It is impossible to overstate the danger facing New York right now. The city confronts obvious problems that the September 11 attack precipitated: a devastated downtown, thousands of businesses struggling and some leaving, a steep drop-off in visitors and consumer spending, and a national recession, to the especial detriment of the financial industry that is the city's top economic dynamo.

But in addition to these woes, the big government, high-tax solutions that lie at the heart of the city and state's traditional political culture are sure to compound the problem. These are the measures that produced economic catastrophe in the early 1990s, when the Cuomo and Dinkins administrations heaped higher public spending and tax increases onto a local economy buffeted by the Gulf War and a national economic slowdown, turning a mild downturn into a three-year recession that drained the city not only of jobs but of much of its fighting spirit.

To stave off disaster—to prevent jobs and residents from fleeing the city, crippling the local economy for years to come—political leaders at the state and local levels need to consider carefully their solutions before they push New York off the precipice again. Here's what they need to do to rebuild the city—not just downtown but the whole economy—quickly and intelligently, and here are the reasons to think such a plan will work.

Let's make City Journal's assumptions clear right at the start. The terrorists hit a city that was at the top of its form. Its economy had been on a supercharged seven-year run that was only just beginning to cool along with the weakening national economy. The expansion, which produced 430,000 new jobs, transformed New York. Wall Street firms re-committed to the city as the world's financial capital—expanding by 55,000 positions in the 1990s—and significant new players crowded in, including technology entrepreneurs who came here with daring ideas and the capital to pursue them. Well-chronicled declines in crime sparked a tourism boom, prompting restaurants and hotels to hire more workers than ever. Safer streets also ignited business activity in neighborhoods throughout the outer boroughs that hadn't seen significant local development in decades. The number of residents with jobs was at an all-time high—and the city was poised for new rounds of growth when the national economy rebounded.

All that the city needed to take it to a higher level of employment than ever in its history were the new offices and apartments to house the new New Yorkers who seemed certain to keep crowding into the world's opportunity city. Without the buildings, renewed expansion would fizzle when it drove rents on available space so high that the city would become truly uneconomical for new businesses and entrepreneurs to consider.

As we think about how to proceed, we have to look beyond our current anxiety and apprehension and approach the rebuilding with the optimistic confidence that the fundamentals are in place for the opportunity city to recover and rebound. We have no reason to think that New York will not remain the capital of the twenty-first century, as it was of the twentieth. Nothing we decide to do must impede that recovery, fueled as it must be by the energy of free-market entrepreneurs. We must do nothing out of fear that our city is crippled or mortally wounded, needing some kind of government-funded life support. Such defeatism would be an admission that the terrorists won a victory. They did not.

To clear the way for the city's natural energies to reassert themselves, the first, most urgent task is to replace the 18 million square feet of modern office space lost in the attack, so that companies wanting to be in New York have somewhere to go. Building the necessary space doesn't mean providing more lavish subsidies to developers; it means clearing away the choking jungle of impediments to private builders that New York has allowed to grow up over decades. It means, above all, getting government out of the way. This task was a priority before the attack; the current crisis needs to focus policymakers' attention and political will on what has now become a matter of the utmost urgency.

The office space we need right now can't rise on the World Trade Center site: clearing away the rubble and rebuilding the infrastructure there will probably take a year, and no construction can begin until that's done. To produce the space we'll need soon, when the national and local economies begin to recover, we must at once accelerate the big projects throughout the city that are ready to start construction but are awaiting city approvals for the 7.5 million square feet of commercial space they will build.

The dozen or so such projects—such as the mixed-use development that a group led by the Fisher Brothers plans for the huge site of a former Con Ed plant on the East River near the U.N.—would normally face two to four years of waiting and millions of dollars in costs to go through the city's planning and land-use process, to obtain permission to build the modern, economically viable structures that Gotham's rigid, antiquated zoning code discourages on many likely sites. In this process, once the city's Planning Commission gives its go-ahead after months of waiting and study, myriad local groups get to put in their two cents: the local community board alone gets two months to review the project, for instance; the borough president gets another month. If either disapproves, the whole project gets thrown into the city council for more consideration and a vote. When developers modify plans to meet community objection—that a project is too big, say, or isn't what the neighborhood needs—the whole land-use review process goes back to Square One. [See "Why Gotham's Developers Don't Develop," Autumn 2000.]

It is a process that seems designed expressly to prevent rather than to facilitate development—and it needs radical reform. The city must sharply curtail the period that any government body can take to review a project and mandate that the entire process must last no longer than one year—at most—from start to finish.

