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The New York fiscal crisis.

Everybody wants simple solutions to New York City's fiscal crisis, so let me start with two I rather like before I get into a discussion of the complications of its causes and why it is so hard to take meaningful action to address the city's problems. Let me also say these are not my suggestions. The first is from Calvin Butts, the pastor of the Abyssinian Baptist Church in Harlem. The second is courtesy of William Geist, CBS-TV Network correspondent. Reverend Butts wants to put a curfew to keep all children under 17 off the streets after 9 P.M. and 12 A.M. on weekends. Vehicles with blasting music (and the drivers' licenses) would be confiscated for 90 days. The final part of his 'improve-the-quality-of-life' program would be to enforce no loitering, public gambling, and drinking of alcohol ordinances. Mr. Geist suggests that we take the $50 billion we'll otherwise spend on the next "Middle East madman" and give it to our 50,000 homeless people. Each would receive a ranch home ($250,000), store credit at Barney's ($10,000), college education ($80,000), two cars ($60,000), deluxe motor home ($45,000), country club membership ($25,000) plus golf lessons and a decent set of clubs ($5,000), speedboat ($25,000), and $500,000 in cash.[1] I'm sure each of us has our own suggestions. They are probably connected to a sense that something is terribly wrong in how we socialize and educate the young and how we spend our tax monies. We pay and pay, but things still seem to get worse. Trying to understand why is complicated because as soon as we start we find we have basic disagreements about such central issues as how markets work and should work, and how governments work and should work in a good society. The rest is simply a matter of which details we choose to make our case. Is this too cynical? Perhaps. Yet, as we discuss what are after all life and death issues for our most important city and for the nation, ideology seems to loom above all else as we consider what can be done.

Let us start again more analytically with a framework for the discussion. While the story of fiscal crisis is always complex, certain common features are usually in evidence. These have to do with three often intertwined cycles. The first is that city and state governments tend to get into trouble in the downswing of the business cycle. While the federal government is able to go into debt, raise taxes and even print money to meet its obligations, subnational jurisdictions are often constrained by debt limitations, limits to how much they can raise taxes without leading to the loss of a significant part of their tax base, and they definitely cannot print money like the federal government can.

The second cycle is in the redistributive claims made on the local state. It involves persistent and cumulating demands on the public purse in the upswing and an unwillingness to relinquish claims in the downturn. The politically significant groups demanding such preferential treatment include real estate developers and other local businesses who serve, or feed off the city and contribute generously to political campaigns, homeowners who in New York are able to defend special generosity to Class I properties (one to three family homes), and municipal workers who also form a large and active voting block. Part of the redistributional cycle involves aid to low income groups and to those with special needs for foster care, health and housing, home maker assistance and so on. Such assistance tends to increase with ability to pay and then is reduced in time of fiscal stringency. Redistributional cycles lag the business cycle.

The third is the long wave or transformational cycle in which urban function and form respond to changes in technology, and more broadly in the mode of accumulation. Dislocation accompanies changes in the post-war economic base of New York, from a predominantly manufacturing city to a service economy. The coinciding of this downturn in the macro-economy in 1974 following the OPEC price shock and a long period of dislocations from the aftermath of Vietnam and the weakness of President Nixon's New Economic Policy of devaluation and increased protectionism and President Ford's Whip Inflation Now campaign hit the city hard. The redistributional programs for the poor, the generous abatements for developers and compensation expenditures for municipal workers could not be maintained. When the banks chose to write down their real estate loans and roll over their corporate and Third World debt, - all of which they had little choice about - they were able to foreclose on the city precipitating the fiscal crisis. New York was successfully portrayed as out of step with national social policy. It was blamed for attempting to achieve liberalism in one city. The 1990s are quite different.

While efforts are being made by Vice President Dan Quayle among others to blame liberalism, and as the New York Times[1] suggests, to make New York City the Willie Horton of the 1992 campaign, the scenario is different this time around. For one thing the city has not undertaken gimmicky financing, and it has cut benefits to the poor quite substantially since the last crisis. The triggering mechanisms in this round include a deep national recession again, but this time the job loss is primarily in financial services following the October 1987 stock market crash. In the 1990s, New York is joined by other large cities and most states in serious fiscal crisis.

