It turns out that not only is the adoption of a right-to-work (RTW) law in states good for business, but even the threat of passing a RTW law is good for business. This is great news for businesses in Wisconsin and the dozen or so other states trying to enact RTW laws and standing up to public union leadership. Idaho became the last state to enact RTW laws in the U.S., becoming the 22nd RTW state back in 1986. Isn’t it shocking to you that the majority of states in the U.S. are non-RTW states? It is to me. That’s a lasting testament to the stranglehold that union leadership has on fiscal sovereignty in this country.
The May 2002 issue of Review from the Federal Reserve Bank of St. Louis, titled “Did ‘Right-to-Work’ Work in Idaho?,” concluded that unionization rates declined before (thanks to the threat) and after the RTW law passed. In addition, after the law was passed, Idaho realized growth in manufacturing jobs and in the number of manufacturers—and became more like an “average” RTW state in terms of its unionization rate and employment in manufacturing.
If you’re starting out in this world trying to figure out what to do, why would you even think of living in a non-RTW state, especially if you’re an entrepreneur looking for a place to start a business? Why live in a state where the likelihood of higher taxes in the future could destroy your lifetime of hard work? Is there any doubt this day is coming? I looked at states’ debt as a percentage of personal income as of the end of January 2010 and found that the worst 10 of the 50 states in this country are all non-RTW states. They are as follows (note that Oregon and Rhode Island were tied): Hawaii, 9.9%; Massachusetts, 9.2%; Connecticut, 8.7%; New Jersey, 7.2%; New York, 6.5%; Delaware, 6.2%; California, 5.6%; Kentucky, 5.4%; Washington, 5.3%; Oregon, 5.2%; and Rhode Island, 5.2%. Now think about the vibrant city of Austin, Texas, for example, which not only is a city in a RTW state but is in a state with no income tax to boot.
People aren’t stupid. A workforce on the move is in large part why RTW states picked up 11 House seats from the latest Census and will total 220 electoral votes of the necessary 270 needed to win the presidency. Workers are going where the jobs are, in RTW states, where businesses are setting up shop free and clear of harassment from unions. Dr. Richard Vedder, an Ohio University economist, and his colleagues report in their study Right-to-Work and Indiana’s Economic Future the following statistics during the 31-year period from 1977 to 2008: Per-capita income growth: RTW states, 62.3%, non-RTW states, 52.8%; growth in real personal income: RTW states, 164.4%, non-RTW states, 92.8%; employment growth: RTW states, 100%, non-RTW states, 56.5%. That last one is vital. Yet governments at the state and local levels haven’t gotten the memo as they continue to blindly overspend with more public-sector union jobs and look for new ways to tax you to pay for it.
Non-RTW states like Minnesota, for example, will continue to tax and spend until we’re all members of the union working for the man. Look no further than this week’s announcement by newly elected governor Mark Drayton and his plan to increase the state’s top income-tax rate to 13.95%—the next-highest in the nation are Hawaii and Oregon at 11%—to close a $6.2-billion deficit. How do you think owners of non-RTW state municipal bonds, including those from Minnesota, are feeling right about now? One measure of the perceived risk in munis measures the spreads in 10-year general obligation bonds for states versus AAA-rated 10-year muni bonds. I looked at this too and found that five of the six worst spreads among the 50 states are in non-RTW states.
Unfortunately, since individuals own two-thirds of outstanding muni debt (they benefit most from the tax-free income), it’s the little guy that’s going to get hurt. Institutional investors, i.e., Wall Street, will pounce when the prices get low enough, but it’s going to be a brutal ride for the retiree who decides to hang in there. Prices are falling as muni bond funds have seen net outflows since November, withdrawn by small investors still scarred from the tech and real-estate bubbles who don’t want to get caught a third time.
Most investors are made whole after muni bond defaults, which are few and far between. It may take a lot of time to be made whole, though, and time is a commodity in short supply when you’re in retirement and depend on the income to pay your bills. As muni bond prices plummet, the steady income may be a soothing balm, but it might not be enough to kill the pain of falling prices. Most munis have durations of around 15 years—meaning for every 1% increase in interest rates, prices fall by approximately 15%.
Of public-sector workers, 36.2% belong to unions, which are still living circa 1986, receiving pensions and benefits long ago given up by the private sector. States like Wisconsin, under the leadership of governor Scott Walker, are saying “enough already,” and I expect more to follow.