Last night on MSNBC, Ezra Klein and I debated whether New York Mayor Mike Bloomberg was out of line when he suggested New York risked a Detroit-like decline if his successor implemented the wrong policies.
I actually think Bloomberg was onto something. Here’s the video:
Ordinarily, I think these kinds of comparisons are off-base. But New York is, in one very important way, like Detroit: Its economy is dominated by one industry, and it doesn’t have a good repositioning plan in place for when that industry falters.
New York has the highest taxes in the U.S., providing very generous pension and health care benefits to public workers that now consume 1/5 of the city’s budget, with a vast social services apparatus that in most other places would be left to the state government to manage.
And that all works because Wall Street is a money machine. Bankers make way more money here than they could make if they moved their businesses elsewhere, and they love living here, so they will put up with high taxes, high rents, and all the other aspects of New York that make life here expensive.
And they really do pay the city’s bills. In 2008, 44% of wages earned in New York City went to people working in the finance and insurance sector; even in the depth of the financial crisis, that share only declined to 37%. Those figures actually understate finance’s importance to the city’s tax base — after all, who’s hiring high-paid lawyers and going out to fancy restaurants and buying apartments in luxury towers that construction workers build? Bankers.
In fact, these huge salaries and profits are what saved New York from its last great fiscal crisis, which we experienced when, like in Detroit, our economic and population base shrank to a point where they could no longer support the city’s financial commitments.
New York was once America’s greatest manufacturing hub. All the charming old buildings that hipsters are colonizing in western Brooklyn (and, 25 years ago, in SoHo) used to be industrial. New York City made heady financial commitments on the back of that industrial base, including some agreements with public employee unions that would later prove to be very unwise.
And as that industrial economic base and the city’s population declined, New York City found itself unable to meet its financial commitments. In the 1960s, the city started depending on short-term borrowing to make its books balance. Eventually, the bond markets decided that the city was in over its head, and bankruptcy became a real risk. In 1975, it took a rescue from the government of New York State to save the city from insolvency.
While fiscal rectitude played a key role in righting the city’s finances in the 1980s, the really important story was the very good fortunes in itslargest economic sector. Finance doubled as a share of the U.S. economy over the last 30 years, and many of the big banker salaries and big bank profits that came along with that are taxed in New York City. Another money spigot started up under New York City at the exact time we needed it.
Of course, automaking was once a money spigot for Detroit, too. The question for New York is, what happens if banking declines?
There’s good reason to think that’s a risk over the long term. The financialization of the U.S. economy has produced great things for New York, but it’s not clear the country as a whole is benefiting. The vast expansion of finance does not appear to have boosted innovation or GDP growth. New York should be worried about public policies that would aim to reduce finance to the role it played in the economy before 1980.
That’s why Bloomberg’s message this week about what the next mayor must do to prevent risk of a fiscal crisis had two prongs. One was getting pension and health care commitments to public employees under control, in case the city’s tax base can no longer support the current largesse. The other was diversifying New York’s economy, so that the city is less dependent on the financial sector.
Bloomberg has taken some steps in this direction, including drawing a new science and technology-focused university campus to Roosevelt Island. He’s also pushing, as his last major initiative, an upzoning of the area of Midtown right around Grand Central Station that would allow even more skyscrapers in an already-dense area of Manhattan. Adding more supply would help non-financial firms compete with the banks that bid up prime Manhattan office rents.
If the financial sector starts to shrink, New York’s cost problem will partly fix itself, as office and residential rents will decline. But the related decline in real estate values would be hugely disruptive to the economy even as it lowers the cost of doing business. And other legacy costs in New York, like servicing the pensions on which the city spends 17 times as much as it did 13 years ago, won’t decline unless policymakers actively choose to push costs down.
Detroit’s problem was that it didn’t have a plan for life after automaking, and didn’t have a strategy for making the city attractive to firms that might come into replace lost manufacturing jobs. New York needs a strategy for life after banking, and part of that strategy has to involve being less outlandishly expensive. That’s the reason it was reasonable for Bloomberg to invoke Detroit, even though municipal insolvency isn’t on the horizon.
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