It makes sense. The news that insurance losses from sub-prime mortgages exceed the losses stemming from Hurricane Katrina gives us an appropriate name for the mess we find ourselves in: an economic Katrina. We always believed that our government would protect us from such a disaster, but boy, were we wrong.
Heeding the call of the current Business Week, "Waking up to the Recession," let's rub the sleep out of our eyes and count the ways today's economy is not the one we thought we had. For this task, the economist in us will need all 10 of our fingers.
George Bush's friend "Brownie" (former Federal Emergency Management Agency chief Michael Brown) must have been in charge of the Federal Reserve. Under chairman Alan Greenspan, our nation's "non-political" guardian of the financial system stood by while banks and other lenders jettisoned any sense of prudence and "irrational exuberance" overtook the housing market. The Federal Reserve acted as though it believed that deregulation meant no regulation. Its officials watched in awe while Wall Street bankers developed ever-exotic financial instruments - ABSs, CDOs, CLOs, CDSs and who knows what else - allowing financiers to trade risks back and forth for more fees. These investments built a sub-prime pyramid on a foundation of ever-rising housing prices.
Other "innovative" forms of money-changing proliferated as long as the pyramid went on pyramiding and banks were willing to lend to super-leveraged hedge fund speculators. Whatever we might have expected of "regulators" like the Bush administration's Securities and Exchange Commission, we had thought that the Federal Reserve itself would do financial fire prevention and not just financial fire fighting.
New Yorkers used to cheer every year that holiday bonuses on Wall Street broke the old record. The conventional wisdom had it that more spending by bankers would slosh around the local economy, and city and state treasuries would be flush with tax receipts to pay for schools, the subway and public hospitals. Now, though, we have learned that big bonus payouts can mean the economy is about to go off a cliff because bankers and brokers do not get those bonuses for helping the American economy create good jobs, new companies or new products. Instead, they rake in those bonuses for finding new ways to generate fees and feed unsustainable speculation.
In his book, "All Together Now, Common Sense for a Fair Economy," economist Jared Bernstein described how in the YOYO economy, you're on your own to sink or swim. When you fall down or get knocked down, don't expect government to help you get back on your feet. This left millions of middle class workers who lost manufacturing jobs, their health insurance and pensions to fend for themselves. But now we see that if a giant bank (think Bear Stearns) falls on hard times (after its ultra-high stake bets went bad), the government rolls out the plushest safety net you could imagine. It spares no expense -- and does not even ask the bankers who made those bad wagers to return their multi-million dollar emoluments.
Consumer spending drives the U.S. economy, accounting for over two thirds of Gross Domestic Product (the national economic yardstick). Used to be, the economy grew and workers' wages grew, allowing families to put food on the table and a roof over their heads, and still have some money left over to save for vacation, college or retirement. For most workers, wages are no higher today after adjusting for inflation than they were in 2000. To maintain consumption, American families have resorted to trillions of dollars of home equity debt and credit card borrowing. It didn't feel like that would be sustainable for long, and it wasn't.
A low unemployment rate once meant that most people had jobs, and if you lost yours, you could find another within a reasonable period of time. That is no longer the case. Now, it means that many people have simply given up. In New York State, for example, enough adult men, particularly black men, dropped out of the labor force in this decade to account for about a percentage point decline in the unemployment rate. They dropped out because the prospects of getting a decent job were almost nil. Also, more of those officially unemployed have been out of work for longer than six months than at the start of previous recessions.
In recent years, economic Panglossians touted what they thought was record home ownership, citing it as proof that a rising tide lifts all boats. Instead, we have had a Tsunami of sub-prime lending. It has created a situation where the equity that American homeowners have in their houses is the lowest since records began being kept in the 1940s, With tens of thousands of mortgage foreclosures already underway or on the way, let's check the homeownership rate in New York City in two or three years.
