Pensions and Corporate Restructuring in American Industry: A Crisis of Regulation.

Burkhauser, Richard V.

Few economic events are more painful than the collapse of a large corporation and the subsequent unemployment of its workers. When this is compounded by the loss of their promised pensions after a lifetime of service, as was the case for many Studebaker workers in the 1960s, cries for reform fill the air. This economic calamity was in fact the impetus for the Employer Retirement Income Security Act of 1974 (ERISA). Yet in the downsizing of the 1980s it has been argued that ERISA was not an effective mechanism for protecting workers' pensions.

In this book, Gordon Clark, who is director of the Institute of Ethics and Public Policy in Industrial Relations at Monash University, wrestles with fundamental issues of equity and efficiency as they relate to ERISA and the effectiveness of the Pension Benefit Guaranty Corporation (PBGC) in protecting the rights of workers to promised pension benefits. He uses three case studies--Gavalik v. Continental Can Co.; Wisconsin Steel Company v. International Harvester Corporation, and PBGC v. LTV Corporation--as evidence that "regulation has lost its moral force, being now understood by managers and business consultants alike as just another cost of doing business. This attitude stands in contrast to the attitudes of unions and their members who look to the courts and the legal rules . . . . as the embodiment of social right and wrong". Most economists will have less trouble accepting the author's first assertion than his second.

In Gavalik the courts found that Continental Can was systematically dropping workers just prior to vesting. In Wisconsin Steel, the PBGC accused International Harvester of a sham sale to avoid pension liability and in PBGC, LTV was accused of illegally declaring bankruptcy to shift pension liability to the PBGC. The author uses these three cases to argue that "many other corporations may be deliberately and secretly circumventing their legal responsibilities".

The author develops standard economic models of rational decisionmaking to reinforce his claim that corporations cannot be trusted to do the right thing with respect to their workers. But he criticizes the work of economists who have used those same models to explain the behavior of unions, declaring that "I do not intend justifying here, at least, my opinion that union officials have a more complex set of motives and reasons for action than corporate executives". Game theory is used to show that "straightforward maximizers" (i.e., selfish corporation leaders) will outfox "conditional maximizers" (i.e., socially-minded union leaders). Evil triumphs!

While the author recognizes that reputation effects are possible, the deterrent effects of a lost reputation are dismissed. Hence, the author argues that stricter regulation is not only necessary but that our regulatory system must be fundamentally redesigned by a Congress willing to take greater responsibility for the political choices involved in balancing economic self-interest with social obligation. The author urges that this should be accomplished by Congress explicitly stating its desired hierarchical ranking of principles and policies, and federal regulatory agencies and the courts simply following these clear signals of Congressional intent.

Such morality plays, complete with happy ending, filled academic bookshelves in the first part of the century. It is surprising to find such an asymmetrical view of the behavior of big business and big labor, as well as such faith in Congress's ability to unambiguously set a moral basis for reform, from a modern scholar. More to the point, the author's emphasis on an overarching conflict between business and labor prevents him from considering another explanation for the legal structure of the PBGC, that business and labor, when it is in their interest to do so, act as allies rather than antagonists in the public policy arena. As Munnell [2] and Ippolito [1] have discussed in the two best treatments of the PBGC, books uncited by the author, once this possibility is considered, then what appears to be an attempt by Congress to shift the risk of pension collapse from workers to shareholders becomes, in fact, a transfer of this risk and its underwriting to taxpayers. Whether this transfer makes policy sense is another matter, but to ignore the possibility that self-interest is not confined to scheming businessmen, as this book does, makes for extremely naive policy analysis.

Presumably the author would be doubly disappointed if labor and management both pursued their private interest above the social good, and he would call all the more for a national industrial policy to insure that both management and labor fulfilled their "social obligations." But compelling individuals to behave in socially responsible ways they do not perceive as in their own interest has proven quite difficult. For instance, a much more important and perfectly legal method that corporations have been using to reduce the liability of future pension promises is to change the form of the pension they provide. Since the passage of ERISA, the number of defined contributions pension plans, which dramatically reduce the risk of future pension liability for corporations, has increased while the number of defined benefit plans, which are the primary target of ERISA regulations, has decreased. Nothing in Clark's reform proposals address this method of avoiding regulatory costs without pension mandates.

The author concedes that economic models of rational decisionmaking are valuable predictors of behavior but considers them flawed as models of moral behavior. Few economists would quarrel with this proposition, at least when self-interest is very narrowly defined. But the marvel of the economic paradigm is its ability to show how much cooperative and ultimately efficient behavior is possible even when self-interest is narrowly drawn, as long as market forces are allowed to operate. After half a century of experience with regulation and regulatory reform, economists are split on whether regulating markets necessarily leads to either more efficient or more equitable market outcomes. Policymakers, in seeking the social good, must recognize both what is and what ought to be. Most economists who evaluate public policy will find little in this book to convince them to abandon their microeconomic tools when they consider the efficiency and income distribution trade-offs that are at the center of PBGC reform.

References

1. Ippolito, Richard A. The Economics of Pension Insurance. Homewood, Ill.: Irwin, 1989.

2. Munnell, Alicia H. The Economics of Private Pensions. Washington: The Brookings Institution, 1982.

Richard V. Burkhauser Syracuse University