I am going to organize the telling of the story into three parts and a brief conclusion. The first will examine trends in jobs and income over the years covering the fiscal crises of the mid-1970s and the current one. Second I'll look at the dimensions of the crisis and the response of government. Third, the situation of the poor and the pessimism which surrounds discussions of the so-called underclass are discussed. I'll conclude with a brief discussion of the contrasting public philosophies which set the terms of debate over urban and social policies more broadly which will bring us back to disagreements concerning how we understand society as it is and as it should be.

The Economic Base of Fiscal Crisis

The underlying feature of fiscal crisis is always the inability of the private sector to support the spending of the state. The loss of 800,000 jobs between 1969 and 1977 (to a total of three million, the nadir of the city's employment total) was largely accounted for by plummeting manufacturing employment. Factory jobs had numbered a million in 1950, half a million in 1980, a third of a million in 1990. In the 1980s New York City lost manufacturing jobs at a rate three times greater than the United States as a whole, and while between 1982 and 1987 the United States recovered half of the manufacturing jobs it had lost in the 1980-82 recession, New York lost an additional 100,000 factory jobs.

Secondly, and surprisingly to many, loss of headquarters jobs followed the same downward trajectory. Especially severe were losses of jobs in the headquarters of manufacturing companies. They dropped by more than half between 1969 and 1987. Corporate headquarters have been leaving New York since the turn of the century when such data was first collected but it was not until the 1974 fiscal crisis that people became alarmed. In 1965 128 of the Fortune 500 companies were headquartered in the city; In 1988 only 48 were. However if we look at the 100 largest multinational corporations, 24 are headquartered in the city and another 16 in New York's suburbs. Most of the top 100 multinational's revenues are generated by these 40 transnationals with headquarters in the New York area. Summarizing these first two trends, between 1970 and 1980 New York City lost 35 percent of its manufacturing jobs and 41 percent of its headquarters office employment. However it lost only 15 percent of its total office employment. This was because business services had begun to grow substantially.

Finally, 70 percent of the new jobs created between 1977 and 1987 in the city were in finance, insurance, real estate and business services.[2] By 1987 these job categories employed a fifth of all New Yorkers in the private sector. Between 1982 and 1987 half of all new jobs created were in professional, managerial and technical positions. The upgrading of the city's labor force was the material base for a secondary expansion in restaurants, health clubs and boutiques - a high end customized production of takeout foods, designer clothes and gentrification rehabilitation work employed many New Yorkers, especially low wage recent immigrants to the city. These developments are complex and interact with population movements in and out of the city. The decline of the white population in the city over these years also opened job opportunities to newcomers.[3] Along with private health care, education and other rapidly growing sectors, producer and consumer services represented 78 percent of the city's export industries' employment.[4]

Globally oriented banking, legal services, institutional investing and accounting firms are also located in the city. At the peak of the financial service boom (1987) close to a quarter of all workers in Manhattan were employed in finance, insurance or real estate compared to only seven and a half percent for the nation as a whole. New York City held a third of the assets of the nation's hundred largest bank holding companies, held two-thirds of all foreign deposits in the 200 largest banks, and generated fifty percent of U.S. corporate legal service profits in the mid-1980s. While a quarter of all workers in the United States were classified as having manufacturing jobs, only 15 percent of those employed in Manhattan were in factory work. This represents a remarkable shift. In 1950 Manhattan had been a manufacturing center. One in three held manufacturing jobs compared to one in seven in services. In 1980 the figures were reversed.

Expansion in producer service employment reached a million jobs in 1987 with dramatic growth rates in computer people, management consultants, architects, public relations experts, communications and media types. Entertainment, culture, and tourism also experienced gains. In the climate of deregulation and internationalization, New York's comparative advantage in finance-oriented activities drew business to the city - mergers and acquisitions, securitization of loan portfolios and all sorts of other innovative products were developed in the city to serve as an outlet for the mountains of free cash assets accruing to the corporate rich in the Reagan years. At the height of the 1980s activities half of the gross city product originated in advanced corporate service firms. Producer service employment accounted for 35 percent of all private sector employment in 1985.[5] New York accounts for twenty percent of national employment in information intensive industries. Given the prospects of continued globalization, Matthew Drennan, a close student of these trends, concludes that "The rise of New York is not over, it is only temporarily stalled."[6] Writing in 1990, he is especially sanguine on the prospects of a European boom benefitting New York's exports of producer services.

