It's difficult to imagine an administration having a more disappointing start than New York Governor George Pataki's first nine months. The governor not only has failed to find enthusiasts anywhere on the political spectrum but has confused almost everyone. It's probably worse to confuse voters than to anger them: they often attribute their confusion to a political leader's incompetence.
Pataki's sluggish start stands in stark contrast with the success of newly elected Republicans around the nation. In Washington the GOP Congress has clearly seized the national agenda: agree or disagree, no one can doubt that its leaders are defining the issues. Governor Whitman of New Jersey is popular and admired; in a very short time, having kept her promise to slash state taxes, she has established herself as a major national figure. Mayor Giuliani is correctly perceived as having done something about crime, the main issue that got him elected.
The governor can point to some modest accomplishments. He has delivered cuts in income tax rates, but orders of magnitude smaller than Governor Whitman's and nowhere near what the state's economy needs. He has slowed the growth of state spending to below the rate of inflation, but it's still growing at a time when it needs to shrink radically. He has enacted welfare reforms to combat fraud and has put some recipients to work, but he has not addressed the culture of dependency.
After nine months Pataki has not delivered himself of a clear vision for governing New York State. If he fails to do so soon, he will have squandered a historic opportunity. Pataki came into office at a time when the state was ready for a new face and a new philosophy. Not only was his predecessor, Mario Cuomo, very unpopular at the end, but New Yorkers widely perceived that something was radically wrong, that the wheels had come off the Empire State cart. Voters were hungry for a governor with new ideas, with a specific agenda of change to halt the state's painfully evident decline. Their anxiety was so acute that they were willing to elect someone virtually unknown. But is Governor Pataki ready to emerge from obscurity and provide the leadership the state needs?
A depressing litany of economic statistics eloquently shows how right New Yorkers are to think their state has declined. Between 1963 and 1992, New York's gross state product grew at a rate 50 percent less than that of the nation's gross domestic product. Personal income growth during the same period lagged almost 30 percent behind that of the nation as a whole. Between 1973 and 1993, New York's rate of job creation was pathetic, less than a third that of the ten biggest states. During the past 20 years, some 100 Fortune 500 companies have left New York State; only 64 remain. Small-business formation, nationally the major source of new jobs, is the slowest in the nation in New York State—and this in a state full of entrepreneurs. The 1990 census shows that New York's talented young people, after acquiring their education and skills here, often leave to work elsewhere. joining their exodus are the affluent elderly, a part of the population that pays taxes, spends money, and rarely requires social and educational services in return. These two groups have been replaced by people who frequently avail themselves of government social services, putting considerable strain on state and local budgets.
One overriding reason that explains New York's dismal economic performance is that its cost of government has risen astronomically. The total state budget has climbed from some $20 billion in 1982—already very high by national standards—to over $60 billion today, a 200 percent increase during a period in which inflation totaled only about 60 percent. New York leads the nation, or is near the top, in the cost of educating a student in the public schools, repairing a road or bridge, and providing welfare benefits. In 1994 the state's per capita spending on Medicaid totaled $1,250, more than double the national average of $570. As of 1992, New York's state and local governments had 635 employees for every 10,000 residents—21 percent above the national average—and New York paid those employees 20 percent above the national average. Even though New York has some 12 percent of the nation's private institutions of higher education and only 7 percent of the nation's population, we insist on maintaining, in addition, a huge state university system.
Funding this vast welfare state during a period of slow economic growth has required higher and higher state and local taxes, an ever-escalating incentive for business to flee. We are trapped in the same vicious circle that welfare-state governments in western Europe—which have seen virtually no new job creation in over a decade—are desperately trying to escape. Most New Yorkers are aware of our need for new direction and sense that the present ways of governance cannot continue. They know that the nation and the world are moving in an entirely different direction from ours, and that at some point we will have to get on the train or be run over by it.
