The Parasite That Kills Its Hostess
The news about the bankruptcy of Hostess, maker of the Twinkie and other legendary junk foods, touched off some memories of growing up in a mid-sized Midwestern town in the 1970s and '80s. No, not that kind of memory, though come to think of it, the 1980s was the last time I actually ate a Hostess snack. What I'm recalling has a lot less nostalgic charm: the whole phenomenon of a kamikaze labor union that keeps demanding more for workers--who end up getting nothing when their employer goes belly-up.
That's pretty much what the unions did, or tried to do, to three of the big employers in our area, and it taught me some early lessons about the real nature of labor unions and of government intervention.
I grew up in an area known as the Quad Cities, a cluster of four towns in Illinois and Iowa, on opposite banks of the Mississippi River. The big local employers at the time were the Rock Island Arsenal, which made howitzers and machine guns for the US Army, the celebrated Rock Island Line, and two big manufacturers of farm equipment, John Deere and International Harvester.
What might strike you about this list is that half of these companies no longer exist. I watched them go down, and that's why the Hostess story seems so familiar.
Take the Rock Island Line, the popular name for the Chicago, Rock Island, and Pacific Railroad. The line's Wikipedia entry tells the story pretty much as I remember it, only worse.
"By the summer of 1979, the Brotherhood of Locomotive Engineers and the United Transportation Union had accepted new agreements. The Brotherhood of Railway and Airline Clerks (BRAC) held firm to their demand that pay increases be back dated to the expiration date of the previous agreement.
"The Rock Island offered to open the books to show the precarious financial condition of the road in an effort to get the BRAC in line with the other unions that had already signed agreements. Fred J. Kroll, president of the BRAC, declined the offer to audit the books of the Rock Island. Kroll pulled his BRAC clerks off the job in August, 1979. Picket lines went up at every terminal on the Rock Island's system and the operating brotherhoods honored the picket lines. The Rock Island ground to a halt."
Here's where it gets worse. The railroad was bouncing back and showing signs that it might survive the strike--so the government intervened to shut it down and finish it off for good. Why? Because the survival of a railroad was considered less important than the survival of a union.
"The Ingram management team operated as much of the Rock Island as they could. Trains slowly began to move, with more traffic being hauled every week of the strike. President Jimmy Carter issued a back-to-work order that BRAC dismissed. Still more traffic flowed on the strikebound Rock Island. Seeing the trains rolling despite the strike and fearing a Florida East Coast strikebreaking situation, the unions appealed to the [Federal Railway Administration] and [the Interstate Commerce Commission] for relief. Despite that Rock Island management had been able to move 80% of pre-strike tonnage, at the behest of the Carter administration, the ICC declared a transportation emergency declaring that the RI would not be able to move the 1979 grain harvest to market. The ICC issued a Directed Service Order authorizing the Kansas City Terminal Railway to take over operations....
"On January 24, 1980, Judge McGarr elected not to review the Rock Island's final plan of reorganization. Instead, Judge McGarr initiated the shutdown and liquidation of the Rock Island Railroad."
Then there was International Harvester.
"In 1979, IH named a new CEO, who was determined to improve profit margins and drastically cut a ballooning cost structure. Unprofitable model lines were terminated and factory production curtailed. By the end of the year, IH profits were at their highest in 10 years, but cash reserves were still too low. Union members became increasingly irate over production cutbacks and other cost-cutting measures. In the spring and summer of 1979, IH began short-term planning for a strike that seemed inevitable. Then on November 1, IH announced figures showing that president and chairman Archie McCardell received a $1.8 million (in 1979 values) bonus. McCardell sought overtime, work rule, and other changes from the UAW, which led to a strike on November 2, 1979.
"Soon after, the economy turned unfavorable, and IH faced a financial crisis. The strike lasted approximately six months. When it ended, IH had lost almost $600 million (in 1979 value; over $2 billion today).
