Rudy's Minority Boom--And Dave's Bust

The economic boom in New York City during the second half of the 1990s helped nurture waves of entrepreneurship in minority communities, giving black, Latino and Asian business owners a greater stake in Gotham's future than ever before.

This expansion was a product of the free market, but government policies initiated in the mid-'90s, most especially tax cuts and activist policing that reduced crime, helped increase the gains. They stand in sharp contrast to the way city government treated small firms in the recession of 1989-1992—and the differences between the two eras is instructive for New York policymakers today.

As small neighborhood establishments were struggling in that devastating recession, state and city government hiked business taxes and fees to close budget gaps—and so sent firms of all types reeling. The Dinkins administration also buried firms under a mountain of tickets and fines for commercial violations amounting to an extra $20 million in fiscal 1992 alone.

Not surprisingly, business failures, evictions and defaults all rose dramatically, and minority business growth slowed appreciably. In fact, the city's tiny black-owned business community actually shrank from 1987 through 1992.

The Giuliani administration took a far different approach, focusing on tax cuts. The mayor also proclaimed that his most important economic tool would be to lower crime—a policy crucial to the economic revival in the outer boroughs, where the drug trade had ravaged retail strips, and theft, muggings and vandalism had drained the life out of manufacturing zones.

The economic effects of the crime-fighting successes are dramatic. By the early '90s, for instance, drug dealers had taken over much of a two-mile strip of Franklin Avenue in Crown Heights, driving away stores and frightening residents. But by the end of 1996, crime had fallen 45 percent. Hopeful local residents and community groups began to visit owners of boarded-up storefronts and encourage them to try to lease their properties again. Slowly, stores started coming back to life.

Some belonged to local residents who liked what they saw happening around them. Ann Marie Fraser, an accountant who had lived in the neighborhood for 20 years but operated a storefront tax service elsewhere in Brooklyn, decided to relocate to Franklin Avenue in 1999. Fraser was the first new business on a block with four boarded-up stores. Now, all the other shops have been rented too, she says.

Such success stories have been repeated in neighborhoods citywide. Yet the city's business community now faces a reversal of fortune prompted by the economic decline since Sept. 11.

Facing a multibillion-dollar budget deficit, the new City Council has suggested a host of tax hikes, including an in-come-tax surcharge. This would be catastrophic for small businesses, not only because high personal tax rates dampen overall economic activity, but because the profits of many small firms are taxed as if they were the personal income of the owner.

Mayor Bloomberg should resist calls for such tax hikes, just as he should also resist a return to the Dinkins administration's minority set-aside programs for city contracts, also recently proposed by the City Council.

Though Mayor Giuliani ended the city's minority-contracting program in 1994, New York minority businesses went on to spectacularly outperform those in cities with minority-contracting quotas and preferences.

* In Houston, for instance, a city that has emphasized set-aside programs for 17 years, the ranks of minority entrepreneurs increased a paltry 11 percent between 1993 and 1997, compared with the 80 percent gain in New York.

* In Atlanta, after two decades of set-aside programs, minority businesses and sole proprietors grew at only half the pace of New York's gain in the last economic census.

Why the differences? Because what helps the overwhelming majority of minority firms—which don't do business with government—is not set-asides, but the city's overall economic climate. And any new initiatives that raise taxes, then try to offset those levies with affirmative-action programs, will only wind up hurting many more small businesses than they help.

Instead, to keep nurturing the city's entrepreneurs, lawmakers must first of all do no harm to them. Then they should hack away at taxes and regulations to make New York an easier, more profitable place to do business.

Never have minority entrepreneurs—and the city they enrich—had so much to gain, or to lose, from what city and state leaders do next.

Adapted from the current edition of City Journal magazine, where Steven Malanga is a contributing editor.