Even more important, the city must immediately rezone its large tracts of developable land, such as Manhattan's Far West Side, where only small buildings are now allowed, or the Brooklyn and Queens waterfronts, which are limited to manufacturing uses, so that developers can build office and apartment towers there "as-of-right," without the need to have every individual building go through the labyrinthine approval process. Even before the tragedy at the World Trade Center, momentum was growing to rezone the area west of Ninth Avenue, from 28th Street to 42nd Street, to permit the building of giant office towers. Today, this area—one of the few sections of Manhattan largely untouched by the nineties boom—resembles the district around the World Trade Center before the towers were built in the 1960s: a mishmash of small businesses like auto-repair shops, along with swathes of government-owned land. The city estimates that the Far West Side could become a third great Manhattan business district, with more than 30 million square feet of new, modern office space. If it were rezoned, builders and their lenders would be free to figure out when the market was right to build, and what the market wants.

Beyond zoning intelligently, the proper role for government is to build the infrastructure that allows private-sector development to take place. On the Far West Side, government should extend the Number 7 subway line down Eighth Avenue to 34th Street and then west to Ninth or Tenth Avenue, and it should extend the Long Island Railroad there, too, beyond its current terminus at Penn Station. Many of the necessary tracks and tunnels for this project already exist. This estimated $2 billion infrastructure investment would generate a tremendous increase in business activity (and tax revenues), and it would be a signal of confidence in the city's continued economic growth. As a precisely targeted part of its reconstruction aid package to New York, sure to promote recovery, Washington should—in exchange for the city's rezoning the Far West Side—earmark federal mass-transportation money for this infrastructure project. Meanwhile, to facilitate development of the area right now, the city should accompany its rezoning with greatly increased bus service to the area.

What, then, about Ground Zero, the World Trade Center site? Already, federal, state, and city officials are wheeling and dealing to figure out who will manage the process of replacing these towers. The federal government will, and should, demand some say in the rebuilding because of the vast sums it is providing for cleanup. The state already has in place the much needed tax incentives that will make building and luring tenants easier, and it has the power of eminent domain that could be necessary to sort out the complex ownership issues on the site. The city has its own tax incentives in place, and it has the planning and zoning powers necessary to make the changes downtown that might be necessary for redevelopment.

A few clear principles need to emerge from all this political maneuvering. Above all, despite the endless talk right now about setting up a special government authority or commission to conceive and carry out the rebuilding, no government agency or authority, new or existing, should under any circumstances be put in charge of planning or executing the project. That way lies disaster. The result will be political infighting and paralysis. If something finally does get built, it will rise years too late, at much too high a cost, and will probably bear no relation to what the market needs.

A scary, monitory example of what results when such authorities run a major building project is Queens West, a joint effort of the Port Authority, New York State, and New York City—precisely the likely members of the government authority that the political class envisions as the rebuilder of the WTC site. Conceived in 1983 as a massive redevelopment project to energize the Queens waterfront, Queens West has succeeded in 18 years in constructing one building—an apartment tower—on a 74-acre tract suitable for 15 apartment and four office towers.

Meanwhile, across the Hudson on the Jersey City waterfront, one builder, Samuel LeFrak, has managed in less time to construct nine apartment towers with 3,800 units, six office buildings for 14,000 workers, a hotel, a shopping mall, a marina, a heliport, a ferry slip, and a health club—a whole town, in short, called Newport City. By contrast with the "political gridlock" that has paralyzed development in New York, according to LeFrak, business-friendly New Jersey officials spent several years negotiating the details and approvals for the project with him but then left him free to construct buildings in rapid succession on the massive site as the market improved and demand increased. Several similar developments are the reason that firms displaced from downtown on September 11 fled to New Jersey: the available modern space was there, not in New York. And 15 million additional square feet of space are slated to rise there soon, too.

The original World Trade Center was the quintessential New York–style centrally planned government-authority project—ill-suited for the marketplace and unsuccessful for years despite its heavy state subsidies [see following article, page 22]. The Port Authority intended it to turn the district into a hub of international trade and thereby re-energize the region's struggling ports. But the towers never fulfilled that mission, and the millions of extra square feet they added to the market actually depressed downtown's commercial real estate for years. As late as 1995, the towers were 16 percent vacant. But when the city's economy took off in the mid-1990s, prime office space became scarce, and the Twin Towers finally emerged as key components of downtown's revival, providing 44 percent of all the modern office space available in lower Manhattan.

