Opinion

DETROIT: THE ABYSS AWAITING NYC?

NEW York has a modern history of good luck – and of finding good leaders when it’s looking into the abyss. The city’s luck has run out – but it’s still got a chance of finding leadership on its dangerously bloated budget.

To see what happens when a city runs out of luck and leadership, look at Detroit.

Last week, the Motor City lost its investment-grade bond rating, joining three other cities in the junk category. The cut, which makes it more difficult for Detroit to raise money for capital projects, is a referendum on Detroit’s leadership over the last 30 years.

One of Detroit’s major problems was that it couldn’t politically and psychologically adapt to the long-term changes and failures of its industry, automobiles.

New York can learn a lesson here – as its industry, finance, goes through a similar long-term contraction.

Over three decades, Detroit never could muster the political will or competence to restructure its city budget to deal with a reality in which the Midwest wasn’t the capital of US auto manufacturing.

New York may face the same kind of challenge. New York’s high-flying financial sector may never return to its size and profitability of the last 25 years. New York thrived in those years because finance was thriving – the dollar and American markets were king, and debt was easy and risk-free.

Plus, developing markets like India and China represented a sweet spot for New York. Their emerging economies were starting to make real money but they couldn’t invest that money or raise their own capital – so they went to New York (and London) for help.

Finally, global investors were confident that Wall Street firms possessed the unique expertise to bet huge sums on opaque ventures.

Finance, in other words, was like US automaking was until the ’70s – insulated from global competition. The next 20 years may be different. Indeed, the next couple of years may seem the hardest, as such bread-and-butter businesses as taking companies public through IPOs, advising on mergers and acquisition and underwriting debt stay dead.

But even after these bread-and-butter domestic markets slowly recover, New York isn’t guaranteed to be a world financial capital. Smaller regions from Asia to Africa to Eastern Europe now can create their own markets when the world begins its slow recovery.

And these markets no longer trust New York to be smartest in finance.

New York, then, faces the same danger Detroit did when automakers started losing their competitive advantage – if not an even bigger danger.

Consider: Wall Street’s unfathomable profitability allowed New York’s budget to increase by 41 percent after inflation in the last seven years. Mayor Bloomberg increased the city’s debt and workforce at unsustainable clips, too.

There is no mathematical way to sustain that profligacy.

Over the last 18 months, New York hasn’t shown the political courage necessary to deal with a challenge of this magnitude.

Bloomberg, for example, recently inexplicably awarded the municipal work force 4 percent annual raises into 2011 – with no requests for givebacks on such things as costly pension and health benefits, which haven’t been as generous in the private sector for decades.

Bloomberg’s damaging actions made it harder for Gov. Paterson and the MTA to rein in their own benefits costs – when

the MTA needs every dollar it has to invest in its fragile subway assets.

If New York City and state continue to vacillate – raising taxes as Bloomberg has done on property and letting assets

deteriorate without addressing the costs of our huge government – they will lose the middle class that supports competent leadership, as Detroit did long ago.

What’s the good news?

New Yorkers sometimes know instinctually when things get out of control. Back in the early ’90s, they elected Mayor Rudy Giuliani to fix what was seemed like an impossible problem – crime – even though conventional wisdom said that it couldn’t be done.

Now, the supposedly uncontrollable problem is the city

budget. But just this week, one probable mayoral candidate courageously pointed to the biggest problem with the city’s budget (besides debt and Medicaid): those unsustainable benefits for city workers, including free health benefits.

When it might have been politically safer for Anthony Weiner to say nothing, he said that the city needed to ask workers for big givebacks.

“Whether it’s five years down the road or 10 years down the road, the days of having a guaranteed . . . pension are probably not going to be around much longer,” he added.

We’ll see whether Weiner keeps up this line of argument and if other potential rivals follow.

If they do, they may be pleasantly surprised. Regular New Yorkers may understand that things need fixing, and they may seize the chance for necessary change – just as they did nearly 20 years ago before it got too late, as in Detroit.

Nicole Gelinas is a contributing editor to City Journal.