Under the last four presidents, "government spending" usually has been treated like some kind of Evil Empire to oppose or at least rail against. Even the one Democrat among them, Bill Clinton, abandoned his campaign's "Invest in People" agenda that called for expanding infrastructure and other "putting people first" government spending to concentrate on reducing the deficit.
So what happens when the economy suddenly turns south? Politicians embrace a big boost in federal spending to cushion the downturn. This year probably will see another round or two of federal stimulus spending because there's no quick economic rebound in sight. It seems we need government spending after all. And if we had a more thoughtful system of government-funded investment in our physical and social infrastructure , complete with safety nets for people and not just giant banks, our economy wouldn't be so vulnerable to a Wall Street meltdown in the first place.
"Get a college education, get ahead." That's so "20th century." Now, we know that for most kids who are not from wealthy families, the only thing a college education definitely will get you is a mountain of student loan debt. The global economy is sending millions of white-collar jobs overseas. The Labor Department projects that, even 10 years from now, two thirds of the jobs in our economy will not require a four-year college degree. Since 2002, the real median wage for New York workers with a bachelor's degree or higher fell by 6 percent. Getting a college education is still a good idea, but somebody needs to think about how we get more good jobs in this economy. The challenge is how can policy makers use a combination of carrots and sticks to get businesses to create more demanding and better paying jobs.
The Bush administration would not let the 200,000 new employees at the post-9/11 Transportation Security Agency join a union, and it tried to scuttle even minimal labor standards in the Gulf Coast reconstruction effort.
At the same time, though, the administration has made a number of moves sending prices, particularly energy prices, ever higher. It turned over federal energy policy to the oil companies and blocked better fuel efficiency standards. The Iraq war has helped keep the oil-rich Mideast unsettled and oil supplies down, both ingredients for $110 a barrel oil. Its efforts to promote biofuels, like ethanol, have helped push grain prices to record levels. Thanks to this, we have much higher energy and food prices to go along with the recession.
Many Americans have wondered whether importing a lot more than we export really is a good thing if it means that American workers lose their jobs and, as a result, communities across the country lose their people. Nonetheless, as major leaders in both political parties touted the benefits of "free trade," many other Americans thought this was the necessary price to pay for a global economy.
Now more people are beginning to question the free trade faith. Not only did the U.S. lose 3 million manufacturing jobs from 1998 to 2003, but we didn't get any of them back in the recovery from 2003 to 2007 (in fact, we lost almost another million during that "recovery" period). That never happened before.
People see that the sky-high prices they pay at the gas station are going to finance the world's tallest buildings and world-class museums in tiny undemocratic, oil-exporting Mideast kingdoms. People worry about the safety of toys they buy for their kids, the food they feed their pets and the medicine they take themselves. At the same time, the country spends so much more on things we import than the rest of the world spends on U.S. exports that mountains of U.S. dollars are piling up in China and oil-exporting countries. So when Wall Street banks needed fresh infusions of capital to stay afloat, the only places to which they could turn was countries from which we buy our imported oil and manufactured goods. It's no wonder more and more Americans are asking to see (not to mention share in) the benefits from the global economy.
The Wall Street recession (a.k.a. this economic Katrina) may really be a "teaching moment," as they say. It does seem like the economy we thought we had doesn't exist, or at least doesn't exist anymore. At least we should know that when bonuses start to shoot up again on Wall Street, it's time to start worrying.
By the way, it's unofficially official now: The economy is in recession. Not only do 71 percent of the economic forecasters in the Wall Street Journal's survey say that, but economist Martin Feldstein declared it a recession last week. He is one of the handful of members (and the most publicly prominent) of the group at the non-governmental National Bureau of Economic Research that officially makes that call, when they get around to it.
James Parrott is deputy director and chief economist of the Fiscal Policy Institute (www.fiscalpolicy.org). He has been studying and writing about the New York economy since he landed in New York City a quarter century ago.ÂThe Independent Budget Office's annual report, http://www.ibo.nyc.ny.us "Budget Options for New York City," comes along at a useful time. With a near or actual recession unfolding and tax revenues declining, it's pretty clear that big budget troubles lie ahead.
