Last week, my parents' neighbors moved out of their $1.6 million McMansion. They sold it quickly at a loss, threw garbage bags of clothes in the back of the van, and headed back to Utah. The husband's hedge fund company went belly up.
Megan speculates what NYC will look like in the Post-Finance period. While I disagree, okay strongly disagree, with her point that lefties can't make smart fiscal policy, I do agree that the city is going to hurt without the easy money of Wall Street.
All that cash led to the gentrification of many neighborhoods that were trash-strewn, crime infested drug dens in the 1970s. (It also pushed out many low income individuals, who could no longer afford the rent in neighborhoods that they had lived in for years.) Bonus money created tax revenue, which went to schools, transportation, and police. In a post-finance city, we're going to see more crowded classrooms and more unemployed teachers. The brokers blew their money on clothes and restaurants. All those who worked in those establishments will be jobless, and creativity will be frustrated.
While I can join my friends who see this new era as a time of a modesty and greater equality, I am deeply worried about the spillover affect. We can't really rejoice in the just desserts of the Wall Street broker.
UPDATE: Confusing typo fixed.
Apt. 11d 
Not surprisingly, Matthew Yglesias begs to differ about fiscal policy. Money quote: “As this handy chart indicates, ballooning deficits are strongly correlated with either fighting World War II or else governance dominated by a desire for ‘additional tax cuts'” And indeed, the picture is worth several hundred words, at least.
How much of a role did Republican mayorships play in making sure the NYC economy was dependent on the financial sector?
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Yes, sorry, I also disagree with Megan. I was just typing too quickly, the school bus showed up early, and I made a typo.
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If you have a morning to burn, may I invite you to http://www.lovelylisting.com? You won’t regret it!
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Hey Laura, you seem to be saying that a city of New York’s size just can’t be sustained without the ultra-rich. Do you think that’s the case?
(I know I’m always bringing up Chicago, and that it may not be a fair comparison. But we do just fine without so many super-rich folks, and our sidewalks aren’t trash strewn. Plus we still have a great theater scene.)
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Chicago’s downtown was only recently developed though, jen. I lived in Chicago in the early 90s and it was only just being gentrified. Those neighborhoods were bad, if not worse than NYC, in the 70s and 80s. The gentrification of those neighborhoods was driven by the finance industry sector – Discovery Card, banks, and all that. They might not make as much as the NYC bankers, but they did just fine. Chicago is going to take a hit, just like NYC.
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I am not saying that lefties as a class cannot make smart fiscal policy–we can have that argument another time. But these lefties can’t. Anyone who genuinely believes that the reason that New York has the tightest housing market in the country is that its rent control regime is too lax is not a good steward of the housing supply. More broadly, the council seems to be going down the same road that pushed the city into bankruptcy in the 1970s–acting as if tax changes don’t alter behavior. If they try to make up too much of the lost revenue out of taxes, rather than spending cuts, they’ll put the city back into fiscal crisis. Labor and capital are too mobile in the US to get away with what they want to do. The governor seems to understand this, but the city council somehow never does; in 2001, Bloomberg apparently had to explain, over and over, that they couldn’t just ram up income taxes as much as they wanted to make up for lost revenue because the ratings agencies would recognize the likely impact on future revenues, downgrade the bonds, and put the city into receivership. We’re not talking about Swedish social democrats, here; we’re talking about many local politician whose power base depends on extremely left-wing community groups that in turn think money comes in gift packages from God . . . sorry, the government. These groups have an extremely adversarial relationship towards business and would happily kill the goose that lays the golden eggs if they could catch the damn thing.
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Not going to argue with you about some of the chuckle-heads in power at the city council in NYC. It doesn’t really have much to do with ideology or hatred of the financial industry. Those guys have people that they are beholden to, and they have to bring home the bacon.
That said, I think that taxes are going to have to be raised. NYC quickly running out of funds for basic services; transportation and education are already in big danger. I don’t think they are going to make up for the lost revenue with taxes, but that money will make sure that the A train shows up occasionally. Yeah, it doesn’t make sense to increase taxes too much, but nobody is going to move for a little more taxes. Tax cuts would be a disaster.
I have to say that I’m very pessimistic about things. No one fix, like raising taxes, is going to help.