Those not fully convinced of the need for reform have only to examine the megatrends in Washington and the world, which will make our state's destructive economic policies even more destructive. House majority leader Armey and minority leader Gephardt have both proposed a flat federal income tax, which would end the deductibility of state and local taxes. Right now, a portion of state and local taxes paid by upper- and middle-income New Yorkers is money they would otherwise have paid to the federal government. With a flat federal tax on income, all their state and local taxes will come right out of their pockets, thereby making it even more expensive for them to live in New York, where, according to the Census Bureau, per capita state and local taxes already are more than half again as high as in the average large state and higher than in any state but Alaska, which squeezes most of its revenues not from local residents or businesses but from out-of-state oil concerns. A flat tax would considerably worsen our already dismal competitive situation vis-à-vis lower-tax states—all 48 of them.
Congress has just converted the federal contribution to welfare to block grants, so states will receive a fixed amount of federal aid per beneficiary. Education assistance and Medicaid are likely to follow this course. Currently the federal government bases its aid on the amount of money a state spends, allowing New York to shift part of the burden for its overspending to federal taxpayers in other states. If we were getting more by spending more, it might be worth continuing to do so, even without federal largesse. But despite our greater costs, who can argue that New York's children are better educated, that its poor are healthier, or that its welfare recipients have a better quality of life?
Global megatrends make it more urgent for us to reform dramatically the way we are governing ourselves. Technological developments in information access and delivery have made business increasingly independent of location and have made it less necessary for many employees to travel to a central location to do their work. Census data show that about 15 percent of Americans work at home full-time, with countless more doing an increasing percentage of their work from their residences. A twenty-first century in which telecommuting is the norm—in which many huge businesses maintain small central headquarters and vast networks of employees tied in from their homes by phone lines and computers—is no longer the stuff of science fiction: it is an onrushing reality. This trend poses an especially difficult challenge for New York City, which derives so much of its tax revenues from large office buildings and the commuters who work in them.
The globalization of commerce, with its fierce competition and technological change, makes high-tax, highly regulated environments like New York incompatible with the requirements of a growing number of businesses. Yet we have done almost nothing here to adjust to the rapidly changing times. The times—no less than the voters—loudly cry out for new leadership and direction in New York State.
If Governor Pataki resolves to set the state on a new course, nobody should underestimate the obstacles he will face. The New York approach to government that he must overturn is not an idea supported only by the poor and by political "progressives" stuck in the ideology of the 1930s and the rhetoric of the 1960s. The entire political culture is utterly opposed to reform just as European welfare states not only provide for the sick, the ill, the old, and the idle but also control broad areas of economic life, the New York State government intervenes broadly in the state's economy by undertaking vast, publicly financed "economic development" projects such as the World Trade Center and the Javits Convention Center. This practice, based on the belief that state officials can allocate capital more efficiently than the private market, I have dubbed "state capitalism." New York's big-government welfare state thus benefits a myriad of special interests—not just social-service contractors and education consultants and bureaucrats but also bond lawyers and Wall Street financiers and contractors who work for government and whose comfortable lives depend, at least in significant part, on the continuance of state capitalism. They are not about to disappear because their economic interests are not compatible with the state's future prosperity and progress.
In 1983, early in my stint as chairman of the Urban Development Corporation, I had my first taste of just how deeply rooted the insider culture is. In a television interview I had suggested that the UDC, which was focusing primarily on Manhattan real estate development, should be offering assistance to computer and other hightech companies that were more promising as engines of economic growth. (I have since arrived at the view that we should leave economic development to the market.) Later a real estate developer said to me, "I see you have the 'contract' for the computer companies." He meant that I was repaying a political debt to these firms: he viewed government solely in terms of special interests contending for a piece of the action and could not conceive that I was genuinely concerned with how to promote economic development.
Public employee unions have the most obvious stake in keeping government big and openhanded; accordingly, they have infiltrated themselves into the state's political machinery whenever they've found an opening. They contribute heavily to candidates of both political parties, closely supporting the Republicans who control the State Senate and the Democrats who run the Assembly. They provide a full range of services to political campaigns: management, polling, telephone banks, volunteers, literature, direct mailings. This kind of assistance is often decisive in low-profile elections, such as state legislative contests, that attract little media attention or voter interest. For a state legislator to oppose the wishes of public employee union leaders is to guarantee well-financed primary opponents and a strong general-election challenge. Unions function in New York like the Praetorian Guard of ancient Rome: it doesn't matter who becomes emperor; the guard must be pleased if the emperor is to survive. Already the guard is displeased—a good sign: the unions recently mounted a multi-million-dollar advertising campaign against Governor Pataki's very modest budget reductions. Yet Pataki must cut far more if he is to restore the state's economic vitality. Just to bring New York's per capita level of government employment into line with the national average, he would have to enact policies that would force about 15 percent of state and local government employees out of work.
