Brian Anderson: Welcome back to the 10 Blocks podcast. This is Brian Anderson, the editor of City Journal. Joining me on the show today is Nicole Gelinas. She's been on the show a number of times. She's a senior fellow at the Manhattan Institute, a contributing editor of City Journal, and a consummate expert on all things New York. Today, we're going to discuss her brilliant article in the new print issue of the magazine. It's called "Inflation and the City." And we'll talk a bit about the state of New York generally. Nicole, as always, thanks very much for joining us.
Nicole Gelinas: Thank you for having me, Brian. Happy to come on.
Brian Anderson: New York thinks of itself, I think it's fair to say, as a world unto its own. But the city's not immune to broader trends, including inflation, which is obviously much in the news these days. Everything from food to rent prices has become more and more expensive in recent months. In some cases in the city, at a faster rate than the national average. And as you note in this story, inflation will affect New York in some very specific and potentially damaging ways. So, the city's highly exposed to trouble in the financial sector. Inflation has historically not been a good thing for Wall Street. What would a sustained spike in inflation do to that part of the city's economy and what would be the consequences for the city?
Nicole Gelinas: Yeah, you're right that the city faces several impacts from high inflation. Inflation is running eight and a half percent compared to last year, and it has been above 8 percent for at least three months running now. So, clearly a sustained trend of higher inflation is something that we haven't seen in 40 years. So, anyone who is a young or even a middle aged adult has not lived in a world with high inflation. For the last 40 years, we've been fortunate enough to have inflation that's been around 2 percent a year, virtually unnoticeable to most people. So, yes, the first impact would be on the economy. That if you look at the 40 years where the federal reserve maintained low stable inflation, these were 40 years that were generally good for financial markets and for Wall Street firms.
Beginning in the 1980s, of course, we've had a few recessions, a couple of crises along the way, over the past 40 years. But for the most part, Wall Street has done very well. And because Wall Street has done well, this sector of the economy is responsible for 8 percent of New York City taxes, and so directly and more of a share of taxes, and indirect taxes in terms of property values, consumer spending, and so forth. So, this has a big impact on the city budget. High inflation in the 1970s by contrast thought that was not a good decade for Wall Street. Stock markets actually lost money during that decade. And in general, the Wall Street business of lending, borrowing, investments, you want stable price environments to do those things. It's much harder to approve a loan to a person or a business if you have no idea if the dollars that people will repay those loans in are going to be worth less in a few years.
So, with inflation comes higher interest rates. Even if the fed doesn't raise interest rates adequately to damp down inflation, financial firms will usually charge higher interest rates because they need to do that to make up for the inflation risk. So, yes, if we continue to see high inflation, whether it's eight and a half percent, hopefully not double digit inflation, but anything much higher than around 2 percent creates a instability for Wall Street. And we already saw that with the most recent quarterly profits, where financial firms reported a significant reversal of the high profits that they've seen over the past few years.
Brian Anderson: As prices go up too, and this would be another effect on the city workers, are going to ask their employers for raises to keep up with those higher prices. And this is obviously going to be true for public sector workers as well. Yet the city's government workers are already earning pretty high salaries, I think comparatively and indexing their income to inflation. Not only I think it's going to worsen price rises, but it's going to strain city finances, I imagine. So, how might that scenario play out?
Nicole Gelinas: Yeah. That would be one or the other impacts of inflation on the city, beyond the impact on the city's economy, the impact on the city budget. So, yes, if you look back once again to the turmoil of the 1970s, many of the public sector strikes that we saw during the Lindsay administration, further public sector, labor unrest in the Koch administration, these were partly due to the impact of inflation, particularly during Koch. The city was trying to hold the line on labor increases and the workforce did not like that. If you look at the transit strike in April of 1980, for example, the transit workers were asking for more than a 20 percent raise over a two year period, largely because inflation was running 20 percent over a two period. And so, the MTA boaked at this, the transit workers went out on strike for more than a week.
And the MTA basically ended up giving them most of what they wanted, which then had a knock on effect on city wages that the Koch administration hadn't want to seen or hadn't want to see. So, if we saw that again, this time around, if you look at a 1 percent raise, the state controller estimates costs the city about half a billion dollars. We are most likely going to see the city's workforce asking for 8 percent raises over a one year period, 15 percent raises over a two year period. So, the compound effect of that a couple years in the future would be well above a $10 billion hit to the city's budget. Something that the Adams administration certainly does not have the resources to pay out these major, major wage increases, something along the likes of which we haven't seen in decades.
And so, I think we should be at least realistic about the possibility of labor unrest as the two sides' demands start to become clearer towards the end of the year. As it happens, pretty much all of the city's labor agreements are either expired or about to expire. So, do we see the Adams administration hold the line on raises and do we see the workforce come out in protest against that, and hopefully not go on strike against that? Or does the Adams administration end up capitulating and give out raises that the city really can't afford?
Brian Anderson: It's very important question. A third area you explore in this essay, where inflation is going to complicate life for the city is a question of debt. The city is nearly a $100 billion in debt. What would a sustained inflationary period mean for the city's fiscal situation? Wouldn't it make it easier in some ways for the city to pay that debt back?
Nicole Gelinas: Yeah, that's one argument. There are some positive aspects to inflation depending on your point of view, although they are largely outweighed by the negative impacts. So, one of the positive impacts would be people and businesses and governments that owe money where the interest rate is fixed. In other words, it doesn't rise with inflation. So, if you have a mortgage, most likely the rate is fixed. You can pay back that mortgage in cheaper dollars, which is probably good for you as a person. Same thing with the city governments, the majority of the money that the city owes has a fixed rate of interest. And so, as the dollar becomes worth less, the city can pay that back in cheaper dollars. But that's assuming that the city doesn't want to borrow any new money.
