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After The Fall: Saving Capitalism From Wall Street--and Washington

After The Fall: Saving Capitalism From Wall Street—and Washington

by Nicole Gelinas

Bloomberg’s Missed Chance
The mayor should have asked the city’s biggest labor union for some concessions.
4 November 2008

Late yesterday, Mayor Bloomberg announced a two-year labor agreement with District Council 37, New York City’s largest public-sector union. The agreement is a missed opportunity for the city, which stands on the brink of what could be an unprecedented drop-off in tax revenues and a long economic retrenchment. The deal, which runs retroactively from this past March through March 2010, allows for 4 percent compounded raises for each of the two years for DC-37’s 100,000-plus employees—mostly civilians working desk jobs in city agencies or support jobs in education and health care. It will cost $370 million.

At first glance, the contract may seem unobjectionable. First, inflation has run higher than 4 percent in recent months; in September, it was up 5.4 percent over the year-earlier period. In that light, a 4 percent raise seems like a good deal. Second, the contract doesn’t offer any expensive new pension or health-benefit giveaways. But inflation could be far lower than 4 percent next year. Energy and other commodities costs have plummeted in the past two months. Rents are sure to fall—even in New York—as fewer jobs attract fewer newcomers to the city, and as investors in the boroughs and in surrounding suburbs put properties up for lease.

In fact, the United States faces a credible risk that it will see deflation for the first time since—yes—the Great Depression. Consumers weaning themselves from easy credit are cutting their spending at the fastest rate in nearly three decades. Businesses, seeing plummeting sales, are cutting even closer to the bone. This producers’ and buyers’ strike pushes prices down. If prices actually fall during the second year of the DC-37 contract, the deal Bloomberg just signed will look worse and worse for city taxpayers.

Conversely, if we do see massive inflation, DC-37 simply will demand compensation for that cost in their next contract in 2010, meaning that the mayor has taken an unnecessary, asymmetrical risk. And it’s not as if the mayor needs to take this risk to keep good workers from seeking jobs elsewhere. Few rational people want to try their luck in New York’s labor market over the next few years. If they have a steady job, they’ll be inclined to stay put.

Plus, even if the nation as a whole does not see an overall deflation, New York City could still suffer deflation in its tax revenues. With the financial industry so decimated that huge portions of it have gone bankrupt or fallen into government hands, the mayor’s projection that city tax revenues will increase by nearly 7 percent over the next two years—before any inflation or deflation is taken into account—seems optimistic.

Consider that New York gets one-third of its tax revenues from personal-income and business-income taxes. On the individual side, 36 percent of all personal income earned in the city—wages, salaries, and bonuses—comes from the financial and property-sales industries. On the business side, finance and real-estate companies were responsible for more than a third of such revenues.

And let’s not forget property taxes, the biggest revenue source. Yes, they’re usually relatively stable in a downturn. But with the city’s main industry, finance, struggling through the early stages of a depression, it’s hard to view what’s happening today as an ordinary downturn. Easy Wall Street profits and bonuses helped push up demand for commercial and residential real estate, but these profits have vaporized along with the business model that created them.

Even without huge revenue drop-offs, though, the city’s $60 billion budget already faces a $2.5 billion shortfall by next summer. It faces deficits of twice that size—more than 10 percent of the budget when state and federal aid is excluded—in future years. With Wall Street in shambles, we simply don’t know where our next dollar is coming from, which makes it imprudent to sign contracts that permanently increase spending.

But the biggest problem with Bloomberg’s deal is that the mayor did not ask for even modest money-saving reforms in return. One such reform would be to ask employees to pay 10 percent toward their own health-insurance premiums. As the Independent Budget Office has reported, requiring that all 560,000 city employees and retirees pick up this cost would save New York taxpayers $400 million the first year and a half-billion annually a few years out.

Politically, DC-37 happens to be the best union on which the city could test support for such an idea. Its civilian employees work hard like anyone else. But unlike police officers and firefighters, they aren’t risking their lives any more than most of us do at our jobs. So it would be easier for taxpayers to wonder why DC-37 workers shouldn’t pay any of their own health-insurance costs—and thus presumably easier for Bloomberg to garner public support for concessions.

The day after announcing his deal with DC-37, Bloomberg said that he’ll try to cut another 2.5 percent from this year’s budget and 5 percent from next year’s, on top of similarly sized cuts already enacted. But when the mayor speaks of such cuts, he’s talking only about the “controllable” side of the budget—like future staffing in the police department (the mayor already delayed hiring 1,000 police-officer candidates as part of earlier budget cuts).

By contrast, what the mayor likes to call “uncontrollable spending”—Medicaid, debt-service costs, and, yes, pension and health-care costs for city workers—make up half of the city-funded budget. Such costs are mandated through long-term contracts like one just reached with DC-37, and they cannot be cut back in a hurry. Unless Bloomberg tackles the “uncontrollables,” though, cumulative budget cuts will come at the expense of services that citizens rely on: garbage pick-up and policing, for example, could visibly decline within a few years. In fact, by locking in future wages, it’s likely that DC-37 itself will see layoffs in the next couple of years. When the city can’t cut salaries, it has to cut people.

The best way to begin reining in the “uncontrollables” is to refrain from signing new contracts that increase the burden they impose. But if Mayor Bloomberg won’t try to win even the most modest concessions from the civilian labor union now, when will he?

Nicole Gelinas, a City Journal contributing editor and the Searle Freedom Trust Fellow at the Manhattan Institute, is a Chartered Financial Analyst.

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