Dinkins Redux?

A year ago, after the terror attack, Michael Bloomberg promised that, if elected mayor, he wouldn't increase taxes to solve the city's growing budget deficit, for that would "drive business and people out of this city. Your total tax revenues over a period of time would probably decline rather than go up."

Yet now the businessman-mayor is saying he'll almost certainly have to resort to big new levies to close the city's projected budget gap for next year—estimated at $3.7 billion or higher.

That's often blamed on the post-9/11 slowdown, but the mayor should acknowledge that New York City's budget woes stem mostly from chronic overspending, not the attacks.

New York has by far the largest budget of any American city, spending more than twice as much per capita, for example, as Los Angeles (including Los Angeles County); only four state budgets are bigger.

In the late '90s, the city went on an especially extravagant spree: Spending grew at between two and three times the inflation rate from 1998 to 2001. The city used huge budget surpluses to support this extravagance, but as the boom came to an end, the extra spending came back to haunt the city. Even before the terrorist attack, analysts were warning that a budget crisis loomed in the near future.

The projected budget for next year boosts spending by about $3 billion, largely because of built-in increases, including rising debt payments and salary and pension hikes. Indeed, this year's budget is about $1 billion in deficit because of shortfalls in projected tax collections and the mayor's failure to cut spending as much as he projected he would last June.

But before he adds to New York's tax burden—already more than double the burden of most large cities—Bloomberg should take a long look at the very different ways his two immediate predecessors dealt with their fiscal travails.

Confronting a $1.5 billion budget gap and a severe national recession soon after taking office in 1990, David Dinkins jacked up New York's already sky-high taxes by nearly $1 billion, then inked a contract with the teachers union that boosted spending by $236 million, or 5.5 percent.

Soon after, the Gulf War broke out, sending oil prices gushing. Dinkins's response was to load hundreds of millions of dollars of yet more new taxes onto already reeling city businesses and residents.

The result: catastrophe. While the nation pulled out of its recession shortly after the Gulf War ended in 1991, New York's downturn dragged on for two more years, costing 325,000 jobs.

In 1994, Rudy Giuliani tried a dramatically different approach. Facing a deficit projected to grow to $2.3 billion on a much smaller budget than Bloomberg's, Giuliani balanced the books by slashing discretionary spending, by relentlessly pushing for productivity gains from city workers and by selling city assets.

Giuliani achieved more than $600 million in savings just from productivity measures on city workers. Perhaps even more important, he ordered personnel cuts to reduce the city's huge workforce by 20,000 workers.

In his first year, Giuliani trimmed city spending by $680 million—the first time in nearly a half century that city-funded spending shrank from one year to the next. That made it easier for him to balance succeeding budgets.

Together with the Giuliani-era crime turnaround, this hard-nosed approach to New York's budget contributed to the late-'90s economic boom. (Unfortunately, Giuliani abandoned this abstemiousness during his second term).

Mayor Bloomberg has been acting less like Giuliani in his first term and more like Dinkins in his only term. Instead of cutting spending radically when he took office, a move New Yorkers would have understood, Bloomberg's first budget raised city-funded spending by $800 million, or 2.7 percent. (A worsening economy later forced him to trim these increases).

Equally alarming, he sought virtually no reduction in the size of the city's workforce, nor any real productivity gains. Instead, the mayor helped fill the hole in his initial budget with $1.5 billion in borrowed funds.

And now the mayor is calling for up to $2 billion in new taxes, proclaiming that anyone who thinks he can solve the budget problems without them doesn't understand the budget. But it was the mayor who showed he didn't understand: By failing to act aggressively last year, when the crisis first emerged, he merely rolled his problems over to this year.

Still, it's not inevitable that the city take the Dinkins path. Bloomberg's budget deficit is only somewhat larger proportionately to the one Giuliani successfully dealt with eight years ago.

The mayor must start by getting rid of the estimated 17,500 municipal jobs New York added in the last four years. In particular, he needs to instruct Schools Chancellor Joel Klein to trim the Board of Education bureaucracy as a way to stem school spending (which is up 6 percent this year, according to the Manhattan Institute's E. J. McMahon).

To bring spending more in line with what other cities spend, Bloomberg should also require city employees to pay for a small portion of their health-insurance premiums—just as federal and state government workers and almost all private-sector workers do.

And the city and state governments need to combine their efforts to reduce New York's overly generous and ludicrously expensive Medicaid program—the largest by far in the country.

Without many moves like these, the city's oversize budget will inexorably swell every year, even without new spending initiatives.

But first Mayor Bloomberg must acknowledge that New York's spending is completely out of whack with that of other municipal governments, something that, to date, he seems loath to do. He needs to recall his experience as a successful businessman—and explain to voters, as he is uniquely qualified to do—why heavy tax increases would make things catastrophically worse.

Adapted from the Autumn issue of City Journal, where Steven Malanga is a contributing editor.