"By 1981 the company's finances were at their lowest point ever. The strike, accompanied by the economy and internal corporate problems, had placed IH in a hole that had only a slim way out. Things only got worse until 1984, when the bitter end came.
"International Harvester, following long negotiations, agreed to sell its agricultural products division to Tenneco, Inc. on November 26, 1984.... Following the merger, tractor production at Harvester's Rock Island, Illinois, Farmall Works ceased in May 1985."
Again, this is pretty much the way I remember it: the union workers went on strike to squeeze more out of a troubled company--and by the time they were done, there was nothing left to squeeze.
I watched them try it again, by the way, with John Deere, where my father worked. He wasn't directly involved in the strike--he worked in advertising and public relations for their lawnmower division--but I do recall hearing the rumors about the union's motivation. Deere workers were part of the United Auto Workers, but Deere was a relatively small employer compared to the giant auto makers in Detroit. So the union leadership made a simple calculation: they encouraged the workers at Deere to strike in order to set a precedent that would help them get a better deal in the next round of contract negotiations in Detroit. They were endangering the jobs of tens of thousands of workers at Deere in order to sweeten the pot for hundreds of thousands of workers at GM. It was a sacrifice for the greater good.
I guess they call it "collective" bargaining for a reason: you may lose your job, but the proletarian masses will come out ahead. Or not. We all know how well those deals turned out for GM in the long run.
In all of these cases, of course, there were other contributing factors. These companies suffered from tough competition, bad management decisions, unfavorable trends. Over the long term, Hostess didn't go bankrupt because of the unions. It went bankrupt because it didn't keep up--possibly couldn't keep up--with cultural change. In an era of healthy living and gourmet coffee shops, Twinkies and Ho-Hos are out of place. Their only resort was to try to convince hipsters to eat Twinkies ironically.
But in all of these cases, it was the unions that delivered the final, self-destructive blow. They had negotiated more generous pay, work rules, and pension benefits in an earlier era, when they were demanding resources from a thriving, profitable company. But when that company began to struggle, they refused to adjust.
Here is how it played out with Hostess.
"Hostess, based in Irving, Texas, said it was saddled with costs related to its unionized workforce. The company had been contributing $100 million a year in pension costs for workers; the new contract offer would've slashed that to $25 million a year, in addition to wage cuts and a 17 percent reduction in health benefits....
"Then, last week, thousands of members of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union went on strike after rejecting the company's latest contract offer. The bakers union represents about 30 percent of the company's workforce.
"By that time, the company had reached a contract agreement with its largest union, the International Brotherhood of Teamsters, which this week urged the bakery union to hold a secret ballot on whether to continue striking. Although many bakery workers decided to cross picket lines this week, Hostess said it wasn't enough to keep operations at normal levels."
What became clear, in times of trouble, is that the unions didn't really add anything to the actual process of production. They didn't recruit workers, train them, build the factories in which they worked or the machines they operated. They didn't provide working capital or marketing skills or strategic advice. Their whole function was simply to find an enterprise that was already a going concern and to squeeze money out of it.
This is no surprise, because unions are built on a Marxist economic theory. In their view the capitalists--the owners and top management of a company--are just skimming unearned wealth in the form of profits, so the role of the union is to muscle in on the racket by demanding their own share of unearned wealth, ostensibly on behalf of "the little guy." In practice, some of that wealth ends up going to well-paid union executives instead, but what do you expect? Some animals are more equal than others. As to the fate of the workers, I supposed you could argue that a job with reduced pay and benefits isn't worth keeping. But in today's economy--as in the Rust Belt economy of my youth--that doesn't sound very convincing.
No, the driving force here isn't any kind of rational economic calculation. Instead, it is the unions' archaic anti-capitalist, anti-profit dogma. That is what leads them to hate the profits of investors and management more than they love the jobs of their workers. It's what turns them, not just into parasites, but into the parasite that kill its Hostess.