In 1975, New York City’s government ran out of money.
“On the simplest level” journalist Martin Mayer wrote, “the story of New York’s financial collapse is the tale of a Ponzi game in municipal paper – the regular and inevitably increasing issuance of notes to be paid off not by the future taxes of revenue certified to be available for that purpose, but by the sale of future notes. Like all chain-letter swindles, Ponzi games self-destruct when the seller runs out of suckers, as New York did in spring 1975.”
“And God knows, New York was prodigal,” journalist William Broyles wrote:
The balance sheet fairly groans with with the weight of fiscal sins too numerous to detail: ambitious social programs where economy and efficiency were unknown; outrageous contracts with public employees and a gargantuan public payroll; welfare recipients in the Waldorf; irresponsible record-keeping that disguised the city’s financial problems; a less than hospitable attitude toward the apartments and businesses which made up the bulk of the city’s tax rolls.
Others disagreed. “Our true sin, in the eyes of Philistine skinflints and neoconservative ideologues, has been the decency – if not sufficient, still impressive – with which New York has treated its poor” the socialist Irving Howe wrote. “The assault on the city is an assault on maintaining, let alone extending, the welfare state. The assault on the welfare state is an assault on the poor, the deprived, the blacks, the Puerto Ricans.”
This argument persists. In Fear City: New York’s Fiscal Crisis and the Rise of Austerity Politics, Kim Phillips-Fein writes:
…today as in the 1970s, austerity remains a political choice…Beneath the narrow debates about how debts can be paid reverberate larger, as yet unresolved questions about what kind of society we want to have, about who will pay for certain kinds of social provisions and whether we will have them at all. At the end of the day, these are inescapably political questions, not accounting ones.
These arguments were absurd when Howe made them in 1976 and were just as absurd when Phillips-Fein made them in 2017.
First, New York’s “austerity” was not “an assault on the poor, the deprived, the blacks, the Puerto Ricans.” To say it was demonstrated “a characteristic form of liberal racism,” Treasury Secretary William E. Simon wrote. “[T]he assumption underlying the rhetoric is always the same: Blacks and Puerto Ricans congregate in New York to go on welfare.” In fact, Simon argued, “[m]embers of racial and ethnic minorities come to New York to work, not to go on welfare. The typical member of a minority group in New York is working at a productive job – and paying exorbitant taxes.”
Indeed, those “tax revenues go to employees’ salaries, pensions, and fringe benefits – all directed to the middle class,” Simon continued. In addition, “the middle class absorbs a significant percentage of the funds allegedly allotted to the poor.” One study “found that some 100,000 middle-class children were receiving welfare;” “…more than one-third of the children attending day-care centers were found to be ineligible;” and “…the free city university system was essentially a gift to the children of the middle class.” New York’s “unpleasant little secret,” Simon concluded, was that the city’s “subsidies to the middle classes have been overwhelmingly greater than its subsidies to the poor.” Something similar is true of social spending more generally, which helps explain why reform is so politically challenging.
Second, whether a government balances its budget is not merely “a political choice.” A government needs money to pay for the goods and services it provides. If it cannot print that money – which New York’s government cannot – if it cannot borrow it – which lenders ceased facilitating in April 1975 – and it cannot tax it – which New York’s government could not do sufficiently as residents and businesses fled the city – then it will have less money to provide those goods and services and will have to provide less of them. Intoning that “another world is possible” does not revoke these fiscal facts of life.
“[H]ad a national government been in place that was willing to accept more responsibility,” Phillips-Fein writes, “the city might not have had to make the kind of cuts it did.” True, the federal government has sources of funding not available to state and city governments, primarily the printing press, but with inflation hitting 11% in 1974, even here there were limits. “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it,” Thomas Sowell wrote. “The first lesson of politics is to disregard the first lesson of economics.” New York’s politicians disregarded the lesson to the city’s cost. Sowell might have noted that academics often disregard it, too.
John Phelan is an Economist at Center of the American Experiment.
