As a rule, people in New York City don’t pay much attention to what goes on up in the sticks of Albany.
New governor Eliot Spitzer has managed an impressive twofer, then, with the ongoing Bruno-Troopergate to-do: Not just grabbing the city’s attention, but also turning New York State Senate Majority Leader Joe Bruno, a cheerful rogue with a penchant for flying in style on the dime of taxpayers and political donors (and who’s presently the subject of an FBI investigation), into the victim in a captivating morality play.
But while New Yorkers watch the unfolding melodrama of what the governor knew and when about his aides’ plot to take down a political foe by leaking state police records to a complicit newspaper, the state and city stand together at the cusp of a fiscal crisis that both Mr. Spitzer and Mayor Bloomberg have chosen to ignore.
The problem, in short, is a chain of unhealthy dependencies: The state depends on the city for more than half of its total tax take (far more than any other state takes from a single city; only Chicago and Illinois are even comparable) and the city in turn depends on Wall Street for the lion’s share of its revenues. With the ports and manufacturing long gone, the financial industry has become the only game in town, providing just 5.6 percent of the city’s jobs, but more than 20 percent of all earnings, and, owing to the city’s sharply progressive tax code, a far higher percentage of tax revenues. As other industries have foundered, Wall Street has accounted for more than half of the city’s income growth over the past twenty years.
The city has done well year-to-year under Mayor Bloomberg, with record-high bond ratings from S&P, Fitch and Moody’s, and higher–than-expected tax revenues as the Dow Jones Industrial Average climbed more than 20 percent from when the mayor took office to the start of this year. But with the real estate balloon bursting and threatening to bring the stock market down with it, the state and city, which have spent their cut of the ongoing Wall Street windfall as fast as it’s come in, have little set aside to paper over a market slowdown, let alone a downturn.
Even as New York has become more dependent on Wall Street, the industry has been leaving New York, which currently hosts just 22 percent of America’s Wall Street jobs—compared to more than 50 percent thirty years ago. As City Journal Contributing Editor Nicole Gelinas has noted, when New York City collapsed in the mid-70's, there was nowhere else for financial firms to go. Today, those that remain do so out of choice and convenience.
At the same time that jobs have dispersed, New York’s dependence on lucre from the financial industries has grown, with the city drawing some 34 percent of its tax revenues from the sector today, as opposed to 15 percent in 1970. In New York State, the wealthiest one percent of filers now account for well over one-third of all revenues raised by the state's largest tax, and a half a percent of tax filers account for about a third of the city’s income tax revenue. The upshot: New York City and State can afford to pay their bills without going deeper into debt only when a predictably unpredictable industry that it has little control over does well and issues big bonuses. It’s the equivalent of long-term budgeting based on a hot weekend at Atlantic City.
Messrs. Spitzer and Bloomberg have both seen this coming crisis, even as they’ve done little to halt it. Mr. Spitzer promised to reform Albany’s high-spending, business-as-usual culture, drawing a sharp distinction between himself and his free-spending predecessor and vowing to “rebuild our economy so that it is ready to compete on the global stage in the next century.” But despite coming into office with 69 percent of the vote and a mandate for reform, his first budget surprised many observers by proposing a rate of spending more than two-and-a-half times the rate of inflation. (State Comptroller Tom DiNapoli warned that “…spending is still increasing at an unsustainable rate… and the result is a three-year budget gap of $13 billion…”).
It’ll prove even harder to cut spending and impose fiscal discipline next year, with the governor’s reputation tarnished by the Bruno affair and his enemies in the state Senate up for re-election, and looking to bring every possible pork dollar home to their districts.
Likewise, Mr. Bloomberg ran in 2001 promising to cut taxes, and gave pride of place in his first state of the city speech not to 9/11, but to the unaffordable size of the city’s taxpayer-funded public workforce. Yet despite the pubic sentiment for shared sacrifice, the mayor announced just a few sentences later that lay-offs were off the table, voluntarily surrendering his negotiating leverage.
Instead of cutting from what’s by far the largest per-capita budget of any big city, he raised taxes and bet on a quick market recovery. The bet paid off, but he lost a rare chance to take control of America’s fourth-largest budget – it’s bigger than those of Texas or Florida — which functions in large part as one of the world’s least-efficient job creation programs, employing a workforce one-seventh the size of that of the federal government, not counting the military. The stifling effect on private sector entrepreneurship is evident: In every borough outside Manhattan, government jobs pay more on average than private sector work.
Despite knowing the problem—in 2005 he conceded that "this city spends more money than it takes in, in an average year”— the mayor has increased spending by 40 percent, more than twice the rate of inflation, and city spending as a proportion of personal income is just short of an all-time high. Mr. Bloomberg, whose ill-fated West Side stadium scheme took priority over rebuilding Downtown, has done little to help maintain Wall Street, save for lobbying Washington for Sarbanes-Oxley reform.
At the same time, upstate has suffered for belonging to the same high tax and expansive regulatory environment, and for its crippling dependence on aid extracted from the city. Since 2000, more New Yorkers (especially those who are young and well-educated) have left for other parts of the country than any other state – more, even, than hurricane-ravaged Louisiana.
Meanwhile, Mr. Spitzer is increasingly focusing his energies on the process reforms dear to the hearts of his backers at The New York Times, where columnist Gail Collins has called for the governor to return to the people’s business, and especially to campaign finance reform, which she called “the centerpiece of Spitzer’s first legislative session.” And with Mr. Bloomberg’s time in office nearly done, none of the candidates for mayor have yet offered a serious plan for curtailing spending, which is understandable, since such proposals are usually as popular with voters as restoring prohibition.
While overdependence on Wall Street may lack the glamour of a classic live-boy-or-dead-girl scandal, time is short and the stakes are high. Mr. Spitzer’s best chance to restore his tarnished reputation as a reformer just may be to make the spending cuts necessary to ensure New York remains the financial capital of the world, lest he be remembered as the governor who presided over the fall.