Seth Barron and Nicole Gelinas discuss the coronavirus outbreak in New York City, the drastic measures being taken to control its spread, and the consequences of an economic slowdown for the city and state budget, the MTA, and New York residents.
New York—particularly New York City—is moving toward a full shutdown. Over the past week, schools have cancelled classes for an extended period and restaurants, bars, and many other businesses have closed. The historic losses in revenue to the city’s public-transit system alone will require a multibillion-dollar bailout, Gelinas believes. Read more of City Journal’s Covid-19 coverage here.
Seth Barron: Welcome back to 10 Blocks, the podcast of City Journal. This is Seth Barron, your host for today. I'm an associate editor at City Journal. My guest today is Nicole Gelinas, a senior fellow at the Manhattan Institute and a contributing editor to City Journal. Nicole, thanks for joining us today.
Nicole Gelinas: Good afternoon Seth. I hope you're doing well under semi lockdown.
Seth Barron: I'm holding up. I'm holding up as best as I can. Let me just advise our listeners that we are doing this remotely. Nicole and I are each in separate locations. Yes. Nicole, here we are in the first week of New York city under some basically under a kind of lockdown or quarantine. Bars and restaurants are closed, people are advised to work from home, many businesses are closed, what is the impact of all of this and this is happening nationwide now and globally. What is going to be the impact of all of this on key New York city institutions and fiscally, what are we looking at?
Nicole Gelinas: Well, I don't mean to sound too negative but I want people to be aware of the reality of the magnitude of this, which I'm sure many people are already aware but New York city and Paris, San Francisco, the rest of the world really have never really experienced a total shutdown of huge parts of the economy. I mean, if you think back to 9/11, people wanted to go out to bars and restaurants, they wanted to see plays so nothing except for lower Manhattan and they expanded the opening zone every week or so. The city was open and business continued as usual.
Same thing after 2008 I mean we actually recovered quite well from 2008 because we had some things in our favor. We were the center of finance, the financial industry recovered very quickly because of federal stimulus that was pushed through the financial system and in the rest of the country when a lot of people stop going to restaurants stopped getting their hair done and all kinds of service industries suffered a big decline because people were worried about not being able to pay their mortgage, New York didn't really have as much of that because we had global tourism.
China for example, Latin America, a lot of emerging market economies didn't see the crisis that we saw. They came here, they spent their money so we never saw that drop off into retail and restaurant industry and this is very, very different. I mean to think about shutting down the retail, much of the retail industry, the restaurant industry, all of entertainment, I mean all of museums, Broadway, off Broadway, indefinitely but we're probably looking at least a month. This is just an enormous hit, not only to the psychology of all of us but also just to the city and state tax, the situation, the job situation for people out of work and also something like the MTA. I mean the MTA can't last more than a few weeks with taking in a fraction of the fare box revenue.
Seth Barron: Well, let's walk through this step-by-step because you just offered us an enormous encapsulation of a global crisis. Just locally, it's funny because, I don't know funny it is but usually a recession or a recessionary period is driven by a decline in demand but this is weird because here it's the supply that's being cut off. Presumably people still have the demand to go to Broadway shows and to the gym and have to eat but they can't but then I guess this will ultimately cause huge disruptions in the way people live. Talk about the tax revenue. How does New York city function normally regarding ... fiscally, the tax money it takes it and how is this going to impact that?
Nicole Gelinas: Yeah, and I think you're right about ... it's like the supply that has been cut off not demand although over time people in higher earning work from home industries are going to suffer income losses as well. I mean, you have massive turmoil on Wall Street. It would not be surprising for us to see layoffs on Wall Street and the legal industry and so forth, just like we see in any recession but yeah, the issue of tax revenues for let's take the city to start with.
If you look at the 2008 crisis, the city lost about $3 billion in major tax revenues, basically overnight. The tax revenues fell from like $38.5 billion a year to like 35.5 and it took three years to recover. Even though we did better than the rest of the country, we certainly weren't doing very well and we had a sort of defacto wage freeze and that Bloomberg didn't give out new raises to people, job losses obviously but if we were to see that level of tax decline today, it would be well more than $5 billion for the city's budget and if we saw potentially higher than that, you could be looking at very significant hit over 7 even $10 billion hit to the city budget.
