“We must share the pain.”
—Felix Rohatyn, architect of the NYC bailout (1975).
“It is spread-your-pain, no-sacred-cow kind of a solution to our problems.”
—Mayor Michael Bloomberg on NYC’s approach to the latest fiscal crisis (February, 2002)
In our last Rail entry, “New York City, LLC” (March/ April), we outlined the inequalities, as well as contrasting priorities, that shape the debate regarding the city’s current fiscal problems. The city’s budget, however, isn’t simply a matter of local politics, an issue of concern only to city residents and assorted policy types. Rather, for the past quarter-century New York City has served as both laboratory as well as a beneficiary of global neo-liberal reform. And even without its World Trade Center, New York City’s centrality within the world economy remains indisputable.
Over the past 30 years, the city’s internal policies have also had significant ramifications for the growth of the global economy. The aftermath of the first fiscal crisis in the mid-1970s, for example, saw the most visible implementation of the structural adjustment-type programs that would be increasingly imposed by the International Monetary Fund on less-developed countries. Meanwhile, during the 1980s and especially the 1990s, New York City’s budget became increasingly dependent on Wall Street’s financial health to sustain it. As Wall Street began to rake in returns for global investments, the IMF-led destruction of the public sector around the globe thus helped subsidize what remained of New York City’s governmental obligations.
There are several obvious dangers involved when the city’s budget banks on Wall Street’s future returns. Despite all the Pollyanna-ish nonsense of the 1990s about uninterrupted future growth, the dot-com collapse and ensuing recession proved that capitalism will never operate free of a boom and bust cycle. Former Mayor Rudy Giuliani’s shortsighted budget management and tax cuts have only compounded the city’s woes during the current bust. Absent from popular discussion is also the degree to which average New Yorkers’fortunes depend on the fate of the global economy. Enron’s boom years, for instance, produced plenty of money for pension plans and Wall Street, and thus trickled back into the city’s coffers.
The city’s long-term health thus depends on the diversification of its economic base away from dependence on Wall Street. But in the meantime, that continued dependency places some necessary global political obligations on the city.
Structural Adjustment Begins at Home
During the fiscal crisis of the mid-’70s, an increasingly aggressive financial community waged an ideological assault on the city’s liberal public policies. “Any federal aid to bail out New York City,” Treasury Secretary William Simon (a former head of Salomon Brother’s municipal bonds division) told Congress, should come on terms “so punitive, the overall experience be made so painful, that no city, no political subdivision would ever be tempted to go down the same road.” The nation’s liberal “philosophy of government,” said Simon, had been shaped in New York City, and retrenchment there would thus help set a much larger example.
At first, the newly-created Municipal Assistance Corporation (MAC), which consists of the city’s leading businessmen, brokers, and bankers, proposed to lend money to New York only with certain conditions: massive reductions in city spending via payroll and service cuts; major concessions from unions regarding wage increases; and the imposition of fee increases for many city services. Unable to overcome militant resistance from city unions, MAC architect Felix Rohatyn and others thus successfully pushed for the creation of the Emergency Financial Control Board (EFCB), an entity that gained control over all city revenue. After severe cutbacks in city services, along with municipal unions’ investment of their pension funds in city bonds, the Ford administration finally agreed to grant $2.3 billion in short-term loans to bail out the city, but only with the stipulation that Simon had to personally approve each loan. In a short period, control over the city’s budget was thus handed over to a financial community that sought to implement a new “philosophy of government.”