Two final important job trends should be noted. The total share of U.S. employment in New York City fell from seven percent in 1970 to 3.7 percent in 1987 before the impact of the October stock market crash's employment effects were felt. New York's job producing abilities had declined and the local labor market had become extremely dependent on a narrow base of employment. The most recent data shows the price the city is paying for this dependence. Secondly, the 1990s job losses erased the private sector employment growth enjoyed as a result of the financial boom. There are now fewer jobs in Manhattan than there were in the late 1970s. The unemployment rate has been in double digits and is about 12 percent at this writing. The decline in the financial service sector has been a major factor precipitating our current fiscal crisis.

Accompanying these job trends was a remarkable growth of income inequality. Between 1975 and 1987 the percentage of aggregate income received by New York City families in the lowest one-fifth of the income distribution fell from 5.1 to 3.0 percent of the total. The gain in income share went to the top twenty percent. The top ten percent of the income distribution alone had seen its real income go up by 20 percent, having received 30 percent of the income gained in the 1977-87 decade. The top twenty percent received half of the increased income over the decade. It is disturbing that in these years of prolonged economic expansion, income was becoming more unequally distributed not only in New York but in the nation as a whole. Most Americans experienced stagnant or declining real income. For the city however, both the relative loss at the bottom and the gain at the top were far greater than for the entire country.[7] The contrast between wealth and poverty became an issue in the greedy vs. needy days which followed the collapse of the stock market, as Leona Helmsley, Ivan Boesky, Michael Milken and other once-high fliers were grounded. A demonstration by homeless advocates at Trump Tower called attention to the priorities of the city administration in its policy of exempting powerful developers from taxation.

The Fiscal Crisis

Between 1983 and 1989 New York City's economy expanded under the impact of producer services generally and the financial sector's dramatic growth as described above. The real value of city spending rose by 25 percent over these years but the local economy grew still more rapidly so that the higher expenditure level was affordable. The impact of the 1987 stock market crash and the slow growth and recession which followed changed the situation dramatically. A new round of cuts has been undertaken amidst double digit unemployment and falling property values.

The 1970s crisis may be, was, and in the literature which has developed, is blamed on the hubris of the local redistributive state. New York simply tried to do too much for too many. It couldn't afford the continued expansion of state functions. The collapse, in this view, was inevitable. Cutting back, or urban triage, was the solution, and it was thought at the time to have more or less worked.

In the 1960s redistributive expenditures aimed at improving the lives of low income residents (social services, housing, medical care and public assistance) rose from a quarter of city spending at the beginning of the decade (25.8 percent in 1961) to a third by the end of the 1960s (35.8 percent in 1969). Welfare payments quadrupled over this eight year period. (Adjusting for inflation makes the growth less dramatic and most of the growth was expanding rolls not increased benefits.) Total city spending more than doubled between 1961 and 1975. In constant (1982) dollars, New York's outflow went from $8.6 billion to $21 billion while the city's population fell by about a.million people. Per capita real spending tripled over these years.

As the city's economy shrank by 11 percent between 1969 and 1975 in real value of goods and services produced locally, real local government spending increased by 30 percent. This disparity led to a situation in which local government became larger--22 percent of the local economy compared to 16 percent of local product in 1970. In 1961 it had accounted for only about a tenth of locally produced goods and services. Such data suggest that social spending caused the city's fiscal crisis of the 1970s.