The city has massive future borrowing needs. It wants to borrow $10 billion to build four new jails to close Rikers Island. It has normal ongoing borrowing needs just to refurbish school buildings, maintain roads, maintain bridges. Most city borrowing is not for glamorous big projects, it's just for long term infrastructure, maintenance, and replacement. So, looking forward to future borrowing, the city will have to do that at a higher interest rate to account for inflation and account for the higher interest rates that the federal reserve is beginning to put in place to try to tamp down inflation. So, either way, it seems a reasonable risk that the decades and decades of cheap borrowing that the city has gotten used to may be over.
Brian Anderson: The post-pandemic geographic reshuffle that's going on across the country, it's been a big story. Many people decided they'd had enough of urban living during the pandemic and they left cities like New York for often suburban locals, more spacious areas, certainly cheaper areas. If anything, what's the influence of inflation on that phenomenon that's been ongoing for some time now? Rents in the city are I believe back to where they were pre-pandemic, for example.
Nicole Gelinas: Yeah, that's an issue if you're in a market rate rental building. The property owners just had a winter of enormous increases in heating costs. Other costs of running the buildings, wage costs for the people who work in the buildings are going up. We saw the union, the private sector union that represents the building workers in unionized buildings nearly went out on strike, but they reached an agreement with the building owners. But the people who work in the buildings, whether it's superintendent or security guards, they also want to see their wages going up to account for the costs of inflation. So, the property owners, they pass this on to their tenants in the cases where they can. In the rent regulated sector, which is about a million apartments in the city, about a third of the housing stock that property owners can't pass those costs down to the tenants.
This city board under state law decides what the rent increase will be, and they haven't decided this year yet. But either way, it's not a great situation. If they allow for a rent increase, then those tenants will also pay the higher costs of inflation. If they don't, then the property owners will have to absorb that cost and they won't have as many resources to maintain the building. So, another example of how there's really no free lunch with inflation, somebody is going to suffer. And as for getting people back into the city or getting new people into the city, I think the city, the main chance of getting people to recommit to urban life is just to improve the quality of life for urban residents. Harder to do that in high inflationary environments, so, particularly, if you have labor strikes and work slowdowns and so forth.
Brian Anderson: Sure. Yeah. Well, that's that's a good transition to another topic, which is public transit. You've been sounding the alarm about subway safety for a while now in City Journal. A few weeks ago, as most of our listeners probably know, a man opened fire on a subway train in New York, in Brooklyn, Sunset Park neighborhood, and on the platform, on the very same day that you had had an event scheduled with a top MTA official to discuss transit crime. So, that event was subsequently canceled or postponed. I think it's fair to say that events have vindicated though, your ongoing worries about what's been happening. What has been going on over the last couple of years, and just maybe summarize that?
Nicole Gelinas: Yeah. And we are holding the event on May 10th, if any of the listeners want to go to the website and sign up for the virtual event. But yes, subway crime, even beyond the terror attack, which hopefully is a one-off strange event that won't be repeated anytime soon, but day-to-day violent crime on the subways has gone up tremendously since the Covid shutdowns began in March of 2020. So, in an average year, since 1997, we would have one or two murders on the subways every year. With ridership close to 2 billion people, you would've had a really difficult time eliminating all murders. One or two a year unfortunate, but that was probably about as low as we were going to go. And that was a massive turnaround from the 1970s through 1990.
In 1990, we had 26 murders on the subway. That was the year that Bill Bratton came in from Boston, started to institute the policies that George Kelling had pushed for many years, saying, "Stop small crimes in the subway and you'll stop big crimes." And sure enough, when they started to apprehend people for jumping over the turnstyle, sleeping on subway benches, which is against the rules, walking between cars. They would catch people with guns, knives, open warrants. You catch people with warrants for murders, all sorts of things. So, by securing the subway system from small crimes, they actually prevented a lot of larger crimes, including homicide.
And we've seen the reversal of this over the past two and a half years, where since March of 2020, we've seen 17 murders on the subway system. That's over the course of just a little bit more than two years. So, the risk of becoming a victim to homicide is much, much higher than it was in 2019, especially once you account for the lower ridership as well. I mean, ridership is only 60 percent of normal. Although, murder is still relatively rare, it is much less rare than it was three years ago. And that is also the case with robberies, assaults, other violent felonies. If you are taking the subways right now, particularly in the off hours, if you are a worker who works at the airport or works in overnight shift, you are much more vulnerable to the threat of violent crime and also just plain disorder.
I mean, people are smoking marijuana on the trains, they're playing loud music, sleeping across benches. And that is largely because of a pullback in policing. In one month in 2020, there was only one arrest on the subway system for fare beating. Enforcement of low level subway crimes is still about 30 percent below what it was before the pandemic. So, you have two things going on, a pullback in law enforcement and fewer people on the subways to deter violent crime, so, that's unfortunately. So far, Adams' rhetoric is not matching the results. Hopefully that will change soon.
Brian Anderson: Thanks very much, Nicole. It's an excellent overview. Don't forget to check out Nicole Gelinas's work. It's on the City Journal website, www.city-journal.org. She has, again, an absolutely brilliant new essay, "Inflation in the City," in our brand new issue. We'll link to her author page in the description. You can also find City Journal on Twitter @cityjournal, and on Instagram @cityjournal_mi. And as usual, if you like what you've heard on today's podcast, please give us a five star ratings on iTunes. So, thanks very much, Nicole. Great to talk with you as always.
Nicole Gelinas: Thank you, Brian. Likewise.