In addition to the public employee unions, New York has its own nomenklatura—the name Eastern Europeans gave to political insiders who profited handsomely from their governments while the general population suffered. New York's nomenklatura includes politically connected lawyers and public relations firms, Wall Street public finance departments, lobbyists, and vendors—from office supply firms to environmental consultants—who do business with the government. Members of the New York nomenklatura are upscale, skillful, and very influential. They are movers and shakers, but they depend on the state for much of their livelihood.
According to Moody's Investors Service, an astonishing 40 percent of the entire nation's outstanding municipal debt is in New York State and local bonds. The public finance departments of Wall Street—New York's merchants of debt—through which former state and local officials such as Carol Bellamy, Michael Del Giudice, Norman Steisel, and Vincent Tese have cycled and sometimes recycled, have an enormous financial stake in heavy state spending and borrowing. In 1990 investment banks collected more than $94 million in fees for underwriting municipal bonds of public authorities in New York State; bond counsels collected an additional $4 million to $5 million for legal advice.
Even the Mafia is a constituency for the status quo, dominating unions and contractors and driving up prices in such industries as construction, food distribution, the ports, and commercial garbage hauling. Texas-based Browning-Ferris recently entered New York City's $1.5 billion garbage-hauling market, but only after working with prosecutors on an investigation that produced 114 indictments of the Mafia-run cartel. Browning-Ferris was able to reduce Columbia-Presbyterian Hospital's monthly trash bills from $100,000 to $40,000 and still profit.
The story of Manhattan's Javits Convention Center illustrates how New York State does business to benefit the nomenklatura at the taxpayers' expense.
In the late 1970s, officials decided that the old Coliseum on 59th Street had become obsolete and that the state should build New York City a new convention center. They prepared a detailed but tendentious investment analysis that claimed a huge "multiplier effect": conventioneers would flock into the city, rent hotel rooms, eat in restaurants, and shop, thereby creating jobs supplying the city and state with tax revenues that would more than pay for the project. In fact, we now know that convention centers are almost always a bad investment. In a recent study of 25 government-built convention centers, Edwin Mills of Northwestern University found that annual operating losses averaged 42 percent of revenues.
More important, center planners never thought to consider the "de-multiplier." Mills shows that the cost of taking money out of the private economy and spending it on a convention center more than cancels out any multiplier. Even the most casual observer of the breakup of the Soviet empire knows that if individuals and businesses are allowed to make their own investment decisions in a market economy, the results are almost always far superior to those of centrally planned economies.
Perhaps New York officials honestly believed in state capitalism and truly thought they knew best how to spend citizens' money. But they knew the voters didn't have faith in their omniscience. Rather than funding the project by issuing normal general-obligation bonds, which would have required voter approval, the state used the Triborough Bridge and Tunnel Authority to borrow money—not because a convention center has anything to do with bridges or tunnels, but because the TBTA could issue bonds without a public vote. The TBTA sold $375 million worth of bonds, supposedly enough to pay for construction and cover any conceivable cost overruns. The investment syndicates that sold the construction bonds, led by Lazard Frères and Dillon Read, collected $8.67 million for their services.
The $375 million proved insufficient to finish the job. The Municipal Assistance Corporation, another public authority, bailed out the center when overruns drove the price up to some $490 million. Total bill for construction and interest on the debt: $1.1 billion.
A breathtaking failure of planning? Not if you consider the unspoken goal that is the essence of state capitalism: creating commercial opportunities for political insiders. A massive project like the Javits Center means business for the architects who design it, the construction contractors and union members who build it, the vendors who sell building supplies, the underwriters who arrange the financing, and the lawyers who serve as bond counsel and who draw up contracts with vendors. After the center opened in 1986, two years late, it also meant business for the companies and unions that maintain the structure.