But how far ahead? The good news is that there is time to anticipate the worst scenarios. Revenues will be higher than anticipated, according to Independent Budget Office director Ronnie Lowenstein's recent testimony before City Council. This, she said, not only assures a balanced budget for next year, fiscal 2009, but reduces the estimated 2010 budget deficit to a "relatively modest $2.1 billion," far less than the $4.2 billion deficit projected in the mayor's January financial plan.
This gives Mayor Michael Bloomberg another 21 months to establish his fiscal legacy and, unlike his predecessor, Rudolph Giuliani, leave his successor with a structurally sound financial plan.
So it's the 2011 and 2012 deficits -- estimated by the office to be $4.8 billion and $5.1 billion, respectively -- that remain cause for alarm. The state deputy comptroller for New York City's March report, in fact, says the 2011 and 2012 deficits could be as high as $6.6 billion and $6.1 billion. The big problem, as the city comptroller's March report notes, is that in those years the city will no longer have huge annual budget surpluses from previous years to help balance the next year's budget.
To confront this, the Independent Budget Office offers a range of options that would save or raise $100 million or more. They fall into three general categories: workforce changes, raising revenues and shifts of fiscal burden from city to state.
Each brings its own political problems: Workforce savings generally mean lower worker wages and/or benefits, as well as more work for public employees; shifting fiscal burdens from city to state requires approval by the state; and tax changes hit influential, higher-income taxpayers. The report takes no position on any of the options; rather, it simply provides arguments for and against each one.
Extending work hours and cutting benefits for the city workforce would save nearly $1.1 billion a year in 2011 and 2012. Having city employees work 40 hours a week instead of the 35 or 37.5 hours they're currently on the job, would eliminate 7,000 positions and save $456 million. Requiring workers to pay 10 percent of their health insurance premiums - they now pay nothing - would slash $508 million. A 10 percent reduction in supplemental services (dental, vision, prescription drugs, etc.) would cut another $100 million. All these "savings" would have to be negotiated by the city with the public-sector unions.
These plans might win favor with taxpayers-but would no doubt be strongly opposed by the unions. Two additional options, though, might get many taxpayers angry.
One, estimated at saving $300 million, would institute "pay-as-you-throw" trash collection. Owners and renters would be charged by the volume of their trash, much as they now pay for water and sewer services. Adding two students to all general education classes in city public schools would save $177 million.
With the exception of the post-9/11 2002 fiscal crisis, which prompted a $3 billion tax increase package, the trend in the city and state for the past decade has been to reduce taxes. So one key option in the report would simply raise the income tax rate on higher income New Yorkers, while still keeping it somewhat below rates in effect from 2003 to 2005 and in most of the 1990s.
The budget office lays out a series of interesting progressive options for the income tax, highlighting how un-progressive it has become. (In a progressive income tax, the higher one's income, the higher the tax rate.) Establishing two new rates above the current top rate of 3.65 percent would raise $619 million in 2012.
The new top rate, for joint filers with $225,000 or more in taxable income, would be 3.92 percent; the second top rate, for joint filers' taxable income over $450,000, would be 4.20 percent. Only 7.8 percent of all city taxpayers would pay more personal income tax under this option.
An alternative would lower rates for those in the lower-income levels as well as raise rates for high earners, with a top rate at 4.20 percent. With this option, which would raise $470 million in 2012, 76.8 percent of all tax filers would get a tax cut in calendar 2009. Both of these options would require state approval.
Then there is the commuter tax, eliminated in 1999 by a Republican governor, a Republican State Senate and a Democratic State Assembly. If restored, that 0.45 percent tax on wages and salaries earned in the city would raise an estimated $835 million in 2012.
The Independent Budget Office report offers a second, more progressive commuter tax option that would raise $470 million in 2012. It would tax commuters' wages in the city at a rate from 0.97 percent to 1.22 percent.