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“That said, I think that taxes are going to have to be raised. NYC quickly running out of funds for basic services; transportation and education are already in big danger. I don’t think they are going to make up for the lost revenue with taxes, but that money will make sure that the A train shows up occasionally. Yeah, it doesn’t make sense to increase taxes too much, but nobody is going to move for a little more taxes. Tax cuts would be a disaster.”
I know both Laura and Megan are both big fans of urban living in NYC, but based on this quote, I wonder if it’s a sustainable way of life.
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“NYC quickly running out of funds for basic services”
That might explain why so many NYT stories have been mentioning Pittsburgh lately. They’re trying to see what happens without public services, but think Detroit is a bit too far gone to be an example.
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I think that they’ve got very, very little room to raise taxes right now. People are already deciding whether to stay there or to leave–up their tax rates, and you might seal the deal. This is certainly true of corporate tax rates.
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I doubt that many businesses would leave for NYC, if taxes go up. Any company that was willing to give up their NYC zip code for lower taxes left long ago. Higher taxes might push some border-line companies into bankruptcy – that might be a good reason to hold back on increased taxes.
The financial industry will rebound, but it’s going to take a few years. Hopefully, a lot of money is going to come from the feds. And certain neighborhoods, like my beloved Washington Heights, is going to backslide. The old timers used to tell me stories of what that neighborhood was like in the 1970s. I remember going to poetry slams in the East Village in the 80s and stepping over junkies passed out on the sidewalk. One memorable evening a crack-head followed me for three block trying to get me to admit that I was a witch.
Manhattan changed a lot in the past twenty years. It has a lot to do with the extra cash flowing about. I think that money could have been used more efficiently and taxed at a higher rate, so that more people could have benefited, but whatever… There were tangible, indirect benefits from the stock broker money.
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The certainty that manufacturing companies couldn’t afford to leave sucha desireable zip code as New York just because of a few measly tax percentage points is the reason that New York City no longer has a manufacturing base.
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We “fled” NYC in 2000, right at the end of the dot-com bubble (purely coincidence–we didn’t realize the bubble was bursting). I had a job; my husband was happily freelancing and probably could have adapted to the dot-com bust. We just needed more space with less commute. (Actually, we moved to Long Island in 1999–we had more space, but I hated the commute.) There was no place affordable in 2000 where we could raise a kid on two salaries. The problem wasn’t taxes or lack of services. It’s that housing was just too expensive. And that was *before* real estate prices skyrocketed.
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Manufacturing left NYC for a lot of reasons — cheaper labor, cheaper space. Some went down South, other manufacturing left the country all together. Upstate NY lost all of its manufacturing companies and it had nothing to do with higher taxes. But those companies are long gone. The businesses that operate in NYC have to stay in NYC. The few broker dealers that are left aren’t going anywhere. Even after 9/11, they stayed in NYC.
But no one wants to raise taxes on businesses in NYC right now. Any sane person knows that business is tough right now. The reason that people are talking about it is because they are desperate. People are worried about no A train service and 40 kids in a classroom. Pensions have to paid. At times like this, all solutions (or temporary fixes) have to be examined.
The problem is that all this bottomed out so quickly.
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I don’t know as lefties can’t make smart fiscal policy, but I haven’t seen it yet, and I’m not seeing it now in DC. To the extent I understand NY politics, it looks like interest groups grabbing for their shares, and difficult for anyone trying to make a common-good argument, trouble for making optimal decisions.
We have been spending a LOT of GNP on the financial sector, and that money has, for historical reasons, been heavily concentrated in NY, NYC. I think we will spend a lower fraction of GNP on the financial sector in future, and that there’s not as much reason to concentrate it in NYC as there was. So I do see NYC needing to get a greater fraction of its revenue from other sources, and I don’t see anything on the horizon which will make it up to recent levels.
Laura, I think your parents’ neighbors were on to something.
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All I can say is, my Dad worked for city government from 1970 to 1982, and watched the havoc first hand, and his report from the front lines is that the Lindsay tax hikes had a great deal to do with it. His other report is that the people talking about the Lindsay tax hikes when he moved to the city–after it had already lost 100K manufacturing jobs in a few short years–is that everyone was blithely assuring themselves that the businesses that were in New York *had* to be in New York because of the ports and the railhead connections and the face time value. Unfortunately, it turned out you really could pick up a whole industry and move it to North Carolina. Moreover, once one or two of them have, your tax rates turn a trickle to a flood. So it’s very important not to make the rates high enough that the first one or two think about leaving.