I became involved in the center during my tenure as chairman of the UDC, which oversaw the center's construction. As a member of the center's board of directors, I took seriously my legal responsibility to monitor its management. I noticed an indifference to cost control that is typical of state capitalist projects. In particular, I was troubled by an inordinate number of "change orders"—spot decisions to pay contractors extra for work that isn't part of the contract. When I went public with my criticism, Andrew Cuomo, the governor's son, then an assistant district attorney in Manhattan, would call and tell me to tone it down: I was making "too many waves." When I told Governor Cuomo that the proliferation of change orders was wasteful and irresponsible, he shrugged and said, "That's the way construction is in New York." I got the picture.
The center's management didn't improve during the later years of the Cuomo administration. A 1995 state comptroller's audit found that Fabian Palomino, a close friend of Governor Cuomo's who served as the center's CEO from 1991 through 1994, had awarded $6.7 million in maintenance contracts without competitive bidding. With millions of dollars floating around, no wonder the center became a magnet for organized crime—from the mobsters convicted in 1988 of rigging $30 million worth of bids for concrete to the two Mafia—connected union representatives whom, the New York Times reports, Palomino put in charge of hiring workers for the center's lucrative carpenter jobs.
These opportunities for insiders have completely subsumed whatever weak economic-development rationale the center may originally have had. The center has a hard time attracting trade shows, and little wonder. Exhibitors have reported being shaken down for bribes by center personnel; they've also complained of exorbitant costs: the food-service contractor charges $27 for a gallon of coffee; until a few years ago, union electricians charged $80 to change a lightbulb. Some multiplier.
The State Legislature—both houses and both parties—works hand in glove with the nomenklatura and is filled with conflicts of interest. New York ostensibly has a part-time legislature, but in truth it's made up of career politicians who earn a base salary of $57,500 with bonuses of up to $30,000 depending on committee assignments. Astonishingly, the ethics laws under which the Legislature functions include none of the post-Watergate reforms that govern Congress and many other state legislatures. There aren't even any limits on how much outside income legislators can earn and how they can earn it.
Recent state legislative leaders—including former Senate majority leaders Ralph Marino and Warren Anderson, former Senate minority leader Manfred Ohrenstein, former Assembly speakers Mel Miller and Saul Weprin, and current Assembly minority leader Clarence Rappleyea—all were partners in law firms while in the Legislature. Many law firms with legislative partners have as clients banks and insurance companies, which are broadly regulated by the state, as well as construction companies and brokerage firms that do extensive business with the state. Senate minority leader Martin Connors has had public employee unions as private law clients while a member of the Legislature. Former majority leader Marino's law firm collected $130,000 in legal fees from the Nassau County government in 1991 and 1992, when Marino played a key role in passing legislation that affected the county's finances.
The list of lobbyists and contributors to statewide and legislative campaigns is a who's who of the nomenklatura and special interests. The state's main teachers' union leads the pack, followed by other public employee unions, medical industry groups, trial lawyers, and bankers. Other large campaign contributors who profit royally from the state's dysfunctional policies include still more public-sector unions representing workers who benefit from lavish state and local spending (New York City's District Council 37, representing municipal workers), private-sector unions (the United Auto Workers and International Longshoremen's Association), business interests that seek tax and regulatory breaks (political action committees representing soft-drink makers, beer wholesalers, and the food industry), and the PACs of financial institutions that do business with and are regulated by the state (Allstate Insurance PAC, Chemical Bank Fund for Good Government, Bear Stearns Political Campaign).
Legislators' private business dealings often create at least the appearance of a conflict of interest. A 1989 Newsday investigation found that more than a dozen legislators or their spouses were either corporate officers, partners, owners, or board members of 13 firms that had received at least $23 million for selling goods and services to the state, from banking to medicine for state prisoners to telecommunications services, in the previous year and a half. Mel Miller, then speaker of the Assembly, brushed aside the ethical questions, saying there's nothing wrong with legislators' bringing their "life experiences" to bear when deciding how to vote. "I assume that people vote for things with the best of motives, and that's what I really believe," said Miller, whose legislative career ended with his 1991 felony conviction for investment fraud. Having successfully appealed the conviction, Miller is now back in Albany as a lobbyist for real estate and other interests.
