The recent publicity of the goings on at Hostess Brands, Inc. perked my curiosity about the dispute between the company and related labor organizations. On a first stab at finding information about this dispute to better understand it, I stumbled on the preamble to the National Labor Relations Act of 1932. One thing that came to mind upon reading it, understanding what was going on the country economically at the time, was the sticky wage theory.

The inequality of bargaining power between employees who do not possess full freedom of association or actual liberty of contract, and employers who are organized in the corporate or other forms of ownership substantially burdens and affects the flow of commerce, and tends to aggravate recurrent business depressions, by depressing wage rates and the purchasing power of wage earners in industry and by preventing the stabilization of competitive wage rates and working conditions within and between industries…

The next thing that came to mind was, ‘sure, try to counteract the effects of deflation on wages and prevent the employment market from clearing.’ Wouldn’t it have been a more meaningful solution to just make the Federal Reserve stop hoarding gold and do its job? It isn’t much different than the problems we’re having today, with the government doing all of the wrong things to solve the unemployment problem and deal with the effects that come with mass unemployment while ignoring the root cause and making the problem worse.

Why would employees not have full freedom of association or actual liberty of contract in a free market economy? I can agree that the situation is very likely to end up that way when the national unemployment rate is somewhere in the area of 25%, with it going as high as 50% in some local areas. It’s a buyer’s market.  But is that a result of inequality of bargaining power between employees and organized ownership of enterprise that supposedly substantially impacts the flow of commerce?

I think the cause is quite different. Rather, it is the result of the market conditions in the economy created by tight money that substantially impacts the flow of commerce in a much more general way by reducing the number of opportunities and jobs available, and disrupts the natural bargaining power each employee would otherwise have if jobs were plentiful. The government should have been focused like a laser beam on fixing that portion of the problem instead of taking a more populist approach, blaming the problem entirely on evil capitalist vultures who are so stupid as to overproduce themselves into bankruptcy and take the economy down with it. It sounds quite like the rhetoric toward bankers and Wall Street people today – and sadly, it is not helpful.

What is even more unhelpful is that we are stuck with this law that is based on erroneous reasoning and that keeps coming around to bite us in the rear when the Federal Reserve takes a vacation from logic and foists an unnecessary demand problem on the economy. It might be partly true that Hostess Brands is a poster child for mismanagement. I don’t know all the facts about what happened with it to make a judgment about it one way or the other. What I do know is that it went into the Great Recession with a weak position, coming out of bankruptcy in 2009 with more debt than it had to start with. Considering the dysfunction of financial markets in recent years, I am very surprised Hostess Brands lasted as long as it did. People don’t have a lot of extra pocket change these days, and it is much cheaper to make sweet treats at home. I make cookies for my son’s lunch and muffins to snack on during the day because I don’t have any extra money to spend on the convenience of premade desserts and snacks. So whatever mistakes management might have made, they certainly weren’t helped by economic reality.

I also don’t think that popular rhetoric helped matters much for Hostess Brands when it came to labor relations. Employees seemed to be quite angry about the dire straits, blinded by it to the point of sacrificing their jobs as they attempted to squeeze blood out of a turnip or stick it to the Committee of Creditors, as the case may be.

From what I’ve read, the union leaders were not happy with the decisions of the Committee and expressed dissatisfaction that the bankruptcy proceeding was being conducted in a way that preferred secured creditor interests over their own. I don’t really understand that because the pension funds were some $900M of the$ 1.7B in debt Hostess Brands said it owed in the Chapter 11 bankruptcy filing. And I think the whole point of filing Chapter 11 is to reorganize the debt to be sustainable so that at least some portion of it can be paid. The unions had a substantial interest in making sure the company survived, yet balked over an 8% pay cut and 17% benefits cut so that compensations packages were more in line with market rates. Perhaps they thought the secured creditors should take a bigger chunk of the loss so that they didn’t have to; but that would have been a contravention to bankruptcy law – and I am sure they knew that. There is also the possibility that they would have received more in the way of pension guarantees from the government, so that part of the equation didn’t mean much.

In the end, it no longer matters who got what or who was going to get what. It’s over as a result of a senseless strike, 18,500 people are now unemployed and still the only people who will get anything at all are the secured creditors. If I were a union member, I think I would not be one ever again because it isn’t worth the dues.

PS: I dedicate this song to the baker’s union at the former Hostess Brands

Cinderella – Don’t Know What You’ve Got ‘Til It’s Gone

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