In terms of what that means, of course de Blasio spends too much money and we don't start off from this in a very good situation but you don't just want like mass scale layoffs of public employees like we saw in the 70s and 80s that hamper to recovery and so I do think cities are going to need immediate infusion of federal aid. Not really to make them whole but just to stem the crisis. I mean if you think about a city basically not taking in any sales tax from restaurants, not taking in any much sales tax in retail stores, income tax is going to be down, payroll taxes for the MTA is going to be down. These are significant revenue hits and we just don't really know how long they'll go on.
Seth Barron: Well, the city under mayor de Blasio ... and mayor de Blasio, as we've both talked and written about, has been very lucky in that he's had increasing revenue over the last six or seven years. He's always been able to increase the budget. The budget's going up like, I don't know, $20 billion a year ... I mean $20 billion since he came into office. Now, can the city run deficits the way that the federal government does or is that off the table?
Nicole Gelinas: No, the city really can't run an operating deficit. There are immediate things it can do in a crisis, which are not wise but I guess in some cases they're better than the alternative. I mean, they've got a reserve of $4 billion for future healthcare benefits that they're supposed to pay as people retire from the city workforce over the coming decade. They could spend that now but that means they have less money for later. Things like suspending payments to the pension fund. I mean in an extreme situation they could do those things. The MTA could do those things but they're not really very beneficial in the long term.
Seth Barron: You were talking about the MTA. I read that ridership is off maybe 1/3 or 1/2.
Nicole Gelinas: I think it's higher now. The last number I saw was from Friday when the MTA said soundbite close to 40% on Friday but if you think about the big change in street traffic from Friday to today, I think when they released the week's numbers they won't be a very good.
Seth Barron: What does that mean? I mean to what extent does the MTA actually depend on the fare box? I mean we always hear people saying that the MTA could just make everything free because the trains run anyway. Do they really need the money that people use? I mean that people spend to buy Metro cards?
Nicole Gelinas: Well, yeah. I mean if you take a typical month, like the month of March, which the MTA estimated before this crisis happened, they were going to take in $750 million in fare and total revenue and then another $861 in taxes and subsidies. If you were to say the fare revenues are going to be cut by 20%, the MTA and then the tax revenues could fall down potentially by the same, looking at their total expenses for the month, which are $1.5 billion but if none of this had happened, they would have ended the month with a cash surplus of $100 million which you would think is good but they need that money to smooth out other deficits in other months during the year but if they saw a 20% drop, which is very conservative, they'd be looking at a quarter of a billion dollar deficit just for the month and if they saw a 40% revenue loss, which is certainly not out of the picture, they'd be looking at a three quarters of a billion dollar deficit just for one month.
They can't really survive two months of that. I mean, if this goes into like late April, they're really going to be in dire streets. I mean, yes, there's some things they can do like again, suspend payments, independent fund, draw down on a letter of credit that they have, which is borrowing. I mean, that would not be a good idea in any other circumstance but they can't just sort of run service and not have passengers for very long at all.
Seth Barron: What is the upshot here? I mean the city also has the MTA, the city employees, the city and the MTA have their own payroll to meet. Are they going to have to lay people off? Is that actually tenable, politically?
Nicole Gelinas: I think we really are going to need substantial federal operating aid. I mean, I'm not one to go around suggesting that most of the time I think the problems that the city brought upon itself after 2008 should have really fixed most of those problems itself but I think this is a different circumstance. Yeah, I mean if you thought about like laying off or really furloughing under the contracts thousands of MTA workers that just kind of makes the immediate crisis worse because you don't want to like start up a recovery with train service that's running significantly before we were running the crisis because we just don't have enough money.
Seth Barron: What are some of the ... I mean you were talking about federal intervention. I mean, could the state step in and assist the city or is the state also going to be in a bad position?