The movement in Washington toward devolution of power and money to the states—that is, toward giving state legislatures more power over taxpayer money—could worsen matters in New York. While the lack of strong congressional-style ethics laws governing legislative conduct is not unique to New York, the sheer magnitude of our state government makes such laws all the more necessary. There has been no talk in Washington of even suggesting ethics reform to the state governments to which Congress plans to devolve power and money.
The push for devolution is based on the reasonable assumption that governments closer to where people actually work and live are best suited to making decisions about health care, welfare, education, and other matters largely, or at least significantly, financed by state and local taxes. But the federalizing of power over the past 30 years has resulted in less voter interest in, and awareness of, state governments, especially in a state like New York, where the capital is remote from most of the population centers. Thus the New York Legislature functions in Albany without extensive media scrutiny. No New York City television station has a full-time correspondent in Albany, even though the State Legislature routinely involves itself in matters that profoundly affect life in the city: it regulates pension and residency requirements for local employees; it establishes mandates for health care and welfare that local governments must follow; it elects the Board of Regents, which has extensive control over local education policy; and it has jurisdiction over the criminal laws that affect cities' quality of life.
Nor has bipartisan control of the Legislature acted as a check on its irresponsibility. To the contrary, Senate Republicans and Assembly Democrats, in true co-dependent style, resolve their differences over budget priorities by spending more on everything: GOP legislators vote for more welfare and public housing in exchange for Democrats' support for upstate schools and prison construction. (See "New York's Nightmare Legislature," City Journal, Spring 1995.) The result is no shortage of largesse for the nomenklatura.
Here is the choice Governor Pataki has to make. He can be a political ship in the night, passing through on his way to a lucrative spot as a lobbyist or a partner in a politically connected law firm while making believe that restoring the death penalty, modestly cutting tax rates, and uttering well-intentioned generalities about reform represent real change. Or, reaching for something more, he can actually be a public servant whose name will be gratefully remembered.
To become a real agent of change, the governor must reject the Albany political culture from which he came as a five-term state legislator. Both legislative houses and both parties are equally steeped in that culture. The Republicans in the State Senate, where Pataki represented Peekskill, have been fully complicit in the enormous growth of government over the past 30 years. They have opposed all meaningful ethics reform. They have opposed process reforms, such as term limits, that would check the power of entrenched incumbents. They have blocked efforts to institute initiative and referendum procedures that would allow the voters to bypass the Legislature and change laws through the ballot box. They have imposed massive unfunded mandates on localities, from education to welfare to health care. To return New York to economic health by shrinking its government and cutting taxes, Governor Pataki must renounce his former colleagues. Like Lyndon Johnson repudiating his segregationist past or Richard Nixon going to China, Pataki must boldly defy his own history.
Since all of those who will fight to retain the status quo have bought enormous influence in the Legislature, a political leader who sets out to battle them one by one is bound to lose the war. Each group will offer reasonable-sounding arguments why its programs are vital to the state. Governor Pataki must offer a broad vision—one that puts the future of the state above all special interests—and take his case directly to the people. This will require great courage, for Pataki will have to take on the entire nomenklatura, including members of his own party.
Pataki's vision should start with a call for ethics reform in state government, including, above all, strong ethics laws for the Legislature. Because it has been decades since any high state official treated integrity in government as a major issue, Governor Pataki has the opportunity to be taken very seriously if he does so. Strong ethics laws in themselves would make an enormous difference in transforming the state's political culture, since so much of the nomenklatura's budget-bloating wheeling and dealing, though legal, is unethical.
From the outset, the governor must make sure his own executive branch is squeaky clean. His administration got off to a good start with its push to drive organized crime out of the Javits Center. But unfortunately, some of his appointees have already engaged in questionable conduct. Charles Gargano, commissioner of the Department of Economic Development, and Peter Delaney, who heads the Department of General Services, have both raised campaign funds from companies that have or are seeking contracts with the state, according to the New York Times. In August, horse-racing executives were invited to a fund-raiser whose organizers included Joseph Negala, a member of the Racing and Wagering Board, which regulates the horse-racing industry, and Clarence D. Rappleyea Jr., chairman of the state Power Authority, which sells low-cost electricity to businesses. (After embarrassing press reports, the administration said that commissioners and board members will no longer serve on fund-raising committees.)
