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Stagflation Grips Gotham
New York’s economy has not yet turned the corner.
Winter 2004

Politicians often confuse their own bottom line with the larger economy’s. As long as tax revenues are growing and fattening the public kitty, everything is just swell to them.

We see a version of this thinking in New York now, as the Bloomberg administration declares that Gotham has turned an economic corner because city tax receipts are racing ahead of expectations, helped by growing profits on Wall Street. But while the Street’s recovery—powered by a stock-market surge thanks to the federal government’s capital-gains and dividend tax cuts last summer—is welcome news for New York City, Gotham’s economy is still struggling, and some portions of it are heading ominously in the wrong direction. That corner that New York has turned may still lead to a dead end.

First some good news: the stock market’s 20 percent gain in 2003, combined with cost cutting among firms, has fattened the finance industry’s profits, with estimates that the industry earned more than $20 billion last year. That not only has helped bolster corporate tax receipts in New York but has already prompted a 20 percent increase in estimated city withholding-tax payments, much of it no doubt coming from Wall Streeters anticipating higher year-end bonuses.

Outside of Wall Street there has been other good news, too. The city’s tourism industry—battered by 9/11—has recovered a bit, adding about 3,000 jobs through the first nine months of 2003, a credit to the Bloomberg administration’s commitment to keeping the city’s crime rate down. Spurred by low interest rates that boosted residential building, Gotham’s construction business is also getting healthy, adding about 1,500 jobs in 2003. In the third quarter, such job gains, combined with rising profits on Wall Street, produced an ever so slight uptick of 0.3 percent in the gross city product, which in turn has spurred headlines declaring the recession over in New York.

But talk of a recovery is premature. The gross city product, for one thing, is not some precise state or federal government statistic, but a rough, inexact index of economic activity, a sort of guesstimate built upon multiple other guesstimates. A minuscule increase in such an imprecise index is inconsequential and no grounds for declaring an end to the recession.

By contrast, what’s especially worrisome right now is that many of the city’s key industries continue to struggle. The category of business and professional services—which encompasses law, accounting, management consulting, and other professions that define New York as an international center of business expertise—has lost 50,000 jobs since the recession began and continues shedding jobs. And despite the stock market’s upturn, the city’s finance sector shows no sign of an employment recovery, in what amounts to a replay of the last recession in New York, in the early 1990s. Back then, financial firms registered big profits for nearly two years before they started hiring robustly again, and it took three more years for the firms finally to replace all of the jobs that they’d cut during the recession. The current job numbers suggest that financial firms may not be in a serious hiring mood for some time yet.

Hiring weakness in such key sectors could slow the city’s jobs recovery process. At best, what the jobs data show so far is that the rate of city job losses is slowing, but losses have not clearly ended yet. Most significantly, at no time during 2003 did the city record a month with more jobs than in the same month of 2002. By contrast, when the city’s last recession ended in 1993, Gotham notched seven months in which its jobs total surpassed the same period a year earlier.

Other key indicators are heading in the wrong direction. Chief among them is inflation. Despite the sluggish economy, prices are rising in the city more rapidly than in the nation. That means that New York—already among the priciest places to live and do business—is growing even costlier than the rest of the nation. Right now, the New York area boasts an unusual distinction: it has among the highest unemployment and inflation rates of any U.S. city, creating the troubling condition known as stagflation, which the national economy hasn’t seen since the Carter presidency.

A severe local downturn should be producing the opposite effect, bringing New York’s prices more in line with the rest of the nation’s and making the city more competitive, as decreased demand pushes prices down. But state and local government have piled on tax increases during the current recession. New York City alone has raised taxes and fees by more than $3 billion, while state tax increases on city residents amount to another $1 billion, meaning that the city’s suppliers of goods and services either need to raise prices to pay the taxman, or they must absorb the tax increases, leaving less cash for new hiring and investment—or both.

All of this is also a replay of the last recession, with potentially distressing repercussions. State and local governments enacted hefty tax increases in 1990 and 1991, with the result that inflation rose even amid staggering job losses. It wasn’t until 1993 that New York’s inflation rate finally sank down to the national level. Only then did the recession end in New York, and it was not until 1994, when the area’s inflation rate actually slipped below the nation’s and New York regained some measure of competitiveness, that a substantial rebound began.

The city’s own forecasters seem worried. Official forecasts call for a gain of a mere 26,000 jobs in 2004, an increase of only 0.7 percent, then another increase of 51,000 jobs, or 1.7 percent, in 2005. In other words, two years from now, by the city’s own estimates, New York will have recovered fewer than 40 percent of the jobs it lost in the last recession and will still be 125,000 jobs below the jobs peak of three years ago.

All of this assumes that government won’t do more to add to the burden. Mayor Bloomberg has pledged no new tax increases, but city spending is still rising rapidly—much faster than inflation—and without significant concessions from city workers, it will be difficult for New York to pay its bills even with growing tax revenues. Moreover, the state budget is also growing rapidly, and, despite pledges by Albany leaders not to boost levies again, there is talk of raising corporate taxes and fees.

Such actions could push back the city’s recovery even further. Absent any unexpected boost to the economy, New York could take far longer truly to turn the corner.

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