Governor Pataki, therefore, who controls half the Port Authority's board and appoints its executive director, will need to use his leverage to get the Port Authority out of the rebuilding of the WTC site. The Port Authority should never have gotten into the real-estate business in the first place, and its role as a bi-state agency makes it an inappropriate player in New York–based projects, especially now that the agency will have its plate full ensuring security at the area's airports, bridges, and tunnels.

The governor also will need to limit the role of the state's Empire State Development Corporation, the successor to the Urban Development Corporation, notorious for mismanaging everything from the Times Square renewal project to the construction of the Javits Center, a case study in cronyism, price fixing, Mafia involvement, delays, and cost overruns in the hundreds of millions of dollars. Soon after the bombing, state economic development czar Charles Gargano tactlessly rushed to claim primary author-ity for the state in the redevelopment effort, while various other officials have squabbled, in a way that is disturbingly reminiscent of former battles, over the makeup of a proposed city-state authority designated to rebuild the area.

With the whole world watching, New York and the nation dare not let the rebuilding of downtown turn into a debacle like the original construction of the Twin Towers and other big development projects that the state and city have mismanaged. New York does not need or want a government-planned, government-financed, and government-controlled rebuilding effort. Here is what government should do—and all that government should do.

First, the federal government should provide the capital to clean up the site and ready it for rebuilding, just as it would with any disaster-relief effort. Washington should provide the funds to rebuild the surrounding infrastructure, too, including the demolished subway tunnels and stations and the PATH station serving commuters from New Jersey. The feds would also do the WTC area an incalculable favor by providing mass-transit financing, if available, to extend MetroNorth train service from Grand Central to downtown, which currently has no direct commuter rail lines.

Federal aid should come with the maximum number of strings attached, as a way of forcing New York to make long-needed, and long-resisted, reforms in its How-Not-to-Do-It approach to redevelopment. Washington should appoint a federal rebuilding czar with the ability to sweep away impediments to reconstruction and resolve disputes that lead to gridlock. It should also set and enforce strict deadlines on spending the money it sends to New York, especially for infrastructure projects, so that the rebuilding does not get entangled in the kinds of local squabbles and indecision that have plagued big projects like the Columbus Circle redevelopment. To ensure that the rebuilding process is not corrupt, the feds should charge the General Accounting Office with auditing what happens to federal aid dollars, and it should also direct the U.S. Attorney's Office for the Southern District of Manhattan to monitor the rebuilding closely, to minimize the mob influence so pervasive in the New York construction industry.

It will fall to city and state agencies—the Metropolitan Transportation Authority and its subsidiaries, above all—actually to carry out the infrastructure rebuilding projects, and these will be massive undertakings. City and state officials, along with New York's congressional delegation, will have their hands full with making the case in Washington for generous help in rebuilding the infrastructure. But beyond that, city and state officials' main task ought to be preparing the way for private developers to build whatever the market wants at the site as expeditiously as possible. The 1995 downtown revitalization plan's generous tax breaks for redevelopment are still in place; the city and state probably need to offer few, if any, further sweeteners.

The ownership issues at the site are presently murky, and here the governor, armed with the state's power of eminent domain, will have the ultimate authority to clarify matters. Once he has eased the Port Authority, the owner of the land, out of the picture, he needs to make sure, possibly by using his powers of condemnation, that Larry Silverstein, who recently purchased a 99-year lease on the Twin Towers (but did not own them or the land beneath them), does not automatically become the site's developer. Insurance will cover Silverstein's losses and allow him to pay the remainder of the $3.2 billion he owes to the Port Authority. The billions of dollars that government will spend to clean up the site—far beyond what Silverstein himself could pay—makes it imperative that the redevelopment process gets opened up to other major developers to propose the best market-driven alternatives.

To allow whatever rises on the WTC site to be more in line with what downtown has become over the last decade—a 24-hour community, where offices sit side by side with residences, as in urbanist Jane Jacobs's vision—the new mayor and city council should reconstitute the street grid, providing thoroughfares through the neighborhood. The shops and restaurants encased in the plaza under the old design can emerge at street level, providing a continuous line of stores, eateries, and other amenities throughout much of the area, drawing people into the district, reviving its street life, and providing Jane Jacobs's "eyes on the street," day and night. The city can also connect this new district to Battery Park City by rebuilding West Street, the quasi-highway that cut off Battery Park City from its neighbors, into a classic, pedestrian-friendly city boulevard, like Park Avenue. An urbanistic monstrosity, the inhumanly vast, featureless Twin Towers, on their windswept raised plaza-often empty (especially on weekends and evenings)-had been a 12-block-square barrier to foot traffic, a forbidding island of central planners' relentlessly aggressive gigantism and sterility right in the middle of a resurgent, human-scale, vibrant downtown.