Pataki's agenda for legislative ethics reform should include a requirement that all legislative leaders and committee chairmen be true full-time legislators: no outside income allowed. Rank-and-file legislators should be required to disclose all sources of income and should face strict limits on gifts and speaking fees. These should bind the governor too; over the years, Mario Cuomo earned almost $1 million giving speeches while in office. Though legislators already must disclose their sources of campaign money, Pataki should demand that they computerize this information in easily accessible form so that journalists and government watchdog groups can analyze it.
Getting tough ethics laws passed won't be easy, for legislators themselves have to approve them. Gentle persuasion won't bring them around: Pataki will have to shame them into cleaning up their act. That means he must publicly attack individual legislators—of both parties, in both houses—who take special-interest money and balk at supporting serious reforms. It also means he should recruit and campaign vigorously for reform-minded challengers to run against recalcitrant incumbents in 1996—including primary opponents for Republican defenders of the status quo.
Pataki must mount an equally aggressive campaign to reform New York's political process. The issue of ethics illustrates why: winning the ethics reforms I've suggested, though they seem wholly uncontroversial, will require a bloody political battle' Put to the voters, it's hard to imagine they wouldn't pass overwhelmingly. But there's the rub: while 24 states have initiative and referendum procedures that allow direct lawmaking by voters, New York does not.
Commendably, Pataki has called for a constitutional amendment enacting initiative and referendum, along with one imposing term limits on legislators. But amending the Constitution requires legislative approval too, so again the governor must be willing to wage a personal battle against legislators who continue to guard their own power unbendingly.
Pataki should champion another process reform, one that would permanently restrain state spending. New York lurches from year to year, perennially on the brink of fiscal crisis, because the state's economy simply cannot support a government of its present size and scope—especially when the overwhelming tax burden it imposes is driving businesses away, continually shrinking the tax base. It's not enough to avert each year's crisis by making modest cuts: the spending will always grow back. That's what happened in the 1980s, when an explosion in the highly cyclical financial-services industry fueled a temporary boom that momentarily obscured the state's continuing long-term economic slide. The state government should have used the increased revenues of the 1980s to bring tax levels into line with those of other large industrial states and to reduce debt, the service on which now consumes over 10 percent of the state budget. Instead, Albany spent money on schools and universities and on revenue sharing as though the good times would never end.
To control spending permanently, Governor Pataki should push for a constitutional amendment prohibiting the Legislature from raising spending more quickly than the growth of New Yorkers' total personal income. Both Governor Cuomo and his predecessor, Hugh Carey, supported this reform, which would have prevented the wild spending increases of the 1980s. But neither chose to make it a major issue. Unsurprisingly, both legislative houses have always opposed the idea.
Even if Governor Pataki loses these early battles for political reform—if the 1996 election produces a Legislature still hidebound in its defense of the status quo—he will have won a partial victory if he succeeds in transforming the terms of debate. And 1997 will present him with an opportunity to complete the victory. In that year New Yorkers will vote on whether to call a state constitutional convention. Pataki should urge a yes vote and press the convention to bypass the Legislature and write his ethics and process reforms into the Constitution.
To spur economic growth, Governor Pataki must go much further than he has in relieving the state's crushing tax burden. He should propose a truly comprehensive plan that would ultimately slash New York's taxes—both state and local—to about the average of the ten largest industrial states, an overall reduction of some 30 percent. Only if he commits himself to such an overarching goal will the governor be able to face down the inevitable special-interest pressure for more spending.
Critics in the nomenklatura will disingenuously claim that the poor will bear the burden of budget cutting. No wonder: the big-government, welfare-state idea is the philosophy that makes the most money for the insiders. The governor must disarm his opponents by arguing forcefully that New York's welfare-state government has spectacularly failed the poor by feeding the social ills that destroy the quality of life in impoverished communities. He should set forth a new agenda for helping the poor, one that encourages opportunity rather than dependency. It might feature vouchers to provide choice in education and housing, revitalized vocational schools that prepare students for twenty-first-century jobs, and criminal-justice reforms to get predators off the streets of poor communities.
