20, 2006, Anonymous Anonymous said...

Tory, you might want to use a different example than a Long Beach crane operator. Those guys make bank because they are extremely good at getting containers off the ships and onto the trailers VERY quickly. It is common for people who don't perform manual labor to think all of these jobs are easy, but dropping a container onto a trailer from a 200 foot crane without having to fish around takes great skill. An operator who can do so twice a minute for 8 hours is worth plenty.

I am also amused at those that blame everything on the unions. Did the unions design the crap that GM sells? And is all labor reduced to an unwanted expense?

Your belief system about laborers proves why unions are still needed.

At 1:22 PM, February 20, 2006, Blogger Tory Gattis said...

"Fair living wages" - if you force labor to be more expensive than the value created, then unemployment will rise. Fewer people will even be able to begin climbing the economic ladder. A "fair" price for a service is what people are willing to pay for it, also known as the market.

Port crane operators: if it's a high-skill job - great! Let the market dermine the price for that service/skill, rather than a union that can shut down half the nation's imports on a whim.

Unions are certainly not to blame for all of GM's troubles, but they certainly have impeded it's adaptation to new market realities.

The real danger of unions is the long-term slippery slope. Almost nobody can argue with the usually very reasonable demands when unions first form: a slight pay increase, safer working conditions, a benefit here or there. People look at it - like the new janitor's union in Houston - and they seem like reasonable requests. But now, every year, those union officials have to justify their salaries and dues - so they push a little harder to prove their worth. The demands slowly morph from reasonable to unreasonable, but by then, it's too late - and deeply entrenched.

At 3:55 PM, February 20, 2006, Anonymous Anonymous said...

Tory, here's something off topic.

What's your "Houston Strategies" come back to these complaints from everyone's favorite ESPN net scribe.


At 4:21 PM, February 20, 2006, Anonymous Anonymous said...

- " ‘Fair living wages’ - if you force labor to be more expensive than the value created, then unemployment will rise. Fewer people will even be able to begin climbing the economic ladder. A "fair" price for a service is what people are willing to pay for it, also known as the market. -

The argument that providing a living wage will cause an increase in unemployment is an old war horse that living wage foes like to trot out, however it’s mythology, and studies have shown as much. Baltimore’s experience with a living wage found no increase in unemployment. In fact, living wages help to reduce turnover and improve employee satisfaction, which helps to reduce a company’s labor costs.

There are reasons why we don’t let the market make all of our labor decisions – we find child labor immoral, we don’t feel that anyone should earn just a few bucks a day for their work, we demand protections for our workers’ safety, etc.

We can either pay our workers now through living wages that keep them out of poverty, or we can pay them later through government programs, which is certainly a more expensive way to do it.

At 6:06 PM, February 20, 2006, Blogger Tory Gattis said...

I will admit there is some debate over the minimum wage. On the other side is the argument that we could completely eliminate unemployment by eliminating the minimum wage. I don't really know the right answer on that one.

So I'm open to arguments on the min wage, OSHA, and redistribution tax policy - even on govt vs. nonprofit charities' effectiveness of giving people a "hand up." But unions seem to be the wrong answer.

At 5:40 PM, February 26, 2006, Blogger Gary said...

Politicians love this. It creates a larger pool of bribers all fearful and anxious.

See my post - privatization doesn't lead to corruption it is corruption.

At 6:04 PM, February 26, 2006, Blogger Tory Gattis said...

The corruption potential is somewhat worrying. Transparency is the most critical immunization, but another solution I think that has a lot of potential is "citizen juries" that are randomly assembled to review private bids and pick winners. With the right process, buffers, and identity protections, it would be almost impossible to bribe them.


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