Obama to City: Drop Dead?

"Last week, Mayor Mike Bloomberg announced a grim update to New York City's $60 billion budget. To meet falling revenues he proposes spending cuts and property-tax hikes, and he may increase income taxes by 15%. The real risk to the city isn't a tough budget this year or the next. It's that the mayor might be too optimistic in assuming the downturn in tax revenue will be short-lived. ... The problem is that the 'dark old days of the '70s' didn't start with cuts to vital services like police and sanitation. They started in the late 1960s, when the city had a chance to avoid its near bankruptcy a few years later. Instead it chose to raise taxes for new spending. It was in this period when the city enacted its first income tax as well as new business taxes. It kept raising taxes as it went on to lose half of its one million manufacturing jobs and half of its more than 100 Fortune-500 headquarters. ... The result was a deterioration of quality of life, including police cutbacks that allowed crime to spiral out of control. ... In the early 1980s, the financial industry started to grow at a spectacular rate relative to the rest of the nation's economy. The financial sector's profits as a percentage of the nation's income doubled twice from the early 1980s to 2006. ... Today, things are different. The financial-services industry could be at the beginning of a long-term correction that will leave profits much lower than they had been. Wall Street's business model--of taking ever bolder risks with shareholders' and lenders' money and reaping fees from ever-more-complicated proprietary financial products--now appears to be dead. Consequently, high finance may shrink as a share of the national economy and the city's economy, not just temporarily but for a decade or more. ... Two years ago, a third of all the wages and income in the city came from the finance, insurance and real-estate industries, up from just a quarter a decade earlier. The securities industry alone was responsible for a quarter of wages, up from 17% from a decade earlier. ... The financial sector provides more than a third of business taxes. Last year, Wall Street bonuses alone comprised 8% of of the city's personal income. In 2000, the peak year for high-tech bubble bonuses, they comprised 6.6%. The budget in general is 22% bigger, after adjusting for population and inflation, than it was at the height of the 1970s fiscal crisis. Most of that growth came in the past seven years. ... An indefinitely shrinking financial industry would seek to cut costs, including taxes. Companies like Merrill Lynch, merging with out-of-state institutions, could easily move jobs out of New York if taxes go up", my emphasis, Nicole Gelinas (NG) at the WSJ, 8 November 2008.

"The global credit panic has swept away many illusions, and we're about to find out is that includes those of the politicians who have feasted for years on Wall Street tax revenues. Ground Zero is New York, which has lived a tax-and-spend fantasy thanks to the long bull market and 'progressive' tax rates. Reality is now biting. The financial services industry employs between 2% and 3% of nongovernmental workers in New York, the same as it did in the late 1970s. What's changed is the share of total wages in the state represented by Wall Street jobs, which had skyrocketed to nearly 20% last years from a little over 2% in 1977. 'This is 212,000 people making nearly $80 billion in wages and salaries last year,' explained E.J. McMahon of the Manhattan Institute at a recent panel discussion on the financial crisis. ... New York's revenue coffers are set to take a hit. The only question is how big. ... Governor David Patterson ... is urging labor unions to renegotiate contracts on behalf ofpublic employees. And he's proposed trimming as much as $2 billion from this year's budget, including cuts to health care and education. ... New York spends more money per pupil ($14,000) than any other state", Editorial at the WSJ, 13 November 2008.

Does anyone remember mayor John Lindsay's (JL) handling New York's (NYC) 1966 transit strike? Transit workers union (TWU) chief Michael Quill (MQ), said, "The judge can drop dead in his black robes", when the judge signed an injunction prohibiting the strike. I still remember MQ's voice! JL became mayor in January 1966. The TWU went on strike. NYC was in chaos for about three or four days. Then New Yorkers figured out how to get into Manhattan even if it meant hitching a ride with a stranger. Crime fell. Traffic began returning to normal. MQ was panicked! NYC's peasants had decided "we will beat the TWU. Come hell or high water". But MQ knew who he was dealing with. A man he derisively called "Linsley". After 12 days, JL caved and gave the TWU whatever it wanted. My mother cried and said, "The damn Yale movie star. He's bankrupted the city". So JL had. I remember when NYC had 128 Fortune 500 headquarters! Any firm can move jobs out of NY State, NG. Financing and operating decisions are separable. If an operating decision makes sense, it doesn't matter who the owners are!

Good luck Patterson. Imagine cuts to health care and education. These are the last days.