Unions, The Wire, and Transitional Gains

August 22, 2010

“It is hard for an economist to recommend any positive action to deal with this kind of situation. It is, as the title of this article suggests, a trap. I can recommend very strongly that we try to avoid getting into such traps in the future…”

—Gordon Tullock, “The Transitional Gains Trap” (1975)

Somebody should write a book about the economics of The Wire. In stark contrast all other fiction, The Wire actually gets it right. Though, ironically, I find the depiction of Stringer Bell’s economics class somewhat unrealistic.

In season two, Frank Sobotka’s union provides an illustration of what Gordon Tullock called “The Transitional Gains Trap.” Economists love to hate unions for their monopoly power. By setting work rules and restricting the number of workers in a certain industry, unions can raise the wages of their members at the expense of consumers and non-union workers. By controlling the labor market for certain jobs, unions capture monopoly rents.

And yet, Frank Sobotka himself is not rich, despite being a union leader. If the union is doing what it is supposed to do, this is a puzzle. One major advantage of creating a monopoly in labor supply is that you can restrict output, as a profit-maximizing monopolist would. What, then, is happening to all his monopoly rents? As the viewer sees throughout the second season, they are all dissipated in payoffs to the politicians who keep the union in power.

To take a different example, when you go into a Roy Rogers on the New Jersey Turnpike, you’ll notice that their prices are a lot higher than in comparable restaurants in suburban locales. For most people, it’s “obvious” why this is the case: the restaurant has monopoly power at this location, so they can charge higher prices and extract more of their customers’ wealth. But the question is: who is benefiting from this arrangement? If Roy Rogers is renting the space, the answer is not “Roy Rogers.” Why not? Because the person who does own the land is no dummy. He realizes that this is a prime location with lots of hungry customers. There are many restaurant chains who would be happy to serve these people, and so the land owner can demand a high rent. In fact, the final rent will be high enough that Roy Rogers ends up paying its entire monopoly rent to the owner of the land.

“Aha,” you think, “so now we know who really benefits from rest-stop pricing. The landowners!” But wait, don’t start your subscription to the Socialist Bulletin just yet. The question you should now ask is, how much did the current owner pay for the rest stop spot? Well, the guy he bought it from was no dummy, either. He, too, understood the advantage that the location conveys, and would have factored the value of that advantage into his selling price. He would charge just enough to incorporate the entire future value of the monopoly rent into the value of the land.

At the end of the analysis, where there is a market restriction it is the resource owner at the time the restriction was created who benefits. Everyone else is just trying to recoup their costs. The Roy Rogers owner isn’t making monopoly rents, he is giving them away in land rent to the owner. The owner isn’t making monopoly rents, either, though, he is just trying to pay off the enormous debt he incurred by purchasing the land in the first place.

In Tullock’s article, “The Transitional Gains Trap,” he cites the example of New York City taxicabs, whose operation is restricted to those who hold official licenses to operate, the medallions. Again, the restriction of supply below the level that open competition would support creates monopoly rents, but these monopoly rents are incorporated into the cost of acquiring a taxi medallion. As Tullock points out, the creation of monopoly rents is a “trap” because the original owners benefit, while subsequent generations merely pay higher prices, both for the right to provide the service in question and for the service itself.

Throughout season two of The Wire, the dockworker’s union is struggling to survive, with most of its members underemployed and living in near-poverty. It is easy to imagine that dockworkers were in a similar situation before the union was created. But the fact is, creation of the union did not transfer ownership of the important property right that is the true source of the union’s effectiveness. The union’s monopoly is government-created, and its continued existence depends on government support. As a direct result, those who control this support can demand, and get, all of the excess rents that the union accrues, leaving the union members no better off than they were before.

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