June 27, 2016
By Larry Cary
Great Britain has voted to leave the European Union causing huge instability in the international financial markets with sharp stock and currency declines and a flight to safety driving bond prices up and yields down. Gold is again attracting buyers.
Trillions of dollars of value have been wiped out. It remains to be seen just how long this panic will last. But in any event, it is clear that while Donald Trump proclaims Brexit not only good for the business of his Scottish golf course, but also a good example of a country taking back its boarders, millions of workers in the United States will be hurt and hurt hard.
With stock declines pension assets will be negatively affected. For defined benefit pension plans with a June 30th end to their fiscal year, it is likely that these losses will force many plans in the red zone to reexamine their rehabilitation plan with an eye to requiring higher contributions from employers, which in turn will drive down their ability to grant future wage increases or force them out of business.
Some retirement plans on the cusp of remaining green will be forced into yellow or even red zone status. This will result in pension cuts that hurt future and in some cases current retirees. Annuity and 401K pension plans will also suffer, resulting in less retirement security for those now living off of such savings.
With a strengthened US dollar, American exports will be more expensive causing loss of jobs in those U.S. industries dependent on selling their products overseas. Foreign goods will become even cheaper than they are now, leading to greater exporting of U.S. jobs and plant shutdowns because they no longer can compete with foreign manufacturing.
While refinancing mortgage interest rates may be cheaper than what they would have been without Brexit, it’s too early to tell if there will be a sustained bounce in first time home sales, which could lead to a bright spot in this mess. But whatever happens in the housing sector, it is clear that our economy’s tepid recovery from the Great Recession is profoundly jeopardized by the impact of Brexit. It is also clear that Trump’s campaign is poised to take advantage of the harm and confusion Brexit will cause.
Polls show that Brexit would not have happened without older, less educated, less employed, poorer working class people in England blaming their circumstances on the integration of their economy into the EU causing a wave of immigration to Britain. Outright racist appeals to vote to leave the EU resonated with this part of the population. The British Labor Party, which opposed leaving the EU, with the election of Tony Blair and the ascendency of the “New Labor” wing of the party in the 1980s, had long before abandoned its special relationship with the British labor movement and proved incapable of reaching these voters in the referendum.
The model for creating Britain’s New Labor program was Bill Clinton’s successful election and the ascendency of the “New Democrats” wing of the Democratic Party which as part of abandoning a special relationship with organized labor ideologically supported integration of the American economy into the international economy without regard to its impact on American workers. This meant the Democratic Party became more concerned with the welfare of Wall Street than the welfare of Main Street. Millions of high paying union jobs were lost because of the North American Free Trade Agreement (NAFTA) as much of America’s manufacturing base was exported overseas.
To be sure, in the 1980s the Republican Party under President Reagan also did its part in waging war on the working class and the destruction of the labor movement. Reagan’s appointment of ideologically anti-union pro-management advocates to the National Labor Relations Board remade America’s labor law into something more interested in protecting business than the rights of workers. Reagan’s breaking of the airline traffic controllers’ union after they had struck caused American business to realize that they now could go “union free”. This meant unions were confronted by a 30 year wave of aggressive concessionary bargain tactics that meant either the union agreed to lower standards or suffer destruction.
More recently, when the Great Recession hit, millions of workers were again harmed either because they lost their jobs, suffered wage freezes or reductions, or lost their homes when the bank foreclosed on their mortgage. Government at all levels and both political parties failed to help the working class recover. Instead, government’s response was to pass the Troubled Asset Relief Program (TARP) which made $700 billion available to bail out the banks. Most people don’t realize that when TARP was passed it specifically allowed moneys to be used to bail out union pension plans which had suffered terrible losses and were threatened. Not a single penny was used to help any pension plan. Had Treasury used these funds as intended many if not most of the red and yellow zone pension plans would today likely be in the green zone.