Nicole Gelinas: Yeah. I mean [inaudible 00:00:11:59], McMahon, our colleague could certainly talk more details on the state picture and has written somethings but I think the state is basically in the same picture as the city looking at massive revenue drops so not in a lot of position to, to be giving out new money and remember like after 9/11 and after 2008, we dealt with these crises in part by raising taxes but I think a lot of businesses and people will need substantial tax relief. I mean we should be cutting state sales tax, cutting the city's commercial rent tax, like increasing taxes on people when they're really suffering comeback is probably not a very good idea. Let me ask you a question if you don't mind?
Seth Barron: Sure.
Nicole Gelinas: Talking about leadership in terms of, we have a governor, Governor Andrew Cuomo, we have a mayor Bill de Blasio. Do you think that either one has stood out as doing a good job, a bad job, who's taking the lead here in terms of like the always fight between the state and the city over who's in charge of the city?
Seth Barron: I haven't been very impressed with de Blasio. I mean he can kind of put up a good show and when you listen to him, he sounds like he's really engaged but then it really seems like he's not getting it. I mean more than a week ago now, he was talking about how the St. Patrick's Day parade was going to go ahead as planned come hell or high water but even at that point it was clear that was a bad idea and then it was canceled ahead of time but it sort of felt as though somebody else was putting the squeeze on him and then last week he was saying that the schools, he couldn't close the schools because so many families depend on the schools for free meals and other services.
Seth Barron: This advocate for the hungry told me that during the summer only 15% of kids who get school free lunch during the year go and get it during the summer, which indicates that the free meals program is very important and I'm not going to say that it's not an essential program but at the same time, I think to a certain degree it may be more of a convenience than a dire necessity that if only 15% of the kids are going to get the free meal during the summer, presumably the other 85% are managing and not starving to death over the summer.
Keeping schools open just for the sake of offering the free meals, it didn't seem like a very farsighted way to look at it. I felt that de Blasio could have grokked that there must be a work around and in fact there was, they figured out where they can still make the meals as like grab and go, which is what they're doing but clearly Cuomo, it seemed was going to close the schools so de Blasio jumped ahead of it. Then Blasio was dragging his feet on shutting bars and restaurants, even though everyone was saying it was a good idea and other places that done it, places that are less badly hit the New York city with the virus and de Blasio was just kind of sort of making light of the situation.
Reporters were asking him about it and he was saying, "Well, just make sure if you're going to your favorite bar just to socially distance there." But this was right before St. Patrick's Day and he was planning on keeping the bars open even though it was clear that St. Patrick Day becomes ... tons of mobs of drunk people. Obviously they're not going to practice social distancing. It would just be a very bad scene.
Governor Cuomo I think has done a reasonable job of acknowledging the gravity of the situation but he too he's playing it up a little bit. He closed the schools, he's closing the bars and restaurants but at the same time he's sort of pointing fingers at the federal government and there's kind of a blame game going on but look, I'm not going to say that the president is doing a phenomenal job of leading us either. This is a very strange situation and I'm not sure anyone really knows what to do.
What's your take, Nicole, on where things are going in the future? I mean you've written a lot about Rikers Island and the plan to close Rikers Island, which in the last year or two became this ... all of a sudden this became a major imperative. First from social justice and anti incarceration people and then it just took on a life of its own and now there's this huge plan to close Rikers Island and build borough based jails but you were indicating that the fiscal problems that are sure to arise from the virus are going to the [inaudible 00:17:49], on this plan. Can you elaborate on that?
Nicole Gelinas: Yeah. I mean building for borough jails supposed to cost $9 billion so it's an enormous percentage of the city's capital plan. I mean if you think about the other big priorities that we have, like we building the Brooklyn Queens expressway in some form so that it doesn't fall down, if we're looking at a year from now, are we going to be able to spend this enormous amount of money on building four borough jails?
Now of course the jails, they're susceptible to virus like any institutional setting and so probably smaller cells with fewer people congregated together would do something to stop the spread of the virus if it does start to spread on Riker's Island and actually we had a 56 year old corrections officer die of the virus yesterday. He was the first active city ... we'll hopefully the only active city employee to die of the virus but you could build better jails on Rikers Island and likely do it more cheaply. I mean, it's not going to cost like $1 billion but you could probably get the cost to down to like 6, $7 billion with the cheaper cost of construction in a less populated environment in build jails that are less susceptible to infection. It's not the location that's important. It's the design of the jail.
