An imagined Q&A between the Mayor of Seattle and a local reporter about inequality In Seattle

Reporter:     Mayor Murray, you've established an

                    Inequality Committee to consider a 

                    $15/hour minimum wage in Seattle.

Mayor:        Yes, that's right.  We’re determined to reduce the excessive inequalities of wealth and income in Seattle.

Reporter:     Well, if you’re really serious about reducing inequality, then why is the Seattle City Employees’ Retirement System planning to triple its investment in Private Equity?

Mayor:        Private Equity?  You mean the sort of thing Mitt Romney was involved in?

Reporter:     Yes, it's the province of the very wealthy, and Private Equity investors enjoy one of the most unjust loopholes in the Federal tax code.

Mayor:        Which loophole is that?

Reporter:     It's the so-called "carried interest" loophole that allows Private Equity investors to pay lower tax rates than most Seattle workers pay.  (See here and here).

Mayor:       That is unfair!  But the City of Seattle can't do anything about the Federal tax code.

Reporter:    Well, not directly, but Private Equity firms hire lobbyists to preserve this tax break, and Seattle invests money with these firms. (See here).

Mayor:        OK, I take your point.  But the Seattle Retirement System must act prudently, not politically, when it invests.

Reporter:    Yes, of course, but did you know that the Seattle Retirement System's largest investment in Private Equity, a $20 million bet on a Private Equity firm located in the Cayman Islands, is now worthless? (See here and here).

Mayor:       All investors make mistakes.

Reporter:    Granted, but according to the Retirement System’s own website (here), Seattle's Private Equity investments have underperformed their benchmark by 7.5%/year over the last five years, and by 1.5%/year since April 2007.  And these figures don't even include the high fees charged by Private Equity firms.  

 Mayor:       (Sigh) That's depressing.  Have you talked to the Retirement System's private financial advisors?

Reporter:    Oh, they love Private Equity.  But then they get much higher fees when Seattle invests in actively managed funds like Private Equity.

Mayor:        So, the upshot is that, by getting out of Private Equity, Seattle can make better investments and strike a blow against the unjust tax loopholes that benefit the very rich.

Reporter:     Well, many economists, including several Nobel Prize winners, think so.  (See here).

Mayor:        Maybe I should talk with Councilmember Licata; he's the Chair of the Seattle City Employees’ Retirement Board.

Reporter:    You've both said you wanted to address inequality.

Socialism in One City

Opening the Seattle Times this morning, I was surprised to see a photo of Seattle’s new Socialist Councilmember, Kshama Sawant, standing alongside the City’s new Mayor, Ed Murray, who was announcing the formation of a new Income Inequality Committee.  The Committee will consider minimum wage legislation, which Ms. Sawant would like to set at $15/hour, the level recently adopted through initiative by the City of SeaTac.

The paths leading to a more Egalitarian Seattle are cluttered with obstacles.  A former UW political scientist, Paul Peterson, insists that egalitarian initiatives, "redistribution" in Peterson's jargon, are pursued more effectively by countries than cities.  The title of Peterson’s book, “City Limits,” captures the main idea, which is that businesses and well-to-do residents aren’t trapped within the City’s boundaries; they can relocate to more “hospitable” jurisdictions, as Boeing is threatening to do.

In a more perfect world, minimum wages would be raised in concert nationwide (or worldwide), we’d have a more progressive tax code, and there would be better educational opportunities for less advantaged citizens.  But we don’t live in an ideal world, and so Seattle must seek out the next best alternatives.

There are some egalitarian policies Seattle can pursue without running up against the “city limits.”  Ms. Sawant isn’t the first Socialist elected to the Seattle City Council.  A hundred years ago, the Socialist Party was an active participant in the political battle to create Seattle City Light.  At the time, the existing electric utility was owned by a Boston syndicate and charged 20 cents/kWh.  When City Light started delivering power, it charged 8 cents/kWh, forcing its private competitor to reduce its rate to 8.5 cents/kWh. Now that's public power!

But I digress.  Today, Seattle has a chance to follow the excellent lead of B.C. Hydro, British Columbia’s publicly-owned electric utility.  B.C. Hydro charges its larger customers a carefully designed electric rate that doubles the financial incentive to conserve.  Each customer receives a block of low-cost power based on their past consumption, but pays a much higher rate for additional consumption.  In the long run, this electric rate alternative will reduce total energy costs, which are borne disproportionately by low-income households.  Perhaps our new Socialist Councilmember can nudge Seattle City Light in this progressive direction.

Here’s another question for Ms. Sawant: Do you approve of the City’s Retirement System's plan to triple its investment in Private Equity?  Thanks to the so-called “carried interest” tax loophole, Private Equity owners (remember Mitt Romney) pay a lower tax rate than most City Employees.  Seattle’s Liberal Councilmembers seem content to allow the City’s Private Equity holdings to be sharply increased, even though Private Equity lobbying groups are now pressuring Congress to maintain a tax loophole that benefits the highest echelons of the top 1%.  Surely a Socialist can’t support such investments!

