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New York on the Precipice

May 31, 2009

By Fred Siegel

Modern Washington, with its vast powers and giant bureaucracies, was created in the wake of the 1929 stock market crash and the Great Depression that followed. Franklin Roosevelt’s New Deal brought an end to New York City’s reign as the nation’s unofficial capital and gave Washington pride of place, which it has held ever since. FDR’s “brain trust” of intellectuals and academics quickly superseded the heavily starched class of bankers and stockbrokers who seemed to have brought the country and the world to the brink of permanent ruin.

That changed somewhat over the quarter-century that concluded with the bankruptcy of Lehman Brothers in September 2008. Once again, bankers and stockbrokers came to occupy the high ground in American culture, while the standing of Washington policy wonks receded. The Giuliani-led recovery of New York and the city’s grace under fire after September 11 gave the city an unprecedented glow in the eyes of its countrymen. New York worked.

No longer. Today, as in the 1930s, the failures of Wall Street have laid the city low. Power is again shifting dramatically from New York to Washington, as Treasury Secretary Timothy Geithner and his employer, Barack Obama, have made plain their determination to bring the entire financial system under strict federal supervision. This is a startling development; a year ago, one would have been hard-pressed to advance a believable argument that the federal government possessed the administrative capacity even to begin to manage the complex dynamics of a $14 trillion economy.

And yet the illusion that it can do so persists, and now holds sway in Washington. The persistence of this illusion is due, in part, to past symbiotic relationships between activist Democratic administrations and New York City mayors who were eager to win Washington’s heart.

The first such relationship was struck between Franklin Roosevelt, who had once been governor of New York, and Fiorello LaGuardia, who became mayor of the city in 1934. In return for favored financial treatment from Roosevelt, LaGuardia turned New York into the New Deal’s model city, a place where FDR’s programs succeeded with gleaming efficiency. LaGuardia was able to produce this result because he exercised enormous powers as mayor under the city’s charter. Once asked by a reporter what irritated him about the job, LaGuardia snapped, “Limitation of power.” More than in any other locality in the United States, the public policies of New York City were unalterably transformed by the New Deal’s pursuit of governmental solutions to social problems, and by its vast expansion of public employment to provide jobs. But as the next experiment in a Washington-New York collaboration demonstrated, serving as the laboratory for Washington’s social experimentation would prove extraordinarily costly to New York City.

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In the 1960s, Lyndon Johnson’s efforts to end poverty and achieve a more just society through public-sector spending found its perfect expression in the policies enacted by Mayor John Lindsay. The results proved as destructive to the ambitions of the Great Society as LaGuardia’s New York had seemed the fulfillment of FDR’s. When Lindsay insisted on doubling the welfare rolls (at a time of full employment, which seems a contradiction in terms) while at the same time providing generous contracts to the increasingly powerful public-sector unions that were also part of the New Deal legacy, he helped push the crime-riddled city down a terrifyingly steep slope. In Lindsay’s wake, New York shed 575,000 jobs and slid into the fiscal crisis of 1975. New York became the object lesson in the disasters that could be inflicted on a polity by a government that had been allowed to grow without limit.

The local economy revived only when Ronald Reagan’s early tax cuts and efforts at financial deregulation helped pull New York out of its slide by inaugurating a stock-market rally that quadrupled the Dow Jones average in five years, from 1982 until the crash in 1987. Not only did the New Yorkers working in finance (and ancillary fields like the law) profit immensely, the astonishing increase in the number of financial transactions caused tax money to descend like manna upon the city and state politicians who found they had an inexhaustible appetite for it.

This was an extraordinarily lucky break for New York City, because this new prosperity hid the wounds that had been inflicted by the tax and regulatory policies put in place over the course of the preceding decades. Those policies had succeeded in driving away the city’s once-healthy manufacturing sector and many of the major American corporations that had formerly based their headquarters in Manhattan. But because Wall Street had come to the rescue, it freed even a reformist mayor like Ed Koch (1977-89) from the obligation of revisiting the basic operating principles that had guided city government since the days of LaGuardia. By the time of the 1987 crash, Koch had restored all the job and benefit cuts that the near-bankruptcy of 1975 had forced on the city, and then some. He was followed in 1990 by the even more disastrous David Dinkins, who responded to the shortfall in Wall Street revenue with billions of dollars a year in tax increases that kept the city in recession till 1995, three years after the rest of the country had pulled out of one.

In his eight years as mayor, Rudolph Giuliani spent much of his time confronting the entrenched public-sector interests that had made New York such a difficult place to do business. But even he could not withstand the temptation placed before him in the form of billions of new tax dollars generated by the dot-com bubble and the overall vitality of the financial sector. In 1999 and 2000, as he prepared for the Senate run against Hillary Clinton that he would abort after being diagnosed with prostate cancer, Giuliani returned to the mayoral habit of increasing city spending by double the rate of inflation.

