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Winter 1998
   
Restoring the Opportunity City
William J. Stern
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The biggest problem facing New York as Mayor Giuliani begins his second term is the economy, which, despite the present temporary uptick fueled by the Wall Street boom, is stagnant and has been stagnant for years. The mayor has two choices. He can continue the policy of managed decline that the city has pursued for decades. Doubtless he will manage it more deftly and intelligently than his predecessors and slow the rate of decline, but the city's long-term outlook will remain gloomy. Or he can take a much more radical approach: he can try to turn the city's fortunes around and make economic growth, rather than a slower rate of economic decline, a public policy imperative. This is by far the preferable course.

It's a course that would break with 50 years of tradition: no New York mayor has made growth a major policy objective since before World War II, and indeed most recent mayors have paid little attention to the city's economy, assuming that, like the weather, it would take care of itself. Consequently, the mayor's first task will be educational. He will have to persuade New Yorkers of the vital importance of a healthy, expansive economy, which the city's political culture has long devalued.

Yet this will not be a hard case to make. In the rest of the nation—and, indeed, around the globe—economic growth has been the dominant political idea for a generation, and the widespread prosperity it has brought is a conspicuous, invincible argument in its favor. Perhaps more important, for generations growth was the animating spirit of New York, too. It is only relatively recently that the city turned its focus to the redistribution, rather than the creation, of wealth. Traditionally, Gotham saw itself primarily as a theater of ambition, a bustling national marketplace and workshop, where talented, energetic people from all over the nation and the world come together to seek opportunity, to exchange ideas, to innovate, to prosper—whether as plutocrats or pastry chefs, bankers or bookkeepers. As Milwaukee mayor John Norquist likes to point out, that's what cities have always been, from Constantinople and Rome to London and Paris: not breeding grounds of problems or objects of national sympathy but places of hope, opportunity, and achievement.

Mayor Giuliani can point to benefits that growth once showered upon the New Yorker in the street. In the decade from 1900 to 1910, for instance, as the city's population exploded 40 percent, to 4.8 million people, jobs grew at an even more sizzling rate—50 percent—so that 94 percent of male New Yorkers between the ages of 15 and 70 were employed. The majority of these jobs paid low wages, as political scientist Andrew Hacker has described, but workers, many of them immigrants, were nevertheless moving steadily up into the city's middle class. During those years, New Yorkers receiving salaries, instead of more demotic wages, grew from 10 percent of the workforce to 15 percent, and 8 percent of Gotham's families had a maid.

Skip to the twenties. In New York, they roared louder than anywhere. The city's population was still skyrocketing, as 350 new residents arrived daily. What they found was a building boom: a new building sprang out of the ground every working hour—literally, according to the 1920 Valentine's Manual—and the assessed value of the city's real estate rose 12.5 percent a year between 1920 and 1925, to $6.7 billion. The local economy was diversified, with 321 occupations listed in the 1920 census. All but five of those occupations included at least one black New Yorker, an indication of the breadth of opportunity. Average income thundered up 43 percent from 1921 to 1927, while at the same time commodity costs fell, so that living standards rose even more strongly. And 96 of the nation's 207 millionaires called Gotham home in 1925.

Growth and prosperity overflowed into the outer boroughs and the entire region. Manhattan's population, 2.3 million in 1920 (or 53 percent greater than its 1990 population), fell 17 percent by 1927, as prospering New Yorkers continued the exodus that had begun at the start of the century out of the Manhattan slums to the many neighborhoods of promise in Brooklyn and the Bronx. In the metropolitan region, with a population totaling 9 million in 1927, prosperity streamed out of 60,000 factories, 868 piers, 13 separate railroads.

Half a century ago, with the depression and the war safely weathered, New York was at the apogee of its prosperity. In 1950 the city's employment reached an all-time peak of 3.3 million. Manufacturing jobs totaled a little over 900,000, and, as former City Journal editor Roger Starr observes in The Rise and Fall of New York City, New York added more value to manufactured products than any other American city, including Detroit—Cartown, U.S.A. Fully 140 of the Fortune 500 companies had their headquarters in the city, and some 90 percent of the nation's financial services jobs were in New York, too. The city's employment portfolio was almost perfectly diversified among manufacturing, financial services, corporate headquarters, science, engineering, and port jobs, and New York was a major tourist destination for the rest of the country and the world.