Over the next decade the IMF and World Bank increasingly applied variations of the New York model to solve debt crises around the world. As William Tabb argued in his 1982 book The Long Default, the result of the NYC fiscal crisis “was the imposition of austerity and the sort of budget the International Monetary Fund imposes on third world countries.” Like MAC and the EFCB, the IMF is a non-democratic body that possesses the ability to make what are in essence political decisions regarding how public goods and resources will be acquired and distributed. What by the early years of the Reagan era became commonly known as “structural adjustment” indeed consisted of prescriptions for heavily indebted countries that stressed reduction of government expenditure and intervention in markets; public sector payrolls and services; and union strength and wages. Along with these cutbacks came a push toward privatization of government enterprises as well as the opening of markets to foreign investment and ownership. In short, from the mid-1970s onward Wall Street began calling the shots from NYC to Buenos Aires and beyond.
NYC & Wall Street: A Co-Dependent Relationship
The outcome of the fiscal crisis in NYC both reinforced and laid ground for the growth of a city economy largely dependent on the so-called FIRE sector, which consists of financial services, insurance, and real estate—essentially the same groups that engineered the bailout. This shift, in turn, has caused city revenues to become more dependent on corporate and personal income taxes from Wall Street and the rest of the FIRE sector. According to statistics from the Bureau of Economic Analysis, the share of NYC’s total personal income originating from FIRE jobs began rising in 1975 and accelerated especially through the 1990s, reaching 25.2 percent in 1999. In terms of personal income taxed, at the end of the 1990s a quarter of the city’s revenue came from a sector that employs a mere 5 percent of the city’s workforce.
In 1998, Carl McCall and the New York State Comptroller’s Office issued a report, “New York City’s Economic and Fiscal Dependency on Wall Street,” which offered a poignant critique of this relationship by looking back to the 1980s when the financial industry rapidly expanded, culminating in a crash that resulted in major fiscal problems for the city. Compared to the 1990s, however, the city’s economy was far more diverse in the 1980s, with twice as many industry sectors accounting for at least 5 percent of the city’s growth. In addition, between 1983 and 1988 only 23 percent of the city’s real earnings gain was derived from the financial sector, whereas between 1992 and 1998 Wall Street accounted for a whopping 56 percent of city earnings.
During the halcyon days of the late 1990s, the city was flush with Wall Street money, which by 1998 accounted for 82 percent (or $2.7 billion) of the growth in New York City personal and business tax collections during that period. This created both a budget surplus and the opportunity for then-Mayor Giuliani to push through massive tax cuts while touting the economic success of the city. Characteristic of the false optimism of the day, Giuliani did not put the surplus away for the inevitable rainy day. As the above-cited 1998 report presciently noted, “Since the City has been spending the budget surpluses of the last two years, it does not have a cushion in the event economic conditions deteriorate.” A cushion for the city’s current fiscal woes it might have been, but of what stuff was this cushion made?
Enron: a Neoliberal Disaster
Enron’s reported first-quarter revenues nearly quadrupling to $50.1 billion, beating Wall Street’s expectations of profit gains
—Associated Press, April 18, 2001
Enron, of course, was not the only cash cow during the booming ’90s that benefited Wall Street, middle-and working-class pensioners, as well as New York City residents. One need only recall the ludicrous rise in stock prices of an Amazon.com or a Kozmo.com to know that money-for-nothing ruled the day. But Enron has turned out to be something far more sinister than a dot-com confidence game. Nor is it simply an object lesson in fraudulent accounting accomplished without necessary regulatory oversight. Rather, it is a story of how the current rules of the global economy can be exploited to produce incredible wealth that flows in and out of the lives of everyday Americans in a range of unrecognized ways.
It remains true that one of the central tenets of investing is no matter how big the investor, if money is rolling in, nobody asks questions. Such was the case with Enron, the Houston-based energy trader turned diversified behemoth whose demise is one of the most spectacular examples of global capitalism run amok yet seen. What is clear at present is that Enron, in its overly expansive bid to become a diversified profit-making company, created nearly 900 “off-balance sheet partnerships,” or “Special Purpose Entities,” that allowed the company to report massive profit to investors when, in actuality, the exact opposite was true.