In my view such an explanation of the situation is faulty. In addition, the "solution" by cutting social programs created serious problems in the next round. The analysis is faulty too because it pays insufficient attention to the cyclical nature of the crisis, both the short term business downturn and the longer cycle of urban transformation of function and form, and to the context of the federal abrogation of responsibility for social problems which occur most dramatically in large cities, but which are caused by forces beyond their capacities to address adequately. Political interpretation is unavoidable in such an evaluation. It is easy enough to see New York as the victim of a Republican mugging. The Southern Strategy in the 1970s and the Supply Side Economics of the 1980s both redistributed federal resources from the Northeast to the South and Southwest. Indeed, big city mayors and governors by the end of the Reagan Years acutely felt the impact of cuts in social programs and the dramatic drop in revenue sharing which helped pay for federal tax cuts.

The hope that the solution to New York's last fiscal crisis would create a smaller and more functional city by shrinking government-provided services and transfers have not been justified. By withdrawing services and reducing aid to the needy it was hoped that the city's dependent population would decline. The incentive would be to leave or not to come. Abandonment of the South Bronx from such a perspective wasn't part of the problem. It was part of the solution. The strategy was dubbed "planned shrinkage." A smaller city did result. But not a more manageable one. The people who left were not the poor; their numbers increased. It was the middle class who left in large numbers. The economists and political scientists who had justified the policy of shrinkage based on the notion of the optimal sized jurisdiction for the provision of public goods had not considered economic dynamics in realistic terms, nor race or class impacts of such devastating not so-benign neglect.[8]

Since 1969 while the number of poor children and adults have been increasing, the number of those living in poverty who have been able to obtain public assistance has been decreasing. The gap between the cost of living and benefit levels increased. Falling real wages and the lack of employment opportunities for unskilled young men contributed to alcohol and drug use, child and wife abuse, and foreclosed the possibility of stable family life for large numbers of New Yorkers. The destruction of families and of communities as viable entities adds enormously to the cost of running the city. Life in welfare hotels and public shelters traumatizes a new generation. The fear and reality of young male drug-using Black and Latino muggers haunts New Yorkers of all racial and ethnic backgrounds. Attacks on people of color who happen to be in "the wrong place at the wrong time" innocent of any crime other than their race has received increased attention as well. Politicians promise more police and people fear to leave their homes. Incorporation of the disadvantaged and a full employment economy is a matter of social justice and increasingly necessary to reestablish stability to our frayed social order. It is also an investment in the nation's competitiveness in a world which looks at America self-destructing with disbelief.

There is, as Ronald Dore has noted, "such a thing as an employability threshold, defined as the capacity to be trained to do a job which, at market prices, produces an added value greater than, and so can yield a wage greater than, the welfare minimum."[9] The threshold varies according to the level of aggregate demand, it rises with the spread of labor saving technology and the availability of alternative labor supplies. The perceived employability of much of the potential labor force is a serious problem in all of our central cities and increasingly for the nation as a whole. Cost relative to quality of work force has led New York banks to move their clerical operations to South Dakota and Delaware. A software company in Beijing finances its software development obtaining foreign currency from American law firms from data entry subcontracting, using teenage girls who know no English and who transcribe each letter as an ideogram onto magnetic tapes which are returned to the United States via air cargo. The rate of error is lower than equivalent operations in the United States.[10] An unwillingness to face questions of employability and the availability of jobs for Americans who need them has ramifications well beyond the inner cities.

The economic decline of the early 1990s is more widespread in its impact. Real estate nearly everywhere is affected. It is not only New York's Donald Trump who is in trouble but Dallas' Trammell Crow and Atlanta's John Portman. The same New York banks which lent Trump nearly two billion dollars in the 1980s without fully reviewing his financial records or his property appraisals lent even more to companies like Olympia and York, the world's largest private real estate company (its properties include the World Financial Center and Canary Wharf in London and other troubled mega-project) which has since filed for bankruptcy protection because of its difficulties meeting its near twenty billion in debt. As a leading real estate lawyer said of the 1980s, "It seemed the more zeros you added to your loan request, the less you had to put down."[11]

The national economic crisis and the urban fiscal crisis have merged. Failures of national policy exacerbate local difficulties. Medicaid, for example, takes one in seven New York State tax dollars, and ten percent of the city's spending is on Medicaid reimbursements. Health care is the fastest growing part of other state and local budgets as well. The lack of a national health care program is acutely felt; so is the failure of job creation and education as federal priorities. In 1991 federal mass transit aid discounted for inflation was fifty percent smaller than it was in 1981.