Its infrastructure was everything that business needed. To the harbor that nature provided and the railways and subways that private interests had built in the nineteenth and early twentieth centuries, Robert Moses had added an extraordinary system of highways and bridges that was nearly complete by 1950. An unsurpassed educational system, from primary schools to universities, provided immense numbers of highly qualified workers for the manufacturing and service industries. Indeed, the plenitude of qualified workers, from clerks to diamond cutters to mathematicians, served as a magnet that attracted businesses of all kinds to the city.

Fast-forward to the present. Today the city's economy has changed radically, and not for the better. Only 31 of the Fortune 500 companies remain in town. Population stands slightly below where it stood in 1950. Between 1985 and 1995, almost twice as many people left the city as arrived from other parts of the United States. Those who left tended to be the affluent elderly and the educated young, entering their most economically productive years. New York is now the nation's leading exporter of native-born talent—the reverse of the situation in 1950, when 80 percent of the immigrants into the city came from other parts of the United States and the outflow of New Yorkers was so small that a contemporary reporter commented: "Nobody leaves New York." Of course, the 1990s out-migration of rich and educated New Yorkers undermines the tax base and the incentive for companies to stay or start here.

Worse still, as the city entered 1997, private-sector employment stood 100,000 jobs below its 1950 peak, and total employment (including government jobs) is today 40,000 jobs below its 1970 peak, despite the strong private-sector job gains of the last few months. Putting those employment numbers in context shows something more troubling than mere stagnation. For while New York's employment went nowhere, employment in the nation as a whole more than doubled, so compared with the rest of the U.S., New York lost ground markedly. Or to put it more temperately, as Steven G. Craig and D. Andrew Austin showed in the last issue of City Journal, if the city were the same job-generating dynamo for its region as other big cities of the East and Midwest are for their regions, New York City would have 750,000 more jobs than it actually has today. If Gotham were still the over-achieving regional job dynamo that it was in 1962, it would have one million more jobs than it now has—rather than having the dubious distinction of failing to create a single net new job in half a century.

Also troubling is the city's current mix of jobs, radically less diversified than a half-century ago. Manufacturing jobs have shrunk to fewer than 300,000, and though the port is enjoying a resurgence, it handles under 40 percent of the Northeast's shipping, half the percentage it handled in its heyday five decades ago. Not that manufacturing jobs are sacred: New York's were traditionally concentrated in such low-wage sectors as the garment industry. Moreover, manufacturing employment is a smaller proportion of today's U.S. job mix than before, and emphatically not the best-paid segment. What's troubling is that many of the new industries haven't sprouted up in New York to replace the old ones—as they did in many other old eastern and midwestern cities buffeted by the same macroeconomic forces that swept over New York. With all its teaching hospitals, where is Gotham's biotechnology business? With all its data-dependent companies, where is its computer industry? With all its consumers, why is its retail sector so relatively small?

Today too much of the Big Apple's quarter-trillion-dollar gross city product is concentrated in financial services and tourism. Financial services is a wonderful industry, with some extremely high-paying jobs and a high-growth future. But a diversified economy is abler than a concentrated one to weather shocks, and the financial services industry in particular is volatile, subject to big swings in employment and earnings. In the four-year shakeout that followed the stock market crash of October 1987, the industry shed 34,000 jobs, almost all of them in New York. In 1987, Wall Street profits totaled a bare $1 billion, compared with a palmy $12.5 billion in 1996. And though in the bull market of the nineties the industry has created over 150,000 new jobs, four out of every five are not in New York. Finally, no one knows how technological changes will transform Wall Street—only that transform it they will.

One last comparison: 50 years ago the city had 250,000 people receiving public assistance; today the number, despite the mayor's successful workfare program, is almost 800,000. And as Heather Mac Donald found ("Gotham's Workforce Woes," Summer 1997), so powerfully destructive has the welfare culture of entitlement been, so deeply has it infected the city's poor, that even the non-welfare unskilled workforce often lacks basic workplace skills. Employer after employer lamented to Mac Donald that he couldn't find workers he could count on to show up, to take orders, to dress appropriately, to speak something like standard English, to treat customers and co-workers with civility.