Michael Bloomberg, the richest man in New York, succeeded Giuliani in 2002. After a recession that began the previous March and the disruptions following September 11, when for three months the neighborhood that had housed the city’s financial sector had been placed under martial law, the city’s budgetary surplus quickly turned into a large deficit that Bloomberg was obligated by law to reduce. He chose to do so by raising taxes; he made no effort whatever to secure concessions from the city’s unionized workforce.

George W. Bush came to the city’s short-term rescue in 2003. The two sets of tax cuts Bush pushed through, combined with the all-too-easy money policy of the Federal Reserve under Alan Greenspan, ignited the housing markets, which in turn set off a stock-market rally that produced yet another unprecedented flow of money. In 2007, Wall Street wages, salaries, and bonuses were responsible for 35 percent of the revenue generated in the city. That same year, the city took in 41 percent more in taxes than it had in 2000.

The money went out as quickly as it came in. During Michael Bloomberg’s first six years as mayor (2002-07), city spending shot up almost 50 percent, from $41 to $62 billion. The overall budget in fiscal 2008, after adjusting for population change and inflation, was 22 percent larger than it had been at the height of the 1970s fiscal crisis. Salaries and benefits for the public-sector workforce grew at twice the rate of workers in the private sector. The average New York City employee cost the city $107,000 a year in wages, health insurance, pension, and other benefits in the 2008 fiscal year, an increase of 63 percent since 2000.

Even in the midst of an unprecedented revenue boom, it turned out, Bloomberg was saddling the city with unprecedented levels of debt. Devoting 8 percent of a city budget to debt service is the maximum considered sustainable by fiscal experts. The constitution of New York State actually limits the city’s debt service to 10 percent of its revenue. But through a variety of budgetary games, the city managed to increase its functional debt load to 14 percent. Now, with the distinct possibility that the Wall Street spigot will for years to come more resemble a trickle than a gush, the city will be contending with the impoverishment of its tax base just as the public-sector guarantees its politicians have made are bearing down upon New York like a tsunami. “The city’s payments to the pension plans have grown at 25 percent annually since fiscal year 2001,” Martin Davis of the city’s Independent Budget Office has said. In 2000, city taxpayers contributed $615 million for pensions. By June 2008, the amount had climbed to $5.6 billion.

In the current fiscal year, wages and salaries represent $21.7 billion of the city budget, with benefits accounting for another $13 billion. But benefits are growing at twice the pace of salaries, according to the city’s comptroller, William Thompson. The two are already equivalent in the budget of the fire department, and the police department is not far behind. Within a few years, the city’s budget director has warned, New York could reach a tipping point in which the costs of pensions and health-care benefits will exceed the cost of salaries altogether.

In a legal version of Bernard Madoff’s Ponzi scheme, the state constitution actually guarantees public-sector employees an 8-percent return on their pension investments in good times and bad. When the stock market was spiraling upward, the city managed to achieve that benchmark every year without having to dip into its general fund. But in 2009, with Wall Street down some 6,000 points off its high, the city will be forced to raise taxes and raid other funds to meet this profoundly ill-considered but nonetheless undeniable obligation. New Yorkers will no longer be able to blind themselves to the fact that, whereas city government was originally developed to serve the citizenry, the citizenry is now working in large part to serve government.

In 1975, in the midst of a severe national economic downturn, the city was able to look to the state government in Albany for relief. But in the intervening decades, with upstate New York hollowing out, Albany has become even more dependent on Wall Street for tax revenue than the city. The state’s budget has actually been hit harder than the city’s by the financial meltdown. In 2007, the wealthiest 1 percent of New York taxpayers generated 41 percent of all state income taxes-up from 26 percent in 1995 (when the marginal tax rate was higher). That wealthiest 1 percent is now less wealthy, and will be sending fewer dollars to Albany.

This is clearly a moment that calls for sober political leadership. But as the state burns, Albany fiddles. Its politics have entered a Gothic period. At the beginning of 2008, Eliot Spitzer was New York’s newly elected governor, Alan Hevesi was state comptroller, Andrew Cuomo the attorney general, and Sheldon Silver and Joe Bruno the leaders of the state legislature. Only Cuomo and Silver remain in office. Spitzer was driven from office by a sex scandal after a disastrous first year. Hevesi was forced out for misuse of state funds. Bruno was brought down by an FBI investigation that found he had long used his office to operate a lucrative influence-peddling scheme. In the aftermath, Spitzer’s replacement, David Paterson, has proved so ineffective and uninspiring that his approval rating stands below 20 percent.

This wretched political comedy is only reinforced by the ways in which the state attempts to demonstrate fiscal probity. State law requires that all new legislation be evaluated to determine its financial impact. For a time, these evaluations were performed for the state assembly by a professional actuary named Jonathan Schwartz. Last year, Schwartz found that a piece of bipartisan legislation allowing city workers to retire early with full pension benefits would impose no new costs. His declaration was greeted with disbelief. Reporters at the New York Times got on the case, and discovered that Schwartz did not work for the Assembly, as was generally believed, but rather for District Council 37 of the Service Employees Union.