Seth Barron: You're a student of city life and transit, bicycling, construction, building, how is this going to change or if it will change, how is this going to affect the way New York city functions going forward? I mean, maybe it won't. Maybe this will all blow over but it seems like you said, this is absolutely unprecedented that the whole world is coming to a standstill in an effort to, as they say, flatten the curve of the rate of infection. All of these social distancing measures, what do you think this is going to do? What is it going to be like to live in New York city going forward?
Nicole Gelinas: Well, I think talking longterm and you can tell me what you think too, but I think the good news is that this has kind of shown that people like to be together. I mean lot of people are working from home. I know that we're lucky to be able to work from home rather than have to brave the subways and do difficult public facing work but people don't really like working from home. I mean maybe it's fun to do once a week to shorten your commute or work sometimes shorter days or so forth and do a little bit of work at home at night but to sort of sit at home all by yourself in your house. I mean for days on end is not all that fun and so I think people will actually want to get back to being in more groups of people in the workplace and also things like groups of people in a restaurant or seeing a Broadway play. I mean, I think it's true that people kind of miss this. I don't know. You agree or disagree?
Seth Barron: Yeah. I agree. It's frightening times to walk down the street and everybody's trying to hustle to avoid each other and all of this fear and honestly, I have to say you and I and maybe other people in our position are very, very lucky to be able to work from home. I mean, when I think about the tens of thousands of people in New York city who whose livelihood depends on interpersonal interactions like barbers, manicurists, waiters, people who work in the theater, ushers at the movie ... I mean gym, people who work at gyms, I mean the list goes on and on and on of people who are going to be so negatively affected by this. It's really horrifying to think about ... and these are people who don't make necessarily a lot of money, probably don't have a lot in savings and they're going to face immediate ... they're going to suffer immediately. It's terrifying. I don't know.
Nicole Gelinas: Yeah, it is and I think that that's also where the federal aid comes in. I mean, I wouldn't call it stimulus because we're not really stimulating anything. It's just things like unemployment benefits. I mean, the top unemployment benefit in New York state is $500 a week so that doesn't replace people's full income that they lose. I think the federal government should probably top up the state unemployment insurance so it replaces most of people's lost income, do something for freelance workers in all different types of industries who might get paid by the day. Kind of compare their income from last March to this March and have the federal government offer a sort of subsidy of that for a little while. Not only because you want to help them, which of course you do but also because it avoids a bigger financial crisis. Like if you start to see people default on their credit card debt and auto loans and all that stuff you can make it worse if you don't act quickly and decisively.
Seth Barron: And think about, say a restaurant has to shut down for a few weeks or a month and can pay its rent. Well, then you have the landlord, the building owner who has mortgages, has a mortgage to meet. Say he goes into default and then banks ... I mean, it really can spiral. I suppose this really could turn into the depression. I mean, it's a horrifying thought but I mean ... look, I mean, let's hope that careful federal intervention and maybe warming weather if that helps could get us out of this quickly and we can try to return to normal and patch things up but it's a very frightening time.
Nicole Gelinas: Yeah. I mean, I guess if you say no one knows what's going to happen, I guess there's a chance that things work out better than we think that this weakens as it passes through the population. We're obviously not doctors but that happens sometimes where we get a vaccine up much more quickly than the government saying 12 to 18 months but I mean, there's certainly hope that those things could happen.
Seth Barron: Indeed. Well, Nicole, I want to thank you for coming on the show.
Nicole Gelinas: Likewise.
Seth Barron: And to all of our listeners, this has been 10 Blocks, the podcast of City Journal. You can check us out on Twitter at #10blocks. If you like the show, please leave positive reviews on iTunes and we will be back next week with another episode of 10 Blocks. Thank you very much, Nicole.
Nicole Gelinas: Thank you, Seth.
Photo by cmart7327/iStock