NY Cant Rely On Wall St. Binge
OVER the last two years, it has looked like New York would have to adjust to living without so many golden eggs from the Wall Street goose. But now Wall Street profits are booming again -- so we can relax, right?
Wrong. This is an empty boom thats based on government subsidy, not economic reality. Goldman Sachs and the rest are benefitting from conditions that cant last -- the two big ones being zero interest rates and the implicit backing of the federal government in the wake of last falls bailouts.
These conditions let Wall Street make big, speculative bets with borrowed money -- which was the recipe for the grand financial party of the last decade and for last falls meltdown. It cant last -- and it temporarily prevents the financial sector from coming up with a new, more sustainable formula. That may mean lower profits.
The danger is that Wall Streets last manic party may give city and state politicians the excuse to avoid getting the governments financial house in order.
In his report on the city budget Monday, Comptroller (and mayoral candidate) Bill Thompson outlined the continued impact to the citys $59.6 billion budget from the Wall Street meltdown: Tax revenues have “evaporated.”
Two years ago, the city expected to reap $37.3 billion in tax revenues for the current fiscal year (which started four weeks ago). Today, it expects to take in just $35.3 billion for that same fiscal year. And that includes what the recent sales-tax hike is to bring in; without it, its a 7.8 percent drop in expected revenues.
Personal-income-tax collections, in particular, are expected to be down 37 percent over two years, and wont return to 2008 levels for five years.
These taxes are a measure of how much wealthy Wall Street workers and investors have lost, since more than half of this money comes from the richest 1 percent.
Yet has the city cut spending in line with lowered expectations?
No. City outlays are down only 4.3 percent from previous expectations. And Mayor Bloomberg just finished giving the workforce 4 percent annual raises (albeit getting some modest cost-cutting union concessions).
Plus, the biggest long-term problems are getting worse.
Over the next three years, tax revenues should rise 15.3 percent. But spending will jump 20.5 percent, driven by pensions (up 14.5 percent), health care (up 17.7 percent) and debt service (up 21.6 percent).
This leaves deficits of more than 11 percent of city revenues. And some of the cuts the mayor has made -- such as trimming the police force -- may be unsustainable.
Bloomberg and the City Council, as well as state pols, may be cheered by the fact Wall Street firms are hiking bonuses. Its quite possible that instead of the continued double-digit drop in personal income taxes, well see a double-digit spike this year.
Again, theres no reason to expect that spike to last -- the Federal Reserve cant keep interest rates at zero forever, and Washington cant keep bailing out Wall Street -- our federal deficit wont let it.
But a spike, even a short-lived one, is all that the New York political world needs to pretend that everything is fine -- even though uniformed workers can still retire well before they are 50, teachers and almost everyone else can retire at 55, and city workers still dont pay any of their own health-care premiums.
Plus, the teachers want a big raise, too, like everyone else got.
The mayor should be doing a full-court press on Albany “leaders” to enact pension reform over union objections. But a Wall Street mini-boom may make such badly needed initiatives seem less urgent.
Meanwhile, Wall Street is as unsustainable as it ever was.
New York needs a healthy, innovative Wall Street -- not one thats running on government subsidies just like poor Detroit. An illusory boom harms New Yorks ability to adjust to a reality that remains inevitable, if maybe further away.
Thats a shame, because, as Mayor Bloomberg noted Monday, people wont want to come to New York or to stay here if they dont have a job. Our growth rate in people seeking jobs is nearly twice as high as the nations. Many of these people often create their own jobs, to the citys benefit.
But theyll have a harder time if a pretend boom on Wall Street crowds them out, while the city and state keep piling on the taxes -- and cutting the police force and other truly vital areas -- in order to keep on funding city governments own unsustainable ways.
Original Source: http://www.nypost.com/seven/07292009/postopinion/opedcolumnists/an_empty_boom_181812.htm