At the same time, Pataki should point out that government can only do so much to help the poor. The problems of poverty and dependency are cultural and spiritual, not just material. And beyond that, in the whole of society, the problems of violence, drug abuse, rapacity, and racism also are primarily matters of values and virtues. Although religious conservatives were the first to thrust values issues into the national political arena, mainstream political leaders, from Bill Clinton to Bob Dole to Bill Bradley, are now addressing those issues in a secular context as well. But no New York politician has stepped forward to do so in a serious way. By broadening New York's political dialogue, now so severely constrained that it seems trivial and irrelevant, Governor Pataki could edify our politics as well as enhance his own image. But if he is to make the moral argument, his administration must be ethically above reproach. The nomenklatura and ideological liberals alike will pounce on the governor if he seems to be lecturing the poor about values while his political cronies feed at the trough of the welfare state.
To vanquish the welfare-state hydra, Governor Pataki must chop off all its heads. That means also repudiating the philosophy of state capitalism that amounts to a vast welfare program for the affluent.
The main instruments of state capitalism are the state's bewildering array of public authorities, whose nominal independence shields them from political accountability. Though, unlike the state itself, they have the power to issue bonds without voter approval—generating tax-free income for wealthy New Yorkers and fees for public finance departments of Wall Street firms—the state is ultimately responsible for the debt they incur. Authorities now account for more than 80 percent of state-supported debt in New York.
Many of these authorities borrow money to "invest" in "economic development." The Job Development Authority issues bonds and lends the money it borrows to businesses in hopes of creating Jobs. Similarly, the Mortgage Assistance Corporation issues bonds, then makes low-interest loans to individuals to build low-income housing. And the Empire State Development Corporation (until recently known as the Urban Development Corporation) is chiefly in the business of subsidizing large commercial developments, including Disney's efforts to revitalize 42nd Street. It 'has the authority to overcome burdens to development by condemning property and overriding local regulation.
No one would ever have dreamed up all these authorities if New York weren't such a hostile climate for business in the first place. Pataki should press for their elimination and for an economic—development strategy based on the simple truth, authoritatively proven by New York's anemic economic performance, that the free market is a far better instrument of economic development than bureaucrats doling out subsidies to favored corporations and developers.
The elimination of these authorities would also force local governments to confront the costs of their numerous unnecessary regulations. It makes no sense for the state to maintain an entity like the Empire State Development Corporation to override other government bodies' regulations. If a city or county wishes to erect barriers to development, that is its prerogative—but state authorities should not help it disguise the consequences of that decision.
Governor Pataki should push for selling off the World Trade Center, Battery Park City, and other such developments that the authorities now own, and use the money to reduce state debt. And he should get the state out of the business of developing office buildings and luxury apartments altogether. Such construction does not produce real economic development. The explosion in financial services, for instance, created a high demand for office space in the 1980s; it wasn't the existence of office space that caused financial services to grow. When the financial services bubble burst, office vacancies in downtown Manhattan soared to 20 percent.
Pataki's vision would be truly visionary if it were to include a desperately needed infrastructure plan to prepare us for the twenty-first century. The government's proper role in economic development is to provide the infrastructure—roads, highways, bridges—that undergird a prosperous economy. But New York has had no major infrastructure development in at least 25 years. To develop an imaginative, well-thought-out capital investment plan free of unsavory influence and political deal making, Pataki should form an advisory panel that represents a spectrum of industries, especially those in the high-growth areas. Most important, the members of this panel must be genuine entrepreneurs, not political insiders.
The governor's challenge is an awesome one. He must persuade New Yorkers to pay attention to state government. He must develop a bold vision to reduce government and transform New York from a welfare state into an economic dynamo. He must risk all his political capital by waging war on entrenched interests, including the State Legislature from which he came.
But it is possible to do all these things: by getting elected in the first place, Pataki has already proved that there is a constituency for real change. To be sure, a forceful, visionary crusade against the nomenklatura has its political risks. But it could also make Pataki unbeatable in 1998—for it is the recipe for a resurgent Empire State.
