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Right Facts, Wrong Conclusions

eye on the news

Right Facts, Wrong Conclusions

A new book compellingly chronicles New York City’s fiscal crisis but misreads the lessons. July 14, 2017
Economy, finance, and budgets
New York

Fear City: New York’s Fiscal Crisis and the Rise of Austerity Politics, by Kim Phillips-Fein (Metropolitan Books, 416 pp., $32)

Kim Phillips-Fein has an intriguing thesis about New York City’s 1970s near-bankruptcy and bailout by the state and federal governments. In her telling, the city’s response to the crisis—temporary budget cuts and business-friendly economic policies—helped remake New York, but at a cost: the city “would no longer . . . concern itself with social inequality” or “try to use its resources to aid the poor.” The city would also prove “far more ambivalent in . . .  support for labor unions, for civil rights, for an activist government,” she writes. The problem with Phillips-Fein’s theme is that it’s wrong, as her own engaging, if uneven, reporting demonstrates.  

A professor of history at NYU’s Gallatin School, Phillips-Fein presents a lively account of the fiscal crisis. Between 1965 and 1975, New York City more than doubled its annual budget to $10 billion. Mayors Robert F. Wagner Jr. and John Lindsay expanded public employment and boosted public-sector wages as well as government spending on welfare, education, and health care. The city’s leaders realized quickly, though, that they could not afford all this expenditure. Wagner forthrightly described his approach in 1965 as “borrow now, repay later” under what Phillips-Fein terms “a plan that barely hung together.” The city would spend more than it took in but look to tax hikes and economic growth to correct the imbalance.

It didn’t work. By 1974, when Mayor Abe Beame took office, the city’s budget was growing by 16 percent annually, while revenues rose only 2 percent. The city owed $10 billion—$6 billion more than a decade earlier. Most of the money hadn’t gone toward capital investments such as infrastructure but to cover budget deficits, which reached 15 percent of annual spending. Worse, more than a quarter of this debt was in the form of short-term notes that the city had to refinance frequently. Beame called the situation “an insuperable problem” that would take “a magician” to fix.

Unsurprisingly, the banks that had unwisely backed all this short-term financing got nervous. Beginning in the spring of 1975, they stopped providing the money. New York entered nearly a year of uncertainty that culminated in an autumn default. The city stopped repaying the principal on some of its debt, making interest payments only. New York State and the federal government eventually came around to providing aid, mostly in the form of debt guarantees, and the city avoided a formal bankruptcy.

In return for this support, New York would have to present balanced budgets annually for approval by a state-appointed “emergency financial control board.” Compliance meant budget cuts, which in turn meant, as Phillips-Fein vividly chronicles, garbage piling up in the streets, laid-off police officers blocking traffic, more building fires, and higher crime. It was indeed a different New York—no longer permitted by Albany to fund its operating spending with borrowing.

The facts of Phillips-Fein’s narrative are sound; the conclusions that she draws from them are not. “As New York City has gone, so . . . has the country” and the world, she writes. That is, the financial world’s tough approach to New York created a now four-decade-old era of “austerity” politics in which “tax cuts have starved state and local governments” and “the idea of using the state to remedy poverty and improve social conditions has given way to the sense that doing so is simply too expensive.”

New York could not have inaugurated a new era of “austerity” politics worldwide, because New York is not austere. As the author herself notes, the city returned to its pre-crisis spending levels (after adjusting for inflation) by 1989. And though Phillips-Fein tries to present post-crisis mayors from David Dinkins to Michael Bloomberg as uninterested in or hostile toward public spending, the numbers show that no modern mayor has tried seriously to cut the budget. In 2018, New York will spend $88.7 billion—nearly twice the (inflation-adjusted) $46.9 billion it spent in 1975.

