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Commentary By Nicole Gelinas

The Debt Monkey on New York's Back

Cities, Economics New York City, Finance

On the campaign trail, Donald Trump said that as a businessman, he was the “king of debt” — and now, he’s about to preside over a lot of debt.

The US economy has powered itself for decades on cheap credit. If that ends — and early signs are that it might — one part of the economy, in particular, will suffer: ours. New York state and city are dependent on easy borrowing.

“If interest rates continue to rise, New York is vulnerable.”

Remember the financial crisis, caused by too much debt? We fixed it with more debt. In 2008, everyone in the United States collectively owed $39.4 trillion in today’s dollars, through government borrowing or their own personal loans. Today, we all owe $46.3 trillion.

How did we do this? Minuscule interest rates. As President George W. Bush was leaving office, the Federal Reserve set its main rate near zero and kept it there until this spring.

Like all borrowers, state and local governments have benefited, at least in the short term. In 2007, the average state, city or town paid about 4.4 percent a year to borrow, according to the Bond Buyer. Earlier this year, the rate was a little less than 3.25 percent.

Surprisingly, unlike consumers, most states and cities didn’t take advantage of these cheap rates to splurge. In 2007, they owed $3.4 trillion. Today, they owe less than that: $3.1 trillion.

States and cities saved money by refinancing their old debt, just like homeowners do. But they were still strapped for cash even as their pension and health-care costs grew: That’s why people haven’t seen much new infrastructure, which is what debt is supposed to pay for, in the past decade.

New York, though, had no such compunctions. In a report out last Thursday, city Comptroller Scott Stringer noted that Gothamites owe $83.4 billion. Ten years ago, adjusted for inflation, the figure was $64.4 billion — that’s a 30 percent increase.

The same is true at the state level. Though official state debt hasn’t risen all that much, one kind has: State public authorities owe $158.7 billion, up from $143.2 billion in 2008. The state-run MTA owes $37.9 billion, up from $28.6 billion.

Because rates are so low, paying the interest on all this debt hasn’t slammed our budgets: The city paid $2.9 billion in interest costs last year, almost exactly the same as it paid a decade ago.

Now, that could change. After Trump’s election, global interest rates rose. Why? Who knows? Investors might be worried that his stimulus plan could cause inflation, or they might think he’ll usher in new economic growth.

Higher interest rates are already affecting state and local borrowing costs. In November, the municipal-bond market had “the worst month since the Great Recession,” according to the S&P Municipal Bond Index.

S&P Managing Director J.R. Rieger says muni investors, in particular, might be worried about federal-tax reform: If rates go down for top earners, they have less incentive to invest their money in state and local debt, which is exempt from those taxes.

He also notes that markets could be worried about Trump’s trillion-dollar infrastructure pronouncements. “How are those plans going to unfold? It is really uncertain,” Rieger says.

If state and local governments have to borrow a lot more to pay their share of a massive federal-infrastructure program, rates could rise more. The federal government almost never pays the full cost of local infrastructure, or even more than half — but we’ll see.

If rates continue to rise, New York is vulnerable. Mayor de Blasio expects to borrow $6.2 billion in new debt next year, and $7.3 billion the year after that. The MTA might need a whopping $16.4 billion in new debt — both its own and from the state — to make basic investments and modest expansion plans in the next four years.

New York’s politicians have consoled themselves over the Trump win by thinking it’s at least good for their roads, bridges, trains, etc. But their own reliance on debt even as the rest of the country was cutting back might make it harder for them to take advantage of this one.

This piece originally appeared in the New York Post

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Nicole Gelinas is a senior fellow at the Manhattan Institute and contributing editor at City Journal. Follow her on Twitter here.

This piece originally appeared in New York Post