In labor, management battle, more at stake than Twinkies

Early scientists studying electricity discovered that it tends to follow the path of least resistance. German physicist Georg Ohm conducted experiments on this characteristic of electricity and did the math. This resulted in what we now call Ohm’s Law, which allows engineers to calculate precisely the amount of current that will flow through a circuit.

Because the human brain uses electrical signals, maybe we should not be surprised that there seems to be an Ohm’s law that applies to our thinking process. The latest scientific evidence shows that our brains seek the least difficult paths necessary to answer the question or complete a task. This could be viewed as either remarkable efficiency or abject laziness, depending on your outlook on nature and the prospects for humanity.

One of the ways that this fundamental characteristic affects economics is that we find it easier to think about short-term events than long-term trends. Short-term events in the economic news demand far less brain energy, because they are easier to explain and understand. Our understanding and our explanations may not always be correct, of course, but they can seem so in the moment, partly because we devote so little energy thinking to them.

The decline and bankruptcy of Hostess Brands Co. is one of those economic news events that is easily explained but less easily understood.

On the face of it, it seems that Hostess, the maker of such iconic foods as Twinkies and Ho Hos, had become unprofitable and eventually ran out of money. The labor union representing the workers says that the firm’s sad financial state is the result of inept management, while the company’s leadership says that it was the costs of labor and its work rules that torpedoed the business.

Whether it was labor costs or management mistakes no longer matters, of course, since the company is now in bankruptcy court and its fate is no longer in the hands of either management or labor. The company whose Twinkies were once mocked as immortal – they were portrayed as surviving a nuclear holocaust in the animated TV show, “Family Guy,” for example – turned out to have an expiration date after all.

Exactly why management and labor couldn’t put together a solution to keep the company alive isn’t clear, but discussions had descended into acrimony long ago.

The history of the American labor movement is filled with firebrand leaders, and the resultant tradition of outrageous charges against management is still a part of most contract negotiations. That’s easy to understand, but the forces that have so changed labor’s position and role in our economy are tougher to assess.

There is a difference between labor and organized labor, of course, and unions represent only a small minority of workers in the private sector. However, they do represent the overwhelming portion of government workers in addition to others in high-visibility parts of our economy. These are often in sectors that are either taxpayer subsidized or otherwise subjected to government meddling, such as professional sports, entertainment, education, and, more recently, selected parts of the automobile and energy industries.

Labor as a whole has seen its position in the economy shift dramatically over the longer term. Labor’s share of national income has been declining for the past three decades in our economy and the trend shows no sign of abating.

We don’t fully understand all the causes of this reallocation but one driving force is believed to be the decreasing cost of capital. The lower cost tended to accelerate business capital expenditures, most of which emphasized technology and require less labor input: increasing corporate savings and decreasing labor’s share.

Over time, the preference for capital investment affects jobs in two distinct ways. First, it changes the skill levels required to get and keep jobs; and second, it exerts a continuous downward pressure on wages. Labor unions, then, find themselves fighting a defensive war against the longer-term forces of the global economy.

How that war will eventually turn out is hard to say, but there are some unattractive possibilities as well as some new opportunities.

In the short-term, the Hostess brands and products that are profitable will most likely be purchased by investors, and people who want them will still be able to buy them. The company, its management, and its jobs, though, will probably disappear.

Long-term economic forces are changing the face of America and we are fighting them with the tools of earlier decades. This is not your father’s economy and it is most assuredly not your grandfather’s. The challenges headed our way will not be solved by more acrimony, more accusations, or even more cowbell.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.

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