Since I’m gathering up my holiday spirit, let me express the hope that our new Socialist Councilmember will bring the Liberal members of the City Council to their senses on these issues.  More efficient and environmentally-friendly utility pricing used to be a Liberal battle cry in Seattle, and the argument that it won’t work, or will drive business away, holds no water in light of B.C. Hydro’s success.  And if our Liberal Councilmembers can’t be persuaded to halt the City’s indirect support of Private Equity’s “carried interest” tax break, then perhaps their new Socialist comrade will occasionally remind them about the City’s $20 million investment in a Cayman Islands private equity firm, which is now worthless.

Note: This is my first post on this new blog.  Shortly I'll write a general introductory post about the point of "Socialism in Seattle."  Suggestions welcome.   

Boeing, Labor Solidarity, Pension Risks & Opportunities

Kshama Savant, Seattle’s new Socialist City Councilmember, dreams of a Boeing owned by workers who produce mass transit vehicles for the commonwealth.  In the meantime, Boeing’s Machinists Union recently voted to approve a new contract that includes several “takeaways.”

Reaction to the close vote has been mixed.  State officials, who approved billions of dollars in tax breaks and other concessions, say the agreement is “good for the region’s economy.”  But many Boeing workers say the union shouldn’t have capitulated to Boeing’s demand that employees bear the financial risks associated with their pensions.

Here’s what struck me about this episode in the struggle between labor and capital.

1. Labor Solidarity in the PNW.  It’s hard not to be impressed by the willingness of union members to set aside their own personal interests for the sake of their comrades.  Boeing’s contract offer included the creation of a separate pension system for new hires.  Instead of Boeing’s current defined benefit pension plan (similar to Social Security), new employees would be enrolled in a defined contribution pension plan (similar to the individual retirement accounts favored by proponents of privatizing Social Security).  Leaving the details aside for the moment, a point worth stressing is that, while the pension system for current employees isn’t directly affected, the union still opposed Boeing’s two-tier pension proposal.  In effect, the union was willing to take considerable risk to protect the interests of workers (new hires) who aren’t even members of the union. 

Granted, union management has an organizing interest in maintaining union solidarity, which a two-tier pension system tends to fracture.  But let’s consider another local case of union altruism.  In 2008, during the City of Seattle’s budget crisis, most of the unions representing City workers voted to take unpaid days off (furloughs) in exchange for fewer layoffs.  Since individual layoffs are determined by seniority, very few union members actually faced the risk of being laid off.  Yet the overwhelming majority of union members still voted to accept furloughs, and their willingness to do so reduced the risk facing fellow union members who lacked the protection of seniority.

One notable exception, however, was Local 77, representing Seattle City Light’s electrical workers.  They voted against taking furloughs even though this meant more layoffs.  And unlike the Boeing dispute, the vote on furloughs didn’t involve a strategic bet on whether management would capitulate if the union rejected its offer.  This case was, in my view at least, a straightforward choice between sharing costs among all union members or “letting the devil take the hindmost.’”

2. Pensions and The Labor Movement.  Several decades ago, some left-wing thinkers believed that the huge pension funds being amassed to pay union retirees would give labor a stronger voice in the allocation of capital.  Perhaps unions would be able to bargain over the disposition of their pension funds, investing in companies that produced, say, buses rather than warplanes.  But this hope was not realized for a variety of reasons, and Boeing is now following the lead of most corporations by shifting to a more “individualistic” pension model based on self-managed retirement accounts.  The vision of “union pension power” was probably out of reach to begin with, since even public agencies, which also command massive pension funds, have done little to influence their investment practices (disgorging investments in South Africa and Sudan being notable exceptions).  Do the unions in Seattle pressure the Mayor and City Council to divest the City’s Pension Fund of its holdings in oil companies or Private Equity funds (a bastion of the top 0.1%)?  Quite the contrary, as far as I know (and I worked for the City for 28 years) City employees on the Pension Fund’s Investment Committee, union and non-union alike, have never voted against such investments.

3. Brave New World.  Boeing’s new hires won’t enjoy the safety of a defined benefit pension, which pays a fixed amount regardless of the pension fund’s investment performance.  Instead, these employees will have to manage their own portfolios in a defined contribution plan and bear the risks associated with their investments.  Yet, claims to the contrary notwithstanding, defined benefit pension plans aren’t risk-free.  To be sure, City of Seattle employees will get their defined benefits in spite of the Retirement Fund’s poor investment performance.  But they will get these benefits only because City workers are paying roughly 25% more in pension contributions, and the City is paying roughly 50% more in pension contributions than they were a few years ago.  I hope Boeing’s workers, with a natural antipathy to “money managers,” will reject the City’s practice of making costly bets on financial “wizards” who promise superior returns, but very rarely “beat the market.”

Councilmember Savant can’t do much about Boeing’s bargaining power, but perhaps she can convince the City’s represented employees and their unions to take a closer look at how the City’s $2,000,000,000 Retirement Fund is being invested.  And, if Socialism means what I think it means, Ms. Savant may wish to publicly declare that, when the City’s budget must be cut, policy making will favor unions willing to share this burden for the common good.