Looking at this contrast between New York's past and present, who wouldn't agree that the expansive city is better than the stagnant one? It gives choices and opportunities to all classes of residents, sophisticated investors and unskilled immigrants alike. It lessens social tensions, as individuals concentrate on making the most of their own opportunities rather than resenting the good fortune of others. Growth feeds on itself, with new businesses suggesting ideas and creating opportunities for still newer ones. And private wealth confers public benefits, as witness such monuments as Grand Central Terminal, the Metropolitan Museum, the Public Library, and Rockefeller Center, not to mention the city's world-class private hospitals and charities.

What stopped New York from being a dynamo of economic expansion was an idea born of the city's great wealth: the idea that local government could ensure that all New Yorkers shared in the metropolis's good fortune by providing social services and income supports to raise the poor out of their poverty. Here were the flourishing businesses and rich individuals whose taxes could pay for it; here were the poor people who needed a helping hand. It turned out, however, that businesses and individuals were not as enthusiastic as the officials who promoted this idea about paying the taxes required to support the vast structure of public housing, social services, health care, and income supports for the poor that New York established. They expanded their businesses elsewhere, where costs were lower, or moved away entirely. It also turned out that all that effort didn't much help the poor. As they became dependent, the indicators of social pathology worsened sharply. And poverty in the city didn't decline.

As the philosopher Maimonides knew nine centuries ago, the highest form of charity is giving those in need the tools to help themselves. It isn't making them dependent, even though most of New York's politicians today evidently think Maimonides was misguided. The sine qua non for upward mobility is a job, such as New York used to offer anyone who wanted it, and it is job opportunity that the mayor should proclaim as the purpose of his growth agenda. New York's foreign-born citizens and their children, who now form a majority in the city and whose hopes and aspirations are intertwined with the city's future, would be a powerful constituency for a Giuliani growth agenda.

It is not that the mayor has been negligent on the issue of the economy. In his first term he has taken important steps to make the city business-friendly. His emphasis on public safety has had a beneficial economic impact: as word has spread that New York is a safe city, it has become once more a major tourist attraction. For two years, the city's hotels have had full occupancy, and the mayor's reduction of the hotel tax has encouraged the resurgence. And New York residents, no longer apprehensive about going out at night, have brought boom times to the theaters and restaurants.

The mayor's war on organized crime's control of the trash industry has lifted the "mob tax" on waste disposal, saving city businesses some $300 million annually, and his ejection of mobsters from the Fulton Fish Market will also result in cost savings for consumers. His promise to carry the war on organized crime to other industries, such as construction, promises even further reductions in the city's mob tax, which currently drains an estimated $1 billion a year from the city's economy.

The mayor has taken on that sacred cow, the Port Authority, demanding control over the city's airports, crucial to the local economy. He has tirelessly argued that not only has the Port Authority developed Newark Airport more than New York's airports but it has also used profits from the airports to subsidize the PATH system, which benefits New Jersey commuters almost exclusively. And he has tried hard, if unsuccessfully, to get superstores built in the five boroughs.

But worthy as the mayor's efforts have been, he has not advanced an overall economic strategy that aims at making the city a truly competitive player in an increasingly competitive world economy. The cornerstone of such a strategy must be major tax cuts—major, not tentative.

Over the last 15 years, American businesses engaged in wholesale restructuring, downsizing, and outsourcing to reinvent themselves as highly competitive global enterprises. They became sensitive to every cost, including taxation. Especially when technology makes it easy for them to be anywhere they choose, why should they remain in New York, with per capita taxes that are higher than any other city in the nation except basket-case Washington, D.C., and twice as high as the next-most-taxed city, San Francisco? Why should they pay per capita taxes that are 536 percent higher than they'd have to pay if they moved to a city in the South or Southwest? On personal income, New Yorkers now pay taxes per capita that total just over 40 percent—more like Canadian than American levels and headed toward European social-democratic proportions. The taxes are so high that Princeton economist Andrew Haugwout estimates that if New York tries to raise them any higher, it will drive enough of the tax base out of town that it will collect less revenue overall.

