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Public pensions weakened in role as Labor’s Capital

The labor-oriented In These Times features a cover story by left financial analysts Doug Henwood and Liza Featherstone . Henwood, author of a helpful finance dictionary for the masses, blogs at lbo-news.com and appears to have a new finance primer at Scribd.

A short article in the same issue details the example of Puerto Rico’s pension funds, which held especially large amounts of bad debt from the U.S. territory’s public sector. The debt is now held by vulture-type hedge funds, which are seeking to extract money from workers to make good on the bad I.O.U.s.

The news on public pension funds published not surprisingly in the current issue of In These Times, is that they are in large part resorting to “alternative investments” in hedge funds and private equity firms, which tend to be anti-labor in their orientation, though they offer the hope of high returns. Both low interest rates on safe bonds and anti-tax sentiment at the state and local levels have encouraged the higher-risk investment strategies.

Private equity is private in the sense that it does not involve creating publicly traded securities. It includes leveraged buyout firms. Private equity firms specializing in buyouts cut costs by laying off workers, moving operations overseas, and reducing benefits. They use use large amounts of debt, leaving highly leveraged and often badly weakened firms with far fewer workers. Hedge funds, on the other hand, have an even shorter-run view.

That these pension funds hire such firms is an irony for a sector dubbed Labor’s Capital in the title a book by Teresa Ghilarducci of the New School for Social Research, though Ghilarducci mostly argued that this vast amount of wealth held on labor’s behalf remarkable potential in this role. Ghilarducci possesses an entry in this site’s Assorted Links page.

A rebuttal in the same magazine issue written by Max Sawicky makes the argument that in principle the pensions in question are a desirable legacy of the New Deal that are far less shaky than the defined contribution plans that now constitute the only option for most workers with retirement saving options through their jobs. All of that is right, but it is still hard to see how hedge funds and private equity firms make good bedfellows for a constituency with modest and falling wages and salaries and for whom solidarity is crucial.

Henwood and Featherstone argue for a return to the New Deal concept of a more massive and all-encompassing Social Security system–a great vision perhaps despite the reasonable counterargument raised in Sawicky’s critique that labor should not allow such a proposal to distract from the defense of what remains of a functioning and largely effective system.

For a critical Minskyan view by two policy-oriented academics, see this 2010 Levy Institute public policy brief by Randy Wray and Yeva Nersisyan. For Minsky, pension funds have played a role in the unstable stage of our financial system he dubbed “Money Manager Capitalism.” Their view fits in with Modern Monetary Theory, as frequently advocated in this blog.

The articles and the brief are worth reading.

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