It's cruelly ironic that the terrorists who attacked New York on September 11 targeted the World Trade Center as a symbol of American capitalism. For, from the moment it opened its doors in the early 1970s, the center, owned and operated by the publicly funded Port Authority of New York and New Jersey, was really a grandiose monument to the ills of state capitalism, where government substitutes its bureaucratic and politically motivated thinking for the wisdom of the free market's invisible hand. Indeed, the WTC offers a case study in why government should not be in the business of developing and managing commercial property. As New York state and city officials move toward setting up a new public entity to oversee the rebuilding of lower Manhattan, the center's history provides a cautionary tale for everyone involvedstarting with Governor George Pataki.
Pataki will be the key player in the reconstruction effort. The governor controls or has a big influence over all the public authorities that own the buildings and facilities that the terrorist attack destroyed. And with Mayor Rudy Giuliani term-limited out of office, Pataki will soon be the only major Republican officeholder left in New York politics, making him the point man for contact with the Bush administrationand Albany will likely be the main conduit for federal aid to the city. Pataki will thus bear a heavy responsibility for whatever rises from the ashes at Ground Zero, just as his predecessor Nelson A. Rockefeller was most responsible for the World Trade Center in the first place.
The idea for the World Trade Center first took form in the late 1950s, as a group of well-connected businessmenled by Governor Rockefeller's brother David, CEO of Chase Manhattan Banksought some governmental means of pumping economic life into a lower Manhattan that had been in steady decline since the Depression. A government-created and government-run state-of-the-art office complex, they felt, would attract tenants from the world of international trade to replace the financial firms that had left lower Manhattan, and thus it would spur additional economic development throughout the neighborhood and give a boost to the area's struggling ports. The complex would also boost downtown development at a time when the Rockefeller family was making a big financial bet on the area with the construction of Chase Plaza.
Enlisting Governor Rockefeller's help, the group turned to the Port Authority to own, develop, and manage the property. Three reasons made the bi-state agency attractive: it was bursting with money and had the ability to float bonds; it already owned some of the land in the neighborhood; and the governor controlled half of its board. The authority was enthusiastic from the outset. Its powerful director, Austin Tobin, wanted to expand the agency's reach beyond its traditional, profitable bailiwick of managing the area's ports, airports, bridges, and tunnels. Here was the perfect opportunity: the Port Authority could now get into the real-estate business.
Virtually every important consideration in developing the World Trade Center had nothing to do with business and everything to do with politics. Costs, which the public would ultimately have to pay, mounted rapidly. To get New Jersey's backing for the project, for example, the Port Authority agreed to take over the financially strapped Hudson tubes that brought many New Jersey rail commuters into Manhattan (today, it's called the Port Authority Trans-Hudson, or PATH, train). The World Trade Center development thus extended the agency's state-capitalist reach beyond real estate into mass transit. The final cost of the twin towers, as usually happens with publicly financed projects, swelled far beyond initial estimates. Supporters of the development had low-balled those estimates to win public support.
Since the World Trade Center originated as government's idea of what lower Manhattan needed, rather than as what the market really called for, it's no surprise that it misfired commercially. Tobin yearned to build the world's tallest building, whether the market needed two 110-story behemoths or not, and his twin towers proved a perfect embodiment of the rationalist bureaucratic mind in their icy, featureless, and symmetrical inhumanity that, like Governor Rockefeller's Albany Mall, seemed designed to make the individual seem a powerless nonentity, the state an omnipotent colossus. When finished, the towers seemed to drain more life out of downtown than they added. When the trade center's initial 10 million square feet of office space first hit the market in the early 1970s, the result was such a glut of office space that lower Manhattan real-estate values sank at a time when the city was economically struggling and could least afford it.
Rather than attracting new firms to New York, as its planners thought it would, it drew tenants from other lower Manhattan offices, driving up vacancy rates throughout the area. With the towers still unfilled, New York State moved nearly all its Gotham offices into them, becoming the center's biggest tenant. Similarly, the Port Authority moved many of its own offices there.
Despite this dramatic commercial failure, Port Authority bureaucrats still saw the complex as the crown jewel of its growing collection of "economic development" projects on both sides of the Hudson. Building it, as is true with all state-capitalist projects, was a patronage bonanza: all those payments to investment banks for underwriting the bonds, to contractors, to architects and engineers, to consultants of every stripea politician's dream! Thereafter, reviewing the thousands of contracts, work orders, and leases that the buildings issued every year required an army of authority accountants, engineers, and lawyers, the hiring of whom was another rich vein of patronage. What bureaucrat in his right mind would want to give all that up, along with the power of being the commander of such an army? And who would want to relinquish the patronage power of awarding the ongoing maintenance contracts to wash the windows and sweep the floors, or the concessions contracts, for the fancy restaurant on top right down to the coffee shops and newsstands in the concourse?