They probably wouldn’t go so far, this time . . . but there are a whole lot of cities on the East Coast, and no real reason that, say, the advertising business couldn’t be done out of any of them.
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I understand that people are desperate. But the classrooms will be more crowded, the A train less safe, if they push a substantial number of high earning companies or individuals out of the city. The city needs to put itself on a budget now, because it is not going to see the kind of tax revenues it skimmed from Wall Street for probably decades. Raising taxes to fund the country’s most expensive urban infrastructure will make things better this year, but make it less likely that the city will survive in the future.
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Before they worry about the schools, they need to put the cannon back in Battery Park. New York is the richest target within the range of Icelandic long boats.
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I guess I still don’t see why any of this is finance-specific. What we’re saying is that any healthy city needs an employed populace to ensure tax revenues. In NY that has been overloaded on the finance side, a situation appears to be ending. I personally would think a more diversified economic base would be a good thing.
I also lived in Chicago in the early 90s, Laura, and I know what you’re saying about downtown being dumpy. But it’s gentrified/renovated here not because of an influx of super-wealthy finance guys but because people in general want to live in an urban area. (If anything we’re awash in advertising people and lawyers, groups that are well-to-do but nothing like the scale of the hedge fund folks.)
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Those advertising people and lawyers are in trouble, too. If they lose their jobs, Chicago is going to hurt, too. Maybe Chicago can weather the storm better than NYC, because the fallout will be gentler and more incremental. It will give politicians a chance to cut back and save. In NY, the city and state lost billions over night. That’s why they are talking about tax increases. It’s too late for a little belt tightening.
I think that NYC became a dump in the 70s and early 80s for a whole lot of reasons. Not just because manufacturing left. And manufacturing would have left anyway. There are no teamsters in North Carolina or China.
Raising taxes is a last ditch, desperate attempt to keep basic services going. I would be more worried about destroying border-line businesses than their mobility. Every state is going to raise taxes this year.
I am not sure how NYC is going to pull itself out of this mess.
What should have NYC done differently? Not gotten so hooked on one industry? Created larger rainy day funds? Demanded greater regulation?
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It feels like Megan is saying we have to be fiscally enslaved to big businesses, which … well, it irks. It’s a version of “too big to fail.” I don’t really get that there’s much of a difference between having to pay to bail out big businesses so that the city doesn’t fall apart, and having to pay taxes so … the city doesn’t fall apart.
I also wonder if we need to rethink urban planning (all population density planning, really). We used to build cities on major bodies of water so it would be easier to move goods. Nowadays, that’s not so important. It used to be important for all the people to be in one town congregating together to make an industry run effectively. Now, not so much. We have the Internet.
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The classrooms will be more crowded no matter what. I don’t think that the public schools have started to think about the effects of this recession, as significant numbers of kids everywhere, and large numbers in some urban centers, leave private schools their parents can’t afford for public schools.
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Sure, people in Chicago are worried. You’d have to be dead to not be worried right now. Chicago’s having its own money troubles.
I guess my point is that this economic downturn is hurting everyone. We can all agree on that. But when the downturn ends, what will New York look like? I would imagine it would look more like other cities, with less of a delta between finance peoples’ incomes and everyone else’s. And probably more variety in the work of those who live there. I personally think these are good things. Not good enough to make one happy about the economy, but nonetheless a bit of an unintended pleasant by-product.
As with any boom, the higher you reached the harder you’ll fall. This is New York’s unique problem. I don’t think it’s ever wise to get hooked on a single industry — the wild swings are too much. (Witness Detroit, or to some extent Silicon Valley.) I’d have to ask the public policy types how a city can stabilize its tax-based income over time.
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It would be great if NYC looked more like chicago or baltimore and wasn’t quite as hostile to middle class families. Absolutely. If the recession just picked off the rich and didn’t hurt anyone else and in fact made the place more affordable, then that would be great.
My worry is that the recession is going to make NYC a bad place for everyone. They are talking big cuts in public education and transportation. If the schools get worse, the few middle class families in the city are going to leave. Carting a kid in a stroller through the subway system sucks on a good day. If the trains are too packed to get the stroller in the door, the middle class is going to leave.
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I think it will be interesting to see what happens with rents coming down to see the impact on the middle class. Lower rents could be the potential opening for families to actually move in.
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