Any commuter tax would require state approval.
Several other tax revenue and tax reform ideas would also require state approval. Three property tax options would not only raise up to $400 million a year, but would make the city's property tax system more equitable. One would raise the cap on assessments of houses, which currently gives people who have houses a tax break denied those who live in condos or co-ops.
A second takes away a break for co-op owners. Unlike house and condo owners, they currently do not have to pay a mortgage recording tax when the property changes hands. And a third measure would revise the city's co-op and condo property tax abatement program, which currently favors many owners of high-end apartments.
Compared to personal and property tax options, the options for business contributions to revenue enhancement are quite modest. The three biggest ones would raise a total of about $650 million. These are: imposing the sales tax on capital improvements that are now exempt from it; eliminating the insurance industry's current exemption from the city general corporation tax; and doing away with a cap in the general corporation tax that affects about 44 corporations.
If restoring the commuter tax seems a political stretch, two other options in the report could prove even more problematic.
One would shift city funding of Medicaid to New York State. New York City's share - about $5.8 billion in 2008 -- of Medicaid funding is by far the largest share of any local government in the country. In most states the state covers the non-federal share of Medicaid. Under the plan laid out by the budget office, to offset some of the state's new Medicaid costs, New York City would shift half its sales tax revenue to the state. But the city would still come out ahead, reaping a net savings of over $2 billion a year.
There is some recent precedent for such a swap. The state now picks up any increase beyond 3 percent in annual city Medicaid expenditures and recently assumed the local share of the Family Health Care program. According to the state deputy comptroller's March report, this has saved the city $937 million in 2008 and 2009.
The other hot issue in the report calls for tolling of the East River and Harlem River bridges. To help understand the technical and political questions surrounding this, the Independent Budget Office has a separate "Bridge Tolls: Who Would Pay? And How Much." It envisions one-way-only tolls of $8.30 on the East River bridges, and $3.80 on the Harlem River bridges. If city residents were exempt from paying the tolls, the annual revenue from the fees would dip from $830 million to $376 million. This has been floated in the past but could gain more traction with the mayor's congestion-pricing transportation plan on the political table.
The big-money options in report are not all-inclusive. There are other large tax and workforce actions available, including dropping the current 7 percent property tax cut in the January financial plan, further across-the-board cuts or laying off city workers. That usually is the last step in city fiscal crises, but to take only one example, eliminating 8,000 city jobs with an average $60,000 in wages and benefits would save the city about $500 million a year.
Those are the hard political choices ahead. In real budget decision time, the mayor has less than 15 months to tackle them, not only to keep the city on sound fiscal ground but, not incidentally, to set the Bloomberg fiscal legacy.
Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.Â
While the exact predictions vary, almost everyone agrees the palmy days of budget surpluses and bulging city coffers are coming to an end. Facing declining revenues, Mayor Michael Bloomberg has said the city needs to trim $1.5 billion from its budget over the next two years. As part of this, he instituted mid-year cuts in the city schools, prompting protests from some students and parents.
The news from Albany could be even grimmer. With 20 percent of the state's tax revenues coming from Wall Street, cutbacks seem inevitable. Already Governor Eliot Spitzer has called for scaling back increases in state aid to city schools. He has proposed some new spending initiatives, but many experts say his budget projections are far too rosy.
It is against this backdrop that the city's 2009 municipal elections are beginning to take shape. Five people - three City Council members, a member of the State Assembly and a borough president - have already announced their intention to run for city comptroller. Whoever wins this election - and succeeds William Thompson, who is term limited (and almost certain to run for mayor) will pay a key role in plotting New York's fiscal future. The city's chief financial officer, the comptroller invests its employee pensions funds, audits city agencies and makes recommendations on city programs and spending.
Gotham Gazette asked the five declared candidates for comptroller to offer their views on what policies New York City should adapt to confront the new fiscal reality.
(Note: Other politicians are considered likely to enter the race. We limited ourselves, however, only to official announced candidates.)
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