As to what exactly should go on those new streets, the city and state should appoint a small group of mostly private-sector leaders—real-estate executives, New York City CEOs, civic panjandrums, architects, and urbanists—to a special task force to solicit ideas on redevelopment and then select a developer or team of developers to carry out the entire process, without needing a constant stream of approvals from government for each stage in the rebuilding. (Doubtless the federal government, the Port Authority, and Silverstein's insurer will contest who should get the money that the winning developer pays for the site.)

The site, once rejoined to the city grid, can easily accommodate ten or more 60- to 75-story towers that could provide half again as much square footage as the 12 million square feet lost in the World Trade Center buildings alone. It can house a hotel and apartment towers, cultural and entertainment components, perhaps a museum, a theater, or a movie complex, if the market demands them. The designated developer will get to determine all that. But City Journal believes that the new development should center on a memorial to the thousands who died in the attack, a two-block park or mall, with monuments linked architecturally to the surrounding buildings. [See "What Should Rise from the Ashes?" page 30.] Not only will it commemorate the dead, but it will be an amenity on the order of Bryant Park or Rockefeller Center's Channel Gardens, improving the quality of life of those who work and live there and boosting real-estate values. As it is a monument to those killed in war, the feds should contribute to its cost, and it should rise as soon as the site is cleared, a symbol of our intention to rebuild.

Done correctly, the redevelopment can give the city a huge boost. "People worry about downtown dying because of what happened to the trade center, but I think the potential is for a better downtown, with newer, more attractive, technologically sophisticated buildings," says Marc Goloven, a regional economist for J. P. Morgan Chase. "This could become the premier destination in New York."

All these issues are contentious enough, but the second great challenge facing the city is even more contentious—and more immediate: how do we craft a fiscal policy that will keep companies and jobs from fleeing New York, deepening and protracting the recession that has already begun? How to do that is not rocket science, and business-friendly cities across the land will readily give you the recipe. The real difficulty in New York is convincing the political class, including the likely next mayor, of the crucial importance of that task. Let's start with the recipe, then turn to the argument.

Prior to September 11, the city's economy was slowing but still outperforming the nation's. Now, however, virtually every major industry in New York is slumping, and the local economy needs tax cuts to give it a jolt. Reducing real-estate taxes is imperative—especially the commercial rent tax, which exists nowhere else in America and adds to the cost of companies doing business in Manhattan at a time when the city faces a corporate exodus. This tax—which inflates the cost of renting space in midtown and downtown by 3.5 percent, or several million dollars a year for big corporations—needs to be abolished forthwith.

Tourism, a major local industry hit hard by the slump in travelers, needs the next mayor to cut taxes on visitors. Mayor Giuliani demonstrated to great effect the benefit of cutting hotel taxes: in 1992, the city collected just $110 million from its hotel tax; last year, with Giuliani's lower rates helping to attract more out-of-town visitors, the hotel tax collected $235 million. New York's politicos have trouble understanding the underlying logic of such tax cutting: "People come to New York because they want to, not because of the cost," asserts Democratic Assemblyman Herman "Denny" Farrell, chairman of the Assembly's ways and means committee, making an error typical of the local political culture. The next mayor should hack away at the city's hotel tax. If he can't persuade the State Assembly to go along with such cuts, he should use much of the hotel tax revenues to bolster tourism by heavily promoting the Big Apple around the world, something other cities do far better than New York. "Discretionary visits to New York make up 40 percent of tourism here," says Tim Zagat, chairman of the city's visitors and convention bureau, "and that's what's most vulnerable right now; so anything the city can do to mobilize so that it holds on to these visitors is important."

The sales tax on clothing should drop into the ragbag of history, a move that Mayor Giuliani proposed and Albany rejected. Twenty months ago, after Giuliani lobbied long and hard, the state eliminated that tax on purchases of up to $110. In the year following the cut, the city's sales tax revenues jumped by $52 million, or nearly 4 percent, as New Yorkers stayed in town to shop—for taxable as well as untaxed items—instead of shopping in New Jersey. As a result, employment at stores that sell apparel in New York City has increased by about 7,000 jobs, or 12 percent, a far bigger gain than during any comparable period.

Tax cuts, Mayor Giuliani said after the bombing, would help restore confidence in the city: "When businesses think about whether they should stay here, or come here, we want them to know that we have a government that understands how a city economy works, rather than a government that's going to oppress its economy."