During the 1990s, intense privatization spread through Latin America and other regions where IMF structural adjustment programs were in place. Newly privatized and deregulated economies hoped to lure investors with incentives, promises of high productivity, and low wages; meanwhile, formerly state-owned assets such as power plants were sold to multinational companies at relatively bargain prices. Enron was a major player in buying these energy assets in Latin American and other less-developed parts of the world, as it lobbied and worked with various national government agencies, as well as the IMG, the Overseas Private Investment Corporation, and the U.S. Export-Import Bank, to introduce investment and buy assets in countries such as Argentina, Bolivia, Ecuador, and Brazil. According to the Energy Intelligence Group, Enron had 16 major energy ventures all over Latin America, including electric utilities, power plants, and natural gas pipelines. But rather than develop these investments, Enron used many of them as hiding places, entering the market by creating off-balance sheet entities in order to massively boost profit margins and make Enron the investment du jour for Wall Street’s elite.
For example, one large limited partnership, called LJM2, was spearheaded by NYC giant Merrill Lynch and offered to a wealthy set of investors. LJM2 made money by buying Enron assets at low prices and selling them back to Enron at higher prices, thus reaping the difference. A total of 51 limited partners are listed on partnership documents for LJM2, and most are either grouping of executives from Wall Street firms that did business with Enron, private money management firms, or wealthy clients of Merrill Lynch. Limited partners got an annual internal return rate of 43 percent while the general partners (Enron executives) cash in at a mere 8.871 percent. Merrill Lynch was not the only Wall Street firm involved, as major players like Citigroup and JP Morgan were some of Enron’s biggest creditors, absorbing big profits when the going was good. And while emerging markets go in and out of favor on Wall Street, and don’t necessarily make up the bulk of the Street’s profits, privatization and structural adjustment in less-developed counties is continually geared to attract such lucrative foreign investment.
But even without Enron, the effects of privatization will continue to be felt. When Enron collapsed, much of financial press focused on how competitors in various regions were buying Enron assets at bargain prices. Many analysts also argued that even though the “instability” of the situation will result in high-energy prices and shortages, if governments intervene, investment will be further slowed. Thus, even after Enron played games-for-profit with the development of essential infrastructure in less-developed countries, most observers refused to acknowledge that unregulated privatization was the primary cause. While rural residents from Brazil to India lost their livelihoods, and pensioners in the University of California system saw their fortunes go up and down, Wall Street and New York City residents enjoyed the gains of Enron’s fleeting largesse while suffering little of the consequences of its fall.
NYC and Global Justice
Via its dependency on Wall Street, and Wall Street’s relationship to the global economy, New York City continues to play a crucial role, both symbolically and literally, in the future of global justice. Ideologically, the neoliberal juggernaut really started here in the late 1970s, and it clearly continued through the 1990s, as Mayor Giuliani’s experiments in workfare and zero tolerance policing receive global attention. Given the fact that the current Mayor once sat on the board of the New York Stock Exchange, the next few years augur little change in the position of the city’s FIRE sector. In fact, Andrew Alper, president of Bloomberg’s Economic Development Corporation and a one-time investment banker at Goldman Sachs, actually criticized the Giuliani administration recently for its supposedly “inadequate” outreach to the private sector. To rectify this “problem,” in late April the Bloomberg administration, in conjunction with Governor Pataki and Senators Clinton and Schumer, doled out large grants to several downtown businesses. Fittingly, at least in the symbolic sense, Deloitte and Touch, a global accounting firm, received the largest grant, of $13 million. Even normally pro-business reporters like the New York Times’s Charles Bagli objected to these handouts, since such businesses had no intention of moving.
Even at the city’s leading planners, like those belonging the Regional Plan Association, voice strong objections to continued FIRE sector subsidies, those handouts will likely continues during the next few years. Thus, our question is, given the many ideological constraints, are there any ways in which New York City politics can serve to alter the prevailing model of neoliberal globalization? This may seem especially unlikely given that the current fiscal crisis in New York City is likely to reinforce the attack on the public sector that has grown stronger over the last 25 years. However, we think that there are a number of issues which could galvanize the movement of a renewed public sector in New York City, and in the process help establish the city as a model for an alternative process of globalization.