The fiscal plight of our cities and states hasn't been this bad since the Great Depression. This is in part because of macro economic failures, and in part because the federal government has shifted such a heavy burden to the state and local governments by eliminating programs and cutting aid. In the late 1970s Washington provided 25 percent of state and local budgets; in the early 1990s, 17 percent.

Today, while many complain about welfare spending, the situation is very different. Public assistance transfers fell from 15.8 percent of New York City expenditures in 1971 to only 7.2 percent in 1988. The categories where spending has gone up are those which deal with the impact of social disintegration and poverty -- foster care, shelters, and criminal justice. New York is confronted with what Sarah Bartlett has called the triple whammy: "the cost of social programs to combat drugs, AIDS and homelessness is soaring at the same time that Federal and state spending has been sharply curtailed and the city's traditional base of tax revenues is shrinking."[12]

The factors discussed above, the loss of manufacturing jobs which might have employed the less skilled, the mismatch between the employability of many of New York's less fortunate and the requirements of an information intensive economy, and the deterioration of families and inner city communities are all clear enough. The loss of federal assistance has made a big differnce in our ability to cope. What is to be done depends heavily on social philosophy.

Thinking About Solutions

The United States defines its problems by the policies it has to deal with them. Our problems, including the current New York City fiscal crisis, seem intractable because our remedies are inadequate to address them. If we define certain forms of government intervention off limits, and these are the measures necessary to deal effectively with our problems, we doom ourselves to continued troubles. Allegiance to ideology over pragmatism is a form of social rigidity which carries a high price. A narrow definition of self-interest supports such inaction.

The comfortable are less affected and would be asked to pay a significant share of any new federal activism. Static maximization leads them to reject a change in basic policy orientation. Working class taxpayers may also be resistant to helping address the needs of the poor because the regressive nature of our tax system means they will bear a large proportion of the cost, and they fear that their hard earned money will be wasted. The 1980s policies worsened the situation on a number of fronts. The cost of undoing privatization and downsizing government programs grow steeper as we procrastinate. Further the potential command of the American government over needed resources diminishes with internationalization and deepening global stagnation.

But we are still the world's richest nation and even second tier European states enjoy vastly more livable cities. Cities in most advanced nations are seen as valuable resources to be preserved. They are cultural and social centers supported by national governments, and are not allowed to deteriorate under the vagaries of market forces. Imagine what New York might look like if our country viewed its importance as the French think of Paris. Picture how differently we would conceptualize urban space if the U.S. Welfare State had approximated Swedish policies and priorities over the last half century.

Whether one accepts such a diagnosis has nothing to do with the "facts" one way or the other. Clearly not everyone sees New York and other cities' problems as requiring new federal policies. Newt Gingrich, the Georgia Republican leader in Congress, reaches what to him is "the obvious conclusion: that the malignant combination of machine politics, bankrupt welfare statism and rapacious unionism has caused a systematic crisis that requires radical, even revolutionary, change." He sees "the slow-motion suicide of the once world's greatest city."[13] For others including many members of its corporate elite, New York has difficulties meeting the practical needs and minimal social stability requirements because the dominant individualistic ideology of the country undermines collective responsibility to provide public goods.

I don't know that economists finally have anything more to say about fiscal and social problems than anyone else. These are matters of values and understandings of how society works and should work. We can say that if we take a longer term view, all sorts of prevention and investment in people programs make a lot of sense. If we think in terms of our society as a collectivity, as a community, we come to different choices than if it is every person for themselves. In the narrowest cost-benefit terms we know that programs like Head Start pay. They save many dollars later for each dollar spent to help a child now. The same can be shown for other programs. A similar argument can be made for our society and our cities. We can do something or continue to reap the whirlwind.