Phillips-Fein says that after the fiscal crisis, “the rhetoric” around this higher spending was “far different”—perhaps, but the priorities didn’t change. Next year, New York, with local, state, and federal funds, will spend $5.9 billion on medical care for the poor and near-poor, $1.6 billion on welfare programs, $1.6 billion on homeless services, and $3.2 billion subsidizing public-housing residents. The city will spend $27.3 billion on wages for public workers and $19.7 billion on their pension and health benefits. Mayor de Blasio has increased spending on education and public employees far above inflation, as did Bloomberg. If New York is uncaring of the poor and miserly toward public employees, it’s hard to find the evidence in the numbers.

Nor have tax cuts “starved” anyone in Gotham as a result of business leaders wresting control of the budget from old-style politicians. New York was a high-tax city long before the fiscal crisis. In 1971, New York collected the equivalent, in today’s dollars, of $21.5 billion in taxes. By 1975, it took in the equivalent of $25.6 billion. Back then, the city, with Albany’s permission, raised a slew of taxes to help fund the higher spending that had led to the budget crisis, as Phillips-Fein acknowledges. It has steadily increased taxes since. Next year, New York will collect $56.5 billion from its businesses, residents, and property owners. The city’s income taxes, business taxes, and sales taxes consistently rank among the nation’s highest.

All that’s left of Fear City’s thesis, then, is that New York still managed to usher in a global era of austerity, even as it clung to its own high-spending ways. It’s hard to judge this part of Phillips-Fein’s argument because she doesn’t pursue it far enough. She also argues that New York’s austerity, such as it was, helped prepare the way for the Reagan era. But Ronald Reagan’s deficit-funded tax cuts were economic stimulus, not fiscal austerity: Reagan used the language of a budget-cutter, but he didn’t cut the budget. Federal money helped New York to rebuild its subways.

Fear City’s case studies are interesting but don’t prove the author’s thesis. Phillips-Fein laments that New York City ended free tuition at CUNY, for example, in 1976. But this rollback became inevitable after 1970, when the city opened admissions to all high school graduates, regardless of qualification, sending enrollments surging. Phillips-Fein also maintains that the transit-fare hike from 35 to 50 cents in 1975 was a sign that New York had rejected social responsibility—but she never acknowledges that since the 1980s, New York has invested more than $120 billion in its public-transit system, paid for in large part by business taxes (she does concede that the city cleaned subway cars of graffiti). A reasonably functioning transit system is New York’s best anti-poverty program: poor people in much of the rest of the country must borrow thousands of dollars in the subprime lending market to purchase cars to get to work.

Phillips-Fein defends those who looted during the 1977 blackout, which resulted in $1.3 billion (adjusted for inflation) in damage across already-blighted neighborhoods. She excuses the rioters because they were poor, and criticizes the Broken Windows policing that the city adopted later. Yet she laments the rising crime on the subways after the late-seventies budget cuts because private anti-crime groups had to “make up for the missing transit cops, promising protection where the police had fallen down on the most basic of jobs.” If there was another way for New York to do what it started doing in 1990—make subways safer, in large part by cracking down on fare-beaters before they could commit worse crimes—Phillips-Fein does not present it.

Finally, Phillips-Fein falls back on the most time-worn of clichés. New York’s public school students lack “basic classroom supplies and enrichment classes,” she claims, because the rich care only about their own schools. Whatever poor students may lack is not due to insufficient funding. The city’s Department of Education will spend $24.3 billion this year, more than double the amount before Bloomberg took office and roughly double the average per-capita expenditure for school districts nationally.

Today’s New York remains far from perfect. The city’s supposedly progressive mayor allows supertall towers to block sunlight from public parks, though a zoning change could protect the green space that poor and middle-class New Yorkers depend on for recreation. Libraries close too early. The subways and commuter-rail systems are overcrowded. And New York can afford its taxes and spending only because the U.S. economy turned away from industry and toward finance in the early 1980s—a change that benefited the city much more than the rest of the country. This dynamic does indeed leave Gotham, as Phillips-Fein puts it, “relying on favors from the rich”—and needing to ensure that businesses and wealthy residents want to stay here.

Photo by Leo Vals/Getty Images

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