Such deal-making, with the public footing the bill, guarantees inefficiency, since there's no free market in place thatby rewarding good work and disciplining badwould pressure administrators to hire the right people for the right jobs and make sure they worked hard. Corruption in state-capitalist projects is usually endemic, to a greater or lesser degreeand it runs both ways. It's not only that contracts go to the politically connected, or that the price bid, by common understanding, is always much lower than the price paid. In addition, suppose a bureaucrat was incorruptible and wanted to do his job with total commitment to efficiency, demanding, say, that contractors reduce swollen overtime costs. Soon, he'll get a call from a powerful figure in the state legislature or the governor's officea political ally of the contractortelling him to ease off, and if he wants to keep his job, he will. The whole enterprise becomes a pit of cronyism, a tacit conspiracy against the public.
Governor Hugh L. Carey discovered just how much the Port Authority liked its jewel when he made a serious push to sell it in 1980. Though he had the support of then-New York City mayor Ed Koch, who wanted the trade center placed on the tax rollsfrom which it was exempt by virtue of its government ownershipthe authority nixed the idea, and it faded away.
Rather than trying to sell the World Trade Center, Governor Carey's less fiscally responsible successor, Mario Cuomo, decided to use it as a cash machine. In the 1990s, he got the Port Authority, using its own budget (which is separate from the state budget and includes, of course, New Jersey funds), to pay New York State a premium for having moved its offices out of the twin towers, and then he utilized the moneyabout $200 millionto plug gaping holes in the state's operating budget. The onetime boost in revenues was typical of the chicanery Cuomo employed during the early 1990s to balance the state budget temporarily rather than to slash state spending in tandem with declining revenues.
Pataki took office in 1995 committed to privatizing the World Trade Center and returning the Port Authority to its core mission of managing bi-state transportationa mission it has been carrying out disastrously, largely because it has expended so much of its institutional energy pursuing its real-estate schemes. As a result, the scandalous state of New York's airports has been a real drag on the city's economy, since travelers avoid them if they can. Pataki's privatization efforts went nowhere at first, because of ongoing feuds with New Jersey over various projects. In 2000, Pataki at last settled the feuds and got the approval to proceed with privatization.
Yet, even though New York's 1990s economic boom had by then nearly filled the twin towers with tenants, making it the best time imaginable to sell the complex, the Port Authority bureaucracy still wouldn't give up the goose that laid the golden eggs and get out of the state-capitalist business for good. Instead of selling the trade center outright, the authority reasoned that it could make more money by leasing the center, since under continued Port Authority ownership, its exemption from property taxes and other government perks would still be attached, making it more valuable. Just seven weeks before the terrorist attacks, the authority reached a deal with Silverstein Properties and Westfield America, which agreed to lease the towers and other authority-owned facilities in the area for $3.2 billion (over 99 years), with $616 million paid up front.
Larry Silverstein would only have to pay the city $25 million yearly in an in-lieu-of-taxes agreement, about $75 million less than what the property taxes would actually be. In addition, the towers could continue to tap low-cost taxpayer-subsidized electricity from the New York Power Authority, saving Silverstein millions a year over what he would pay if he had to buy electricity from Con Ed at market rates. The Port Authority also agreed to use public funds to pay any property taxes in excess of $25 million that Silverstein might incur in the future if New York City ever succeeded in putting the trade center on the property-tax rolls.
However good the deal might have been for the Port Authority and for Silverstein, it was a rotten one for New York taxpayers and for New York City itself. Ultimately, taxpayers pay a bigger portion of the city's total tax burden than they would have to pay if the WTC paid its fair share. And in a sense they are paying a perpetual tax to the Port Authority, in that Silverstein's willingness to pay more to lease the building than anyone would pay to buy it rests on the tax and electricity breaks that come along with the lease.
Governor Pataki should meditate upon the lessons of this history. Government agencies, even those purportedly dedicated to making money, are inherently inefficient and self-perpetuating. Undisciplined by the market, they make unwise investments, while competing unfairly with the private sector. We must weigh any "profits" that they seemingly generate against the massive subsidies, both hidden and overt, that government pours into them to make them economically viable. Advocates of state-capitalist projects claim they have economy-boosting "multiplier effects," but they also have a demultiplier effect that is rarely mentioned. If all the money lavished on the project stayed in taxpayers' hands, they would invest it in innumerable, unanticipated, creative ways. History shows that the money that individuals and businesses invest and spend, if left alone to do so, generates far more wealth and new jobs than any government-directed spending. The most successful cities and states dedicate their resources to creating the kind of conditions that attract private investment, rather than pouring public money into centrally planned visions of economic development.
The governor should do everything possible to clear the way for the creation of new commercial and retail space at the World Trade Center site without the continuing involvement of the Port Authority or other government agencies. It is past time to get the Port Authority out of the Manhattan real-estate business. Pataki needs to be the anti-Rockefellera leader with enough confidence in capitalism to allow market forces to shape the future of lower Manhattan.