July 1984 The Roemer Report

LABOR & THE NEW ECONOMY:

We've covered the specifics of contracts between organized trucking and the Teamsters many times in recent years. The nuts and bolts of labor agreements seem to be a con­stant ongoing concern for truckers. This month we'd like to stand back and look at the big picture. The occasion? Extraordinarily

Important negotiations have just begun between the United Auto Workers General Motors and Ford. The Chrysler pact is up next year. We all recognize our economic landscape is changing. In the case of trucking, the earth has literally shifted under our feet in recent years. But, have our perceptions changed? Is the same adversarial, legalistic system of negotiation and accommodation still relevant to the world of the 1980s? Our answer is no.

IN SEARCH OF A NEW MANAGEMENT/LABOR ARRANGEMENT: The black and white distinction between labor and management of the 1930s is now very gray. The foundations of the current arrangement go back to the National Labor Relations Act (the Wagner Act) of 1935. It has been the Magna Carta for union organizing and negotiation. Today, many scholars suggest it is simply obsolete. Labor analysts such as Thomas A. Kochan of the Massachusetts Institute of Technology contend that it has become a lawyers' paradise. It wastes enormous time, energy and money defending "rights" and negotiating additional rules for governing the relationship between management and labor. The system itself is destined to create more confrontation and polarization… unless it is is changed to reflect the world of the 1980s. What we have really done, some say, is to project a rigid legal system into the workplace…a burdensome structure that frequently prevents· workers and managers--who ultimately share the same economic interest-- working together reasonably. For example, some employers must negotiate over prices charged in vending machines, while cooperation on the real substantive economic issues is frustrated by the old management and labor roles laid down by the NLRB in the 1930s.

TOWARD A BROADER VIEW: One of the biggest weaknesses of the old system, says Kochan, is that it has kept union leaders glued to the legalistic nuts and bolts. Hence, the union leadership has often lost the longer range, strategic view on how to best represent members, while allowing the employer to stay competitive. Unless the National Labor or Relations Act is changed, say some, the current collective bargaining system in the private sector is on its way to extinction.

TRUCK SALES REFLECT BUOYANT OUTLOOK: One of the best ways to measure the consensus economic outlook of the nation's truckers is to look at sales of heavy-duty trucks. Such an examination reflects votes for the economy during the coming months. Sales of these vehicles are now very near the record set in October 1979. Indeed, sales could hit an all time high before the year is out. "Class 8” trucks, those with a combined vehicle and cargo weight of 16.5 tons, are cruising along at a hefty pace. May sales of these big rigs--a major league investment for even the biggest outfits--totaled 12,443 units. This level ranks second to the record of 15,227 sold in the same month in 1979. The ability of carriers to haul larger loads is an obvious factor contributing to the sales binge. So is the rapid aging of this country's heavy truck fleet. Still, the figures clearly reflect a reasonably broad based vote of confidence on the future of the trucking economy.

BEYOND THE ELECTIONS: Now that your eyes are red from convention-watching, let us make a a contrarian comment. In terms of the direction of the economy during the next few years it may not make much difference who is elected President. Ridiculous? Just consider these new realities. (1) Up until October 1979 the Federal Reserve Board was in a position to set interest rates. Today, it no longer can control long term rates. They are purely determined by the financial markets. (2) We have rapidly evolved into a market economy. These markets are neutral …non-political. Current interest rates are a product of the prevailing perceptions. (3) These perceptions are reflected in interest rates carrying an incredible inflation premium. Why? Obviously fears about the deficit…now hovering around the $200 billion range. (4) Here's the kicker. We're beginning to hear some convincing information from a few savvy Washington-wise economists suggesting that we are in for a historic structural overhaul of the nation's entire tax system. How could this possibly happen and when? First, it is already being studied extensively and could be lead TV news material in 1985. If Reagan is re-elected, he may well announce some sweeping changes in the tax system during his inauguration speech. If Mondale gets the big chair, it would probably happen a little later. But it is very likely to happen. The sheer pressure of the current deficit simply dwarfs all the partisan rhetoric. Both the Republicans and Democrats privately understand that structural tax changes must be made soon.

TRUCKING AND CONSUMPTION TAXES: Right after the election you’ll probably be hearing a great deal about both a flat tax and a consumption tax. The best kept secret in Washington is the pervasive recognition that the traditional income tax system is antiquated. The Treasury estimates that about $60 billion yearly in taxes goes uncollected thanks to the underground economy. The idea of a so-called consumption tax is to tax consumption, not income. Here's a simple example. You can't get taxes from a waitress if she doesn't report all her earnings. But, you can get the money from her if you tax her lipstick. Basically, such a fax system --which obviously would be introduced on an evolutionary basis-- would be designed to: dramatically reduce tax rates, reduce the deficit and reduce the share of GNP consumed by government spending. The interesting thing is that some of the strategic idea merchants in both parties seem to be leaning in the same direction. Their idea, driven by the market command to reduce deficits, is to tax consumption (excluding food,clothing, health care and probably housing) and reward saving and investment. Right now we do the reverse. We tax savings and investment and reward consumption and debt… mortgaging the long term for some short term economic juice.

SOME VERY POSITIVE SCENARIOS: We think that major structural tax changes are quite likely, regardless of who occupies the White House. If such changes demonstrate the ability to push the "structural" deficit down, we could see interest rates drop like a stone. That would mean a major revival in equities market and a wave of investments. That would mean a corresponding increase in freight hauled by heavy-duty truckers. We know that some of the long term projections are darkly clouded by the projected deficits.

Still, we think these projections would turn on a dime if a sweeping alteration of our tax system were enacted. We think the pressure for just such a change is coming from the financial markets and may well dictate the above sweeping policy change. And, any tax system that is designed to stimulate the productive power of the economy --savings and investment-- is just what the doctor ordered for the trucking industry.

INSIDE TRUCKING INSURANCE: Last month we indicated that a major tightening of the Trucking insurance market is well underway. The combination of- reduced investment income by insurance firms and highly unprofitable rate structures are propelling this shift, which is dictating the collapse of some previous trucking insurance providers. You should be aware that a sharp reversal in the previous downward movement of insurance rates has already begun. We are anticipating an escalation in trucking insurance rates and are recommending two concrete steps to minimize the upside damage caused by higher rates. (1) Be certain to get with an insurer that will give your company a stable market over the next several years. (2) You should begin reviewing alternative programs that will minimize these upward rate adjustments. This may include cost plus programs such as liability deductibles and self-insured retentions. W.F. Roemer Insurance, Inc. has 40 years of experience in this business and anticipated this trend about two years ago. We have structured a number of specific new programs that will fill the void in the market availability of affordable insurance coverages.