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City & State


De Blasio's Fiscal Bubble

June 09, 2014

By Nicole Gelinas

Lost in the confusion over Mayor de Blasio's maiden budget is a question: Does the mayor understand the fiscal risks he's taking on—not only on behalf of the city but on behalf of his progressive program as well? The answer is critical, not just because the mayor is raising spending, but also because he's doing it when Wall Street could be in another bubble.

De Blasio's $75.5 billion budget for the year that starts July 1 made news because of how the mayor accounted for the city's new teachers' contract. The budget is balanced only because it doesn't account for or pay for most of the $4.3 billion in salaries the city awarded for work the teachers did in 2009 and 2010. The city won't pay for most of this past work until the start of next summer through the fall of 2020.

Now the shock that the new mayor is doing something the city hasn't done in four decades—pay for past operating spending in future years— has worn off. And one wonders: Did the mayor do this because he is taking a risky but calculated gamble, or because he really doesn't understand?

If the mayor is taking a calculated risk, the thinking would be as follows: Yes, the teachers' deal helped quadruple projected deficits between July 2015 and June 2018, from just under $2 billion total in former Mayor Bloomberg's final budget to nearly $7.6 billion, but the history of the past four years gives New York ample reason to think it can cover the next four years' worth of deficits.

If you look at the four years' worth of tax revenues that New York was projecting nearly half a decade ago through 2014, the actual taxes the city collected over those years, in hindsight, turned out to be $11.4 billion higher than expected. The calculated risk version of what de Blasio is doing is that the future will be like the recent past—the city will continue its spectacular recovery, and growth will make the de Blasio deficits disappear. The other possibility, though, is that de Blasio doesn't grasp this gambit—that he just told his budget folks to make the numbers work, so they did (sort of).

This version makes sense—once you dig a little deeper into why New York has recovered so nicely from the financial crisis. Gotham has reaped these extra billions because the federal government's approach to economic recovery has been to pump as much money into the financial system as humanly possible (and then some). Record-low interest rates for half a decade running now have allowed Wall Street to reap huge profits, because Wall Street thrives when the money it borrows is cheap.

That's why, as the city's budget office noted in an April report, Wall Street profits for 2012 and 2013, though down, “are still the third and fourth most profitable results in Wall Street history.”

When were Wall Street's most profitable results? Not the years leading up to the 2008 crisis. Rather, the two years after the 2008 bailout.

Remember, the financial industry still provides 27.7 percent of New York's total wage earnings—and a higher share of income taxes. That's the reason—and the only reason— New York's budget has looked so good over the past half decade.

But it could all come to an end. Super-low interest rates can't last forever. As the Financial Times reported in early June, “Fears are mounting of a potential bubble in the high-yield bond market, where a rash of new buyers has pushed prices close to record highs.” Bond (debt) crises are worse than stock-market crises.

Bloomberg realized that Wall Street's post-bailout profits were illusory. So he budgeted conservatively. He illustrated, too, in his annual budget speeches how high—and therefore possibly unsustainable—postcrisis Wall Street profits were. De Blasio makes no such warnings. Now he has spent the “extra” money Bloomberg's conservative budgeting appears to have given him—and then some.

The new mayor—as you may have heard!—talks about the tale of two cities. For his governing and re-election plans, he had better hope that the people who are doing extraordinarily well thanks to Washington's feed-the-rich policy continue to do so.

Original Source:



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