Although New York is likely to receive substantial federal help in paying for the lower Manhattan cleanup, the city's budget will still feel a deep impact from reduced tax collections resulting from business interruptions caused by September 11, even without the tax cuts suggested above. That will leave the next mayor facing a real budget gap of up to $2 billion, although estimates double that amount are being made by those seeking higher taxes and more federal aid. Doubtless city hall will ask Washington to replace lost tax revenues, but the feds should adamantly refuse. Just as New York has a dysfunctional real-estate development system and a corrupt construction industry, which Washington should not nurture and perpetuate, so too the federal government should not conspire in maintaining Gotham's overmanned and legendarily inefficient government.

Ideally, the next mayor would use the present crisis to press for money-saving reforms that the city should have undertaken long ago. New York needs to drive down its labor costs by shrinking its bloated municipal workforce and winning the kinds of productivity gains that transformed private industry decades ago. Mayor Giuliani won hundreds of millions of dollars in labor concessions during the first year of his tenure, when he inherited a $2.3 billion budget gap, and the Citizens Budget Commission—a fiscal watchdog group—has identified more than $1 billion in future potential savings from productivity gains, changes in worker benefits, and other contract changes. The city's agreement with its biggest union, DC 37, representing 125,000 workers, expires on June 30, providing the next mayor with the chance to win productivity improvements, including pay increases based on merit rather than seniority. The teachers in the city's astonishingly dysfunctional and low-productivity system are working without a contract, and any pact with them needs to include major productivity improvements that offset the cost of raises to the budget. The next mayor will also have to break the cycle known as "pattern bargaining," in which all city workers are given the same contract, instead of the city's heroic police and firefighters getting more than its clerks, sanitation workers, and so on.

If the next mayor fails to display fiscal prudence and drives the budget into deficit, Governor Pataki should not hesitate to put the Financial Control Board, a legacy of the 1970s fiscal crisis that has oversight of the city's budget, in charge of the city's finances.

Trouble is, New York doesn't think this way. Given the city's political culture, the next mayor will find it difficult to cut the city's workforce and spending as quickly as is necessary to help the economy revive.

In fact, that's exactly what happened the last time Gotham faced a similar crisis—and catastrophe ensued. If the next administration fails to administer this tough medicine, it risks a repeat of the early 1990s, when the Dinkins administration, fresh from signing a rich new teachers' contract, enacted $833 million in new taxes, and Albany heaped on $1.4 billion more in a massive budget bill dubbed "The Big Ugly." No set of tax increases could have been more ill-timed. Just weeks after most of the levies went into effect, Saddam Hussein's troops stormed into Kuwait. As the world went to war, and the New York economy plunged into a deep recession from the accompanying business slowdown, the talk at Gracie Mansion and in Albany was of how to raise even more revenues through still higher taxes. Mayor Dinkins even proposed hundreds of millions of dollars in higher property taxes while Operation Desert Storm was in full swing—and when he enacted them, Gotham lost 283,000 jobs in 1991 and 1992, unprecedented for an American city.

Even faced with such utter devastation, New York's prevailing political culture refused to acknowledge that tax policies mattered. After a decline of 3 million visitors to the city in 1991, for example, hotel owners and labor leaders in the tourism industry pleaded in vain for a cut in the hotel tax, which had been raised to the highest in the world before the Gulf War broke out. "In the early 1990s," says Marc Goloven, the J. P. Morgan Chase regional economist, "the overarching philosophy of government in New York was that the private sector was there to fund the public sector at all costs—even if the cost was horrendous in terms of job losses."

Rudy Giuliani administered a far different tonic when he took office in 1994, and his tax cuts generated a boom in employment—including some 80,000 to 100,000 jobs attributable to state and city tax cuts, according to a Manhattan Institute study by E. J. McMahon. But the city's political establishment just doesn't get it. In the wake of the WTC attack, Democratic mayoral candidate Fernando Ferrer repeatedly suggested reinstating the tax on commuters—even as companies were already considering pulling those jobs out of the city, anyway—while the nominee, Mark Green, postponed but did not relinquish his $1.2 billion wish list of government spending.

The Democratic candidates' aggressive policy of taxing and spending would have spelled trouble for the city's economy before the Twin Towers fell. But now, it promises a replay of the disastrous early 1990s, wiping out all the hard-won gains of the last eight years. Let's hope the new mayor can learn from history instead of condemning New York to repeat it.

Research for this article was supported by the Brunie Fund for New York Journalism.


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