As a 1996 study by Patrick Howie of Regional Financial Associates showed, businesses don't create jobs in places where costs—of which taxes are the easiest to control of four key components—are high. During the first half of the nineties, he found, high-tax New York, Los Angeles, and San Francisco lost 217,100 jobs, while low-tax Atlanta, Phoenix, and Las Vegas added 827,000. Over a wide range of urban America, Howie discovered, low-cost, low-tax cities boomed, while high-cost, high-tax ones shrank or stagnated. And, of course, the nation's historical experience with tax cutting has amply shown its job-creating power: the 1920s' tax cut, President Kennedy's 1960s' tax cut, and President Reagan's tax cut in the 1980s all produced soaring growth in jobs and living standards.

The Giuliani administration has sensibly cut the hotel occupancy tax and the commercial rent tax, and it successfully pushed the state to cut the hated unincorporated business tax. But however valuable, these tax cuts fall vastly short of what is required. And the administration's major tax policy, like that of its predecessors', has been to cut taxes selectively for big corporations that threaten to leave the city. But because small and start-up businesses have created all of America's new jobs since 1970, this strategy fails to do anything for employment growth.

A better policy by far is for the mayor to push for total elimination of the city's personal income tax. Such a dramatic act would send an unmistakable signal that New York is serious about economic growth—as serious as it has been about reducing crime. It would affect all businesses equally, the small, job-creating ones as well as the behemoths. City Hall can't do this alone; it needs the State Legislature's approval—which is why the mayor must make a powerful pro-growth case if he is to generate the political pressure required for such a move.

New York is one of only four big U.S. cities—all of which have flirted with bankruptcy in living memory—to have both a city income tax and a sales tax. Arguably, to bring Gotham into line with the rest of the nation by eliminating one of these, City Hall could eliminate the sales tax just as well as the income tax. But eliminating the income tax would send a much better message, since it is a tax on creating wealth, not on consumption. If two taxpayers work hard to make $50,000, why should the one who spends it all on consumer goods get the tax break, and not the one who invests it? It is the making of the $50,000 the city wants to encourage, not how it should be spent.

True, cutting the income tax will cost the city treasury more than cutting the sales tax—$3.9 billion (or $531 per person) instead of $2.7 billion($372 per person). But it still would leave New York's taxes per capita almost twice as high as the average eastern and midwestern city, and still nowhere in sight of the low taxes of southern and western urban competitors. So the city would still have more tax cutting to do in the future. It could look forward to cutting its corporation tax, and ending its unique taxes on mortgages and the transfer of real property, which, as the Citizens Budget Commission correctly points out, hinders the adjustments in land and space use needed to accommodate economic change. And the mayor should demand that the state end its taxes on inheritance and gifts, so as not to drive out of New York the affluent elderly, who use almost no city services and provide money to the city's restaurants, department stores, and charities.

The mayor can't assume that tax cuts will immediately produce increased tax revenues generated by economic growth. As the Reagan tax cuts showed, though tax cutting assuredly does increase government revenues, no one can predict the timing and magnitude of that increase.

So city spending would have to decline commensurately with the tax cuts; but again, such a cut would still leave total city spending more than twice as high as its average counterpart in the East and Midwest. No one could seriously argue that intelligently planned spending cuts will create hardships for New Yorkers. Those who say city spending can't be cut are like a free-spending spouse who replies to the need for economy by saying, "But we could never stop buying a new Mercedes every year; I couldn't live with a massage only once a week; I've always smoked Cohiba Habanas." The proper way to run a municipal economy—similar in this respect to a household's economy—is to ask, "What can we afford?" rather than to say, "Here is everything we have to buy, regardless of where the money comes from." New York is slowly eroding its economy's capital by maintaining a larger government than it can afford.

Stopping that long tradition requires a drastic change in basic outlook, which is why the mayor's educational campaign is so crucial. In fact, most cities usually drift and dwindle, like Venice, and don't change their ways unless they hit rock bottom. But neither of these fates is very happy, and while Mayors Ed Rendell and Dennis Archer deserve kudos for turning around Philadelphia and Detroit at their moments of catastrophe, those cities remain problem-plagued and almost surely will never regain anything like their former greatness. Rock bottom is too late.