If the political maturity of a people is measured by their ability to think in long run terms and act coherently on their social environment through a political process which values their childrens' generation and seeks to build a better society in which they may live, our collective immaturity and short-sightedness must be deemed frightening. Part of the problem with how we discuss the New York City fiscal crisis is that we see it as an urban issue and as a local one. New York, as Newt Gingrich - and probably a number of readers would agree - can be blamed for causing its fiscal problems and for worsening its own difficulties.

In my view there is something very wrong with a nation which tells its cities and large numbers of its people to clean up their own act or just drop dead when the problems are not of their making. A workable solution does not really lie within New York City's grasp, although greater efficiency in municipal service delivery and more civic spirit on everybody's part are always desirable. Simply cutting services in profounding disturbing ways makes the situation worse, encouraging middle class flight and businesses picking up to leave for more secure grounds. Running away and trying to find individualistic answers is, sadly, deeply ingrained in the American character. But so too is cooperation and caring for one's neighbors and pride in one's community. At this stage in our history we may predict a swing from the former pole to the latter, from the ultra-market emphasis of the 1980s to a greater sense of collective responsibility. Many of the programs which voters nationally have shown to be most important - health care, education and job creation - are also urban programs in the sense that they would benefit our cities dramatically.

The reason big cities tend to be more liberal in their voting patterns is that it is in them that interdependencies are greatest and where individualism's selfish side has its greatest visible costs. In the 1970s New York City seemed more alone in its fiscal crisis, crying out for national solutions to what were national problems. In the 1990s much of the rest of the country has sadly "caught up" with problems which seemed particularly to be those of New York and a few other places. It is time to build political coalitions based on such an understanding. Within the city it is necessary to avoid the divisive politics of negative sum solutions in which some groups try to benefit at the expense of others. The seemingly hard-headed solutions of only "more cops and less taxes" ironically promises a less liveable city. The issues are at base economic, but how we deal with them is essentially political and dependent on our public philosophy. An economist can only lay out the issues. Solutions, for good or ill, will be hammered out in the messy arena of politics and on the streets.


[1.] "What Can Save New York City? Let Them Count the Ways," New York Times, May 17, 1991, p. A31.

[2.] David Vogel, "New York, London, and Tokyo: The Future of New York as a Global and National Financial Center," in Martin Shefter, editor, Capital of the American Century? forthcoming.

[3.] Roger Waldinger, "Changing Ladders and Musical Chairs: Ethnicity and Opportunity in Post-Industrial New York," Politics and Society, 1986-7.

[4.] Drennan, p. 34. op. cit.

[5.] On producer services see Saskia Sassen, The Global City: New York, London, Tokyo, Princeton University Press, 1991, Table 6.4 p. 133.

[6.] Matthew Drennan, "The Decline and Rise of the New York Economy," in John Hull Mollenkopf and Manuel Castells, editors, Dual City: Restructuring New York, Russell Sage Foundation, 1991, p. 39.

[7.] The data is summarized in John Mollenkopf and Manuel Castells, "Introduction," fn. 27, p. 20.

[8.] Roger Starr, "Planned Shrinkage," New York Times Magazine; and for a discussion at the national level see Edward M. Gramlich, "The Economics of Fiscal Federalism and Its Reform," in Thomas R. Swarz and John E. Peck, editors, The Changing Face of Fiscal Federalism, M.E. Sharpe, 1990.

[9.] Ronald Dore, Taking Japan Seriously: A Confucian perspective on leading economic issues, Stanford University Press, 1987, p. 213-14.

[10.] John Mollenkopf and Manuel Castells, The Information City: Information Technology, Economic Restructuring and the Urban-Regional Process, Basil Blackwell, 1989, p. 164.

[11.] As quoted in Business Week, November 4, 1991.

[12.] Sarah Bartlett, "New York's Government: Is It Too Big?" New York Times, May 10, 1991, p. 1.

[13.] Newt Gingrich, "Letter to the Editor," New York Times, March 30, 1992.
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Title Annotation:Symposium: Urban Problems and Opportunities, New York City
Author:Tabb, William K.
Publication:Review of Business
Date:Jun 22, 1992
Previous Article:Introduction: urban problems and opportunities.
Next Article:New opportunities: interview with ... Sal Cirrincione.

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