Columns

Stephen Kagann
Vital Signs: Why New Yorkers Pay More
Spring 1993

It is hardly news that New York is one of the nation’s most expensive places to live. What may come as something of a surprise, though, is just how costly New York is: The cost of living is more than twice as high in the Big Apple as in the average city, according to a survey of 286 U.S. cities conducted by the American Chamber of Commerce Research Associates.

The survey examined living costs for typical city dwellers in middle-management jobs. It found that virtually everything costs more in New York City: Groceries are about 40 percent more costly than in the average city, transportation about 30 percent, and “miscellaneous goods and services”—everything from toiletries to clothing to entertainment—about 40 percent higher. But three categories of expenses contribute most heavily to the city’s high cost of living: housing, which is a staggering four times as costly as the national average, and health care and utilities, each about twice as expensive in New York.

It is easier to grasp just how expensive New York is when these figures are put in dollars-and-cents terms. For example, the monthly rent for a typical two-bedroom apartment in the Chamber of Commerce Survey is $1,935 in New York; $480 in the average city. The typical New York family of four pays $43.54 a month for its local phone service, compared with a nationwide average of $19.36. And a routine visit to the dentist’s office costs $85.00 in New York City, versus $44.37 in the average city.

One might expect that economies of scale would result in lower prices in the nation’s biggest city. In some fields, this is true: Because their airports are so heavily trafficked, New Yorkers pay less for air travel than people in many smaller cities, and the competitive New York market means consumers pay less for TVs, stereos, and other electronic products.

On the other hand, the prevalence of apartment living and mass transit in New York reduces the use of energy, which should result in lower costs. Yet the average monthly household energy bill is $213.50 in New York; $110.71 in the average city. And not only are auto fuel and maintenance more expensive here than elsewhere, but the $1.25 bus fare is well above the average of 89 cents among those cities with public transit systems.

Even New York’s severe economic slump has not provided relief from high prices. Under normal circumstances, prices tend to move in tandem with the business cycle—that is, when the economy is declining, the lower demand for goods and services pushes inflation down. But New York is an exception to this economic rule: For the last four years, inflation has continued to run higher in New York than in the rest of the country, even though the recession has been far more severe here.

Inflation is tracked using the Consumer Price Index (CPI), which is defined and measured by the U.S. Bureau of Labor Statistics. The CPI is initially set at 100, reflecting price levels during a “reference base period” (currently 1982-1984) and is adjusted as prices go up or down. The New York regional CPI, for example, was 151.9 in December 1992; prices had gone up 51.9 percent since the base period. By comparing the New York area CPI with the nationwide CPI (which was 141.9 in December 1992), we can see how much “excess inflation”—increases in prices over the national average—New York is experiencing. It is important to note, however, that the CPI measures only the rate of inflation, not the cost of living itself.

The chart nearby shows the ratio of the New York CPI to the nationwide CPI from 1968 through 1992. When the line is moving up—as it was until 1973 and has been since 1982—inflation in the city is higher than in the rest of the country. During the periods 1969-1974 and 1989 to the present, prices were rising more quickly in the city than in the nation as a whole, even though during both periods the city was in a severe recession while the national economy was either growing or declining much more slowly than New York’s. Why is this so?

A study I conducted along with Zheng Gu, an economist in the Office of the City Comptroller, found that most of the city’s excess inflation is accounted for by two variables: the growth of local government employment above the national average and increases in property tax revenues. Both are measures of the high cost of New York’s city government, the biggest in the nation.

State and local taxes are 55 to 80 percent higher in New York than in the rest of the country, depending on how they are measured. Some of these taxes—on personal income and sales, for example—are borne directly by consumers. But most are invisible to the average New Yorker, because “someone else” pays.

Yet these taxes are ultimately passed on to the consumer in the form of higher prices. Tenants pay more because of the high property taxes on apartment buildings; taxes on businesses—the commercial rent tax, the corporate income tax, and the commercial property tax—are passed along in higher prices for goods and services. The property tax is particularly important because it directly affects housing costs, which account for an unusually high portion of the cost of living in New York.

The increasingly high cost of living in New York is due primarily to the fact that, unlike other local governments, the city has usually failed to cut—and has often expanded—its municipal spending, employment, and taxes even during recessionary times. A shrinking private sector has been forced to raise prices in order to support a growing public sector. This becomes a vicious cycle, as higher costs magnify the pain of a recession and give businesses an incentive to locate elsewhere, putting more New Yorkers out of work. Ultimately, a prolonged deflationary period is necessary to bring prices down to a competitive level.

There was one such deflationary period before: between 1974 and 1982. To bring prices down then took not only a severe and prolonged recession, but also a fiscal crisis that forced the city to cut its government spending and employment. Unless New York’s leaders get serious about reducing the size of city government, breaking the cycle of inflation and recession will ultimately be even more painful than it was in the 1970s.

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