Some items in the budget are obvious candidates for cuts—starting with Medicaid, by far the biggest component of New York's grossly swollen social welfare spending. It costs the city some $3 billion, almost 15 percent of total local revenue and by itself about the size of the budget's structural deficit. In all states except New York and Arizona, the federal gevernment pays half the Medicaid tab and the state picks up the other half. In New York, however, the city pays half the non-federal share. Since city and state pay only 25 cents of every $1 paid out, officials have given in to the temptation to load on benefits like Christmas tree ornaments. Result: out-of-control spending, with only 32 percent of the total costs federally required and the rest mandated by the state. New York State's Medicaid expenditure is twice that of California, which has 70 percent more population, and per capita Empire State Medicaid costs are two and a half times those of the average of the next three most lavish states ("Medicaid's Fatal Attraction," Winter 1996). And New Yorkers are no healthier than Californians.

This year the Republican governor is up for re-election, a perfect time for the Republican mayor to press him to pledge that the state will take over full responsibility for Medicaid, an idea widely discussed for over a decade. If, even without a state takeover, Albany would reduce benefits to the level of other major industrial states, the city would save $1 billion.

The second candidate for big budget cuts is the municipal workforce. Even though the mayor has admirably reduced the number of city workers from 220,000 to 200,000, New York still has more of them per capita than all other big U.S. cities, and their compensation is richer than in any other major city, thanks to their lavish fringe benefits, which cost New Yorkers three times per capita more than Los Angeles spends per capita. If the city cut in half the differential between the total compensation of its employees and that of public employees in other big cities, it would save almost $4.5 billion.

The federal and state governments, along with two-thirds of the nation's large corporations and virtually all of its small businesses, require employees to pay a portion of the premium for their health insurance. Not New York City, which picks up the whole tab. The mayor should make this special benefit an issue and build the political and media support to remove it, contract negotiation by contract negotiation, from public employees. And he should do away with such productivity-sapping perks as the 12 annual paid holidays that city workers get, or the 20 days of annual paid vacation city employees get when they start a job.

The mayor should continue to reduce the size of the municipal workforce, including even the uniformed services, especially the fire department. And he should institute the privatization measures that other innovative big-city mayors have used so successfully, most notably Indianapolis Mayor Stephen Goldsmith. Goldsmith allows private companies, even foreign ones, to bid against public agencies for the pothole-filling contract, or the trash collection contract, or the bus-fixing contract, or even the contract to get welfare recipients into private employment. A private British company now runs his airport; private companies run his jail and his waste-water treatment plant. He has privatized 75 city services in all so far, with savings in each service ranging from 25 to 40 percent and accumulated savings in five years of $400 million. He has reduced the public workforce 45 percent. Imagine what that would do in New York, where the public workforce accounts for half of the $33 billion annual budget.

Goldsmith is quick to explain that there's nothing inherently more efficient about a private worker than a public one. He's perfectly willing to let public agencies bid against private companies for public services, and in some cases the public workers have been low bidders and won the contract. What counts, he says, is not that you have private workers but that you have competition. When public workers win contracts, it's because they jettison their bureaucratic, monopolistic practices—their work rules, their inflexibility, their overmanning, their excess of supervisors—and behave like any lean and mean private company. But they will do so only if they are fighting to keep their jobs.

If the mayor were to succeed in cutting taxes, transferring Medicaid to the state, privatizing city services, and restructuring government-employee benefit packages, he will have given the city a good chance of being the capital of the twenty-first century as it has been the capital of the twentieth century. But it won't be politically easy. He will have to take on all those who profit from New York's government bloat, from the Wall Street public finance departments and politically connected lawyers to the public relations consultants, the construction contractors, and the "nonprofit" social service providers. He will have to face down the politically mighty municipal unions. The city's liberal community can be trusted to attack all spending reductions as racist and an assault on the poor.

He can't do this without making the case for the excitement, the challenge, the economic opportunity and security that growth brings. A Manhattan Institute scholar recently remarked that, while he walked around New York, he was struck by the thought that so much of the city we all love was created by New Yorkers long dead. He felt like an inheritor, living off capital earned by his ancestors who once made New York grow ebulliently. The mayor can challenge us all to the worthy task of adding our own contribution to keep the city premier and unique.

 

 

 
New York faces a stark choice: restart economic growth or continue Gotham’s gradual, decades-long decline.
City Journal Winter 1998.
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