In an arm-length transaction the unions would negotiate with management for a share of the corporate profits.  If the company pays too much of its resources to shareholders, management, or union, then the company goes out of business. There is an inherent requirement in union negotiations that they do not try to take an excess share of profits because in doing so, they will eventually destroy the company and themselves.

Governments have no profits; they just have tax- and fee-based revenues. The control and use of the taxing authority of the government resides in the elected officials. An elected official that is beholden to a public-service union (or any other subsidy receiving industry) is not dealing in an arms-length transaction in negotiating with the unions for their pay and benefits.

In a polarized political environment, this “corrupt” situation is exacerbated because both the unions and the elected official are fighting for their paychecks. If the elected official loses their elected position, they lose their paycheck, power, and podium for advancement. There is a direct benefit for the union-leaning politician to give more pay to the unions so the unions can give more direct campaign contributions, as well as support the politician through volunteer efforts. This effect more tightly weds the favored politician to the union because each are fighting for their preservation against those tax-payers who would direct the available tax revenues to other uses.

This is not a theoretical possibility, but in fact the reality of today’s political environment. Public service unions were the largest single supplier of election funds in the 2008 elections outside of the political parties themselves. These funds were given almost completely to the Democrats, who promised to continue to support their pay and benefits.

This is a “corrupt” system, where corrupt is defined as being unsupportable in the long-run because eventually the tax revenues can not support the system and the system collapses upon itself. See Greece’s current economic conditions for an example of what happens in the long-run if this system is allowed to become entrenched.

The same problem extents to any industrial group seeking subsidies or other transfer payments from the government, whether it is the oil & gas industry, the farming industry, etc.  If those payments are used to lobby or elect political representation, it is bad for democracy, it is bad for the economy, and most importantly it is very bad for tax paying citizens.

It is very bad for citizens because this is a corruption of the democratic system required to maintain economic balance and longevity to any civil society.

Updated March 14, 2011:
In Wisconsin, police and firefighting unions are threatening to boycott businesses that do not support their efforts to over-turn the recent Wisconsin laws.

The subtle long-term threat about which I wrote has moved into direct threats against citizens from the civil servants responsible for protecting those citizens.

Free association is a guaranteed right in this country. No one has suggested otherwise in any of the reasonable debates about public service unions.

The police and firefighter unions were explicitly excluded from the new Wisconsin laws. Yet, the police and firefighter unions are leading the threats against businesses if they do not sign a petition to rescind these laws.

“Corruption” has taken on a new definition with respect to the impact of public service lobbying on democracy.

The world-wide bailout of Greece would be funny were it not so indicative of attitudes by some that you can take more from an economic system than can be created by its participants.

The Greek problem is in a large part the result of the inadvertent corruption of democracy when those who want to use the productive capabilities of others are given unfettered power to do so. This power can accrete slowly, sometimes over decades, but when it starts, it is very hard to stop.

In this case, the Greek bureaucracy began to exert control over the taxing and spending powers of the government by (legal and illegal) contributions to elected officials who supported their desire for more money and benefits. These contributions were collected from their members’ salaries; salaries that were paid for by tax and bond revenues assessed by the elected officials. Union members naturally supported the increase in their salaries and benefits packages. This, of course, also led to the collection of greater union dues, which in turn led to greater contributions to elected officials who would raise tax and bond revenues to pay union members.

This corruption of the control of resources within the Greek society created a positive feedback loop for tax increases and bureaucratic expenses that drained their economic resources. The situation of allowing people who directly depend on tax and bond receipts to elect the officials responsible for determining the assessment of taxes and the selling of bonds is analogous to “putting the kids in charge of the cookie jar”.

George Will has a great article on the recent mess.  In it he states -

Greece represents a perverse aspiration — a society with (in the words of Wisconsin Republican Rep. Paul Ryan) “more takers than makers,” more people taking benefits from government than there are people making goods and services that produce the social surplus that funds government. By socializing the consequences of Greece’s misgovernment, Europe has become the world’s leading producer of a toxic product — moral hazard. The dishonesty and indiscipline of a nation with 2.6 percent of the eurozone’s economic product have moved nations with the other 97.4 percent — and the United States and the International Monetary Fund — to say, essentially: The consequences of such vices cannot be quarantined, so we are all hostages to one another and hence no nation will be allowed to sink beneath the weight of its recklessness.

Recklessness will proliferate.

Those with kids understand that the risk of putting the kids in charge of the cookie jar is not that they will eat all the cookies. Instead the greater risk is that their lack of self-control will make them sick, and in turn, may cause greater problems for those around them.

It is not the child’s fault for eating all the cookies when we put them in charge of the cookie jar; rather it is the adult-in-charge’s fault for enabling them with the opportunity to do so.

In Greece, the “children” have taken to the streets to murder private sector employees because they were told they could no longer have everything they wanted. Whose fault is this? The children or their enablers.

Adults in our society need to learn the word, “No.” and we need to use it.

Could this happen here? The answer is it already has in California. The following is from a Wall Street Journal Op-Ed by David Crane -

In 1999 then California Governor Gray Davis signed into law a bill that represented the largest issuance of non-voter-approved debt in the state’s history. The bill SB 400 granted billions of dollars in retroactive pension boosts to state employees, allowing retirements as young as age 50 with lifetime pensions of up to 90% of final year salaries. The California Public Employees’ Retirement System sold the pension boost to the state legislature by promising that “no increase over current employer contributions is needed for these benefit improvements” and that Calpers would “remain fully funded.” They also claimed that enhanced pensions would not cost taxpayers “a dime” because investment bets would cover the expense.

What Calpers failed to disclose, however, was that (1) the state budget was on the hook for shortfalls should actual investment returns fall short of assumed investment returns, (2) those assumed investment returns implicitly projected the Dow Jones would reach roughly 25,000 by 2009 and 28,000,000 by 2099, unrealistic to say the least (3) shortfalls could turn out to be hundreds of billions of dollars, (4) Calpers’s own employees would benefit from the pension increases and (5) members of Calpers’s board had received contributions from the public employee unions who would benefit from the legislation. Had such a flagrant case of non-disclosure occurred in the private sector, even a sleepy SEC and US Attorney would have noticed.

Let me repeat here. We need to learn the word, “No.” And we need to learn to use it.

crystal clear that the state’s tax policies are resulting in a significant decline in the state’s wealth.

A more insidious effect is that the study found a

less-robust “in-migration,” the study finds that people who are moving to New Jersey aren’t as wealthy as those leaving.

So why would one care about those wealthy people who want to “escape” paying their “fair share”.

Well for one thing, class warfare is bad. Nobody likes to be called a villain, particularly those who are working hard to be successful for their families, their co-workers, and their communities. Making people feel guilty for being successful is not conducive for a healthy community.

For another, you need a concentration of “excess” wealth to feedback into the local investment of new technology and jobs. Governments do not do this; they redistribute wealth. Individuals and corporations operating in their own self-interest invest in opportunities that create wealth, which as a by-product create additional goods, services, and jobs.

I am not suggesting that we “starve” schools. What I am suggesting is that if you chase out (or otherwise make the community unattractive for those who wish to immigrate into that community) those who are at the head of the bell curve in terms of success, the community will eventually suffer. All one has to do is look at the problems seen in New York, California, and New Jersey.

“It is to me a new and consolatory proof that wherever the people are well-informed they can be trusted with their own government; that whenever things get so far wrong as to attract their notice, they may be relied on to set them to rights.”

—Thomas Jefferson to Richard Price, January 8, 1789.