Implement a Global Code of Conduct
The Enron debacle showed that Wall Street investors could act as oblivious (at best) to the consequences of their actions to the livelihoods of people around the world as Ken Lay and company. To take a symbolic stand against unjust global practices, the City Council should pass a resolution calling on Wall Street to reorient its priorities away from financing the privatization of basic public necessities (utilities, health, education, etc.) in less-developed countries. There should also be discussion of an oversight commission with the power to impose penalties on Wall Street firms for Enron-type violations of this code of conduct.
Re-establish Local Control
Mayor Bloomberg recently “joked” that he hoped to reach an impasses with the City Council over the city’s budget, so that the matter could be settled by the State Financial Control Board (SFCB), the members of which “understand” how budgets “work.” The SFCB currently consists of the governor, the state comptroller, the mayor, the city controller, and three officials appointed by the governor (at present, two are Wall Street executives, and one seat is vacant). Regardless of whether the budget debate gets to that stage, the continued presence and ultimate power of the SFCB gives too much power in general to officials not elected to that board, and in this specific case, too much leverage to ideologically-driven mayors like Bloomberg. Additionally, the mayor is also able to oppose the city council’s current efforts to raise income taxes (to pay for schools) by stating that such taxes will never be approved by the legislature in Albany during an election year. Why should Albany have that much say over how New York City pays for its own budget? Ultimately, getting rid of bodies like the SFCB should also be seen as the first step in a larger struggle: to abolish the IMF and allow for the return of home rule around the globe.
Revive Progressive Taxation
The city’s current budget deficit stemsfrom two sources: shortfalls in revenue and an ideological reluctance to impose taxes. Amidst the first fiscal crisis, subway fare increases and the imposition of tuition at CUNY served as ideological symbols that the city residents, no matter how poor, must pay for services. In this current fiscal crunch, Mayor Bloomberg has resisted all corporate or personal tax hikes and instead looked to increase a variety of sales taxes and city fees. Activists across the city should enter into these debates by calling for a renewed emphasis on progressive taxation: corporate taxes, property taxes, and personal income taxes. For example, according to many analysts, if the city’s tax rates remained at the level prior to Giuliani’s cuts, the city’s current budget deficit would be reduced by more than a half. Meanwhile, property tax rates across the city remain disproportionately low, and many of the city’s largest landowners—including private universities like Columbia University and NYU, and a variety of private hospitals—do not pay any property taxes. In New York and around the globe, restoring the ideal of progressive taxation is a necessary first step towards ameliorating the problems of growing inequality.
Restore NYC’s Public Sector
Progressive taxation is a precondition for a larger reinvigoration of the role of NYC government at home. Prior to 9/11, the mayoral debate focused on governmental solutions to the problems of housing and education. However, since taking office, Bloomberg has pushed for mayoral control over schools, which many critics would say is the first step toward privatization. Opposition to the mayor’s plan on this issue should be treated as a larger rallying cry in defense of a vital public sector. Other issues that could generate a debate on how to renew the city’s public sector include the question of HMOs, the conflict over the placement of privately-owned power plants, the defense of public space, and wage increases for municipal workers. After 9/11, many onlookers said, the heroism of the city’s various rescue workers created a renewed faith in the city’s public sector. It’s time to give a wider actual meaning to such a sentiment.
NYC’s current fiscal woes actually provide a unique opportunity to ask questions about the city’s relationship to the global order. The city’s first fiscal crisis served as a catalyst for the neoliberal model of globalization, ushering in the socially liberal, economically conservative era we live in today. As the present fiscal crisis continues to unfold, why not make the city the spark for debates about how to create a new, more genuinely equitable world?