Hillary Clinton has many burdens to carry in this election, among them, the fact that older white working class men are supporting Trump in this election, just as their British cousins supported getting out of the EU. Both groups feel the establishment does not have their interests at heart and are listening to anti-immigrant scapegoating. But the Clinton campaign needs to understand that these workers also suffer from the effects of their political party having abandoned them thirty years ago. They don’t trust the Democratic Party, especially with Clinton at the head, in part, because she supported NAFTA as the First Lady.
Clinton’s campaign is making a big mistake by not contesting Trump in the battle over controlling the 24 hour news cycle and thus ceding to him this important field of battle in the hope that by giving him free rein to spew his rhetoric that Trump’s campaign will somehow implode to his detriment. Instead, she needs to fight to get white working class male voters to support her and abandon Trump.
The AFL-CIO recently endorsed Clinton for President. Union leadership at the highest levels understands that a Trump victory will be a devastating blow to workers and the labor movement. The problem is that many of the rank-and-file are currently supporting Trump because they do not see Clinton standing for something that directly meets their needs and benefits them.
Given Clinton’s centrist political view it is impossible for her to simply adopt Burnie Sander’s campaign rhetoric in order to broaden her base. In any event, since Sander’s support draws heavily on young people, who have no memory of the past and only understand that they have a grim future – just like the English youth who voted overwhelmingly to stay in the EU – wholesale adoption of Sander’s program would not lead many of Trump’s supporters to switch sides.
Instead, I would suggest that the Clinton campaign consider advocating for measures that will attract support away from Trump’s base. Among such initiatives, I suggest that the Clinton campaign announce a new program to solve the pension crisis. There are literally tens of millions of people covered by defined pension benefit plans – what we all understand a traditional pension plan to be – namely, after so many years of service you get so many dollars a month in benefits for the rest of your life. As of 2015 half of the union plans were in the red zone, which means they are likely to fail. Millions of current retirees are faced with the loss of their retirement security and millions more people still working will be confronted with the stark reality that even after they work another 20 years they will get an inadequate pension because current contributions must be used to pay for past obligations. Brexit only made this problem worse.
There are two approaches to solving this problem which have not yet been considered. First, Clinton should call for raising the maximum guaranteed pension benefit for multiemployer plans to the nearly $60,000 annual guarantee enjoyed by participants in single employer pensions. By and large, this would prevent retirees from having their union pension benefits cut if the plan goes insolvent. This would take federal government funding of the Pension Benefit Guarantee Corporation (PBGC). But, doing so would be a better use of government resources than, as currently expected, government funding to bail out the PBGC when it goes insolvent in the next ten years for just paying the current multiemployer guaranteed benefit of only $35.75 per month, per year of service.
A second approach to protecting promised pension benefits would be for Clinton to call on the government to issue 30 year bonds paying a fixed interest rate equal to what the fund currently uses to calculate long term investment results, which only a pension plan can buy. Many plans use an interest rate assumption of between 7 and 7.75 percent. Because a pension plan can only hit this result by holding a large portion of stocks in its portfolio, below expected average market returns can devastate a pension plan’s financial condition. This has happened several times in the past decade and directly led to the present pension crisis. These bonds would be available for purchase by pension plans for the next 30 years and thus cover not only the current generation of retirees but also extend pension plan solvency to the next two generations of retirees. In the meantime, in order to infuse solvency into plans currently underwater, the federal government would have to lend the pension plans sufficient moneys at negligible interest rates to buy these bonds.
Such a program would get the attention of millions of rank-and-file workers, primarily men over age 40 years, who are acutely aware of their pension plans’ approaching death. This is precisely the demographic that the Clinton campaign needs to reach if it wants to undercut Trump’s support in this election. Brexit shows it is not enough to simply let Trump self-implode. His racist, anti-women and anti-immigrant campaign will unfortunately continue to resonate among many of his disaffected supporters. There is no short cut to victory; Hillary Clinton must come up with programs that earn the votes of the working class if she is to win in November.
*Larry Cary is a partner in the New York labor law firm of Cary Kane LLP. Its website is www.carykanelegal.com.