Confronted by a reporter, Schwartz replied candidly that he regularly skewed his evaluations to satisfy his union employers. He described his supposedly actuarial evaluations as “a step above voodoo.” When Schwartz was told that the legislators sponsoring the early-retirement bill were unaware of his affiliations, he replied, “The Legislature knows full well I’m being paid by the unions. If they choose not to disclose that, that’s on them, not me.” When asked which unions he had worked for, he replied, “How many unions are there?” His client list included the teachers, firefighters, detectives, correction officers, and bridge and tunnel officers. New York State has the highest per-employee pension costs in the country for a reason.

Jonathan Schwartz is now gone, but, with Wall Street in shambles and 146,000 private-sector jobs having been lost in the city since last August, the public-sector unions still surge ahead. The recently passed $132-billion state budget, with its record-breaking tax hikes built off of increased levies on those who earn $200,000 or more, higher property taxes, and increased fees and nuisance charges, spends at 7 times the rate of inflation. In a moment of candor, Governor Paterson acknowledged that “none of this makes sense.” With state revenue estimates dropping dramatically each month, it is not unreasonable to foresee still more tax hikes, as well as heightened fears in the credit markets of a state default.

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Having spent themselves into a precarious situation, the city and the state now find themselves prey to President Obama’s warring impulses. In the short run, the federal stimulus package signed into law in March will provide succor in the current crunch-$24 billion will flow over the next two years-even as it exacerbates New York’s worst public-policy proclivities. The stimulus requires that more than 70 percent of the funds sent from Washington to states and localities be dedicated to spending on health care and education. Those are already the two most bloated and ineffectual categories in the budgets of both City Hall and Albany. Three years down the road, Obama’s aid will produce debilitating debt and diminished economic opportunities just as his repeal of the Bush tax cuts kicks in and just as the city is forced to face up fully to the meaning of Wall Street’s collapse.

Obama, the seeming fulfillment of New York’s liberal dreams, may actually be more like a harbinger of doom. His administration has been operating at cross-purposes when it comes to the financial sector. On the one hand, Obama’s need to revive the markets pushed his administration into quietly supporting bonuses for the New York-based American International Group (AIG). But when the bonuses became an object of popular anger, the president joined the chorus of attack.

The idea that Wall Street bonuses are a study in evil poses no small risk to New York. These bonuses are not just hearty handshakes for a job well done. One might describe them as constituting the bulk of the industrial output of New York State. In 2007, bonuses totaled $33.2 billion. In the wake of the meltdown, that number dropped by $14.5 billion, and in the year to come it will fall substantially again. The tax losses are enormous-at least $1 billion to the state and nearly $300 million to the city. And yet, with one exception, the entire 29-person New York State delegation to the House of Representatives voted for the federal tax proposal that would effectively have expropriated all bonus money paid out by firms that had received federal bailout funds. It was as if the Alaska delegation led the fight to eliminate the state’s oil-depletion allowance. Michael Bloomberg, who has moved heaven and earth to change city term-limits law so that he can pursue a third term as mayor, sounded a rare note of sane caution about the war on bonuses. “Fifty-one or 52 percent of our taxes come from people who earn $500,000 a year or more,” he said, with the shocking addendum that a mere 5,000 people were responsible for 30 percent of the city’s local-tax inflow of $35 billion. “Think about that-5,000 people!” he said. (On average, then, every one of those 5,000 people paid $2 million in taxes to New York City alone.) If only 1,500 of them were to move to Connecticut, Bloomberg pointed out, “that would cut 10 percent of our tax base. That’s another $3.5 billion.”

And so it comes down to this: New York, the state that built the Erie Canal and is home to the greatest democratic metropolis of the modern era, is entirely at the mercy of 1,500 people-a handful of its wealthiest taxpayers-and the largesse of one other person: Barack Obama. But even if the wealthiest can bear up under the cost of city, state, and federal tax hikes, the same can’t be said of the educated middle class, which is all but certain to continue heading for the exits. Barring another miraculous turnaround that brings the financial sector roaring back to life in the overheated manner of the past half-decade, first the state and then the city of New York are headed for a fiscal meltdown or worse.

Barack Obama might be wise to take a long hard look at New York City and its looming ruin. For in his own insistence on loading down the American taxpayer with debt in the form of universal health-care benefits and wildly increased public-sector spending during an economic contraction, and hoping to pay for all of this through increased taxes, he may be leading the United States down the very path that has led New York City to its seemingly inevitable moment of reckoning. Franklin Roosevelt believed his policies had seen their finest flowering in Fiorello LaGuardia’s New York. Barack Obama can see what the fulfillment of his ambitions might resemble in the condition of post-meltdown New York. He still has time to reverse his course. New York has very little time left.

Original Source: http://www.realclearpolitics.com/articles/2009/05/31/new_york_on_the_precipice_96745.html

 

 
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