AT a Crain’s breakfast Tuesday, City Comptrol ler (and 2009 mayoral candidate) Bill Thompson acknowledged a vital truth: “Budget growth has lately been out of balance with the growth of our local economy. Had we started to tie city spending to [gross city product] growth 10 years ago, my office estimates that the city would have spent roughly $8.5 billion less last year.”
Tying spending to gross city product, a highly volatile statistic that outpaces inflation, is not a good idea. But Thompson’s basic point is sound: With its $60 billion budget, New York City spends way too much money – more than 10 percent a year too much.
During the Bloomberg era, city-funded spending has far eclipsed inflation, as seen in the graph at right. It would be nice to hear Thompson pledge, if elected mayor, to work to keep future spending to inflation and population growth.
But how to do that?
Practically speaking, the only way is to start reforming the budget’s long-term structural problems: public-sector pensions and health benefits, Medicaid and debt service – which now total 40 percent of spending.
Even modest state-city reforms here – like asking all public employees to pay just 10 percent of their health-care premiums, raising retirement ages for new public employees or paring 10 percent from bloated, patronage-rich, inefficient Medicaid costs – would save hundreds of millions of dollars a year, every year, starting in just a few years.
Thompson did say that he wants to “continue to work in collaboration with our partners in the labor movement to achieve greater productivity gains” – but he didn’t mention any specifics.
He also acknowledged that “while the financial industry will always be a critical part of our city’s growth and prosperity, we are experiencing a seismic shift in our local economy.”
Right again: There’s a strong risk that Wall Street’s turmoil is no short-term cyclical blip. And recognizing the scope of this problem – that the financial industry may shrink indefinitely – is the first step to solving it.
Thompson rightly notes that New York’s economy must diversify away from finance and real estate, which provided a third of wages and salaries in the city two years ago, at the height of the credit bubble.
But it would be another breakthrough to hear an elected city official admit that the private-sector economy can’t diversify – because city and state business and personal-income taxes are just too darned high. (They’re the highest, often by far, in the nation and the region.)
Startup firms, small firms – and even big firms in industries where profit margins are tight – simply can’t afford to locate here.
Thompson should acknowledge that cutting taxes across the board – or, at the very least, in this fiscal crisis, not raising them – would go a long way to attract non-financial firms and people. Falling residential and commercial real-estate prices may help attract new businesses in the years ahead; lower taxes would be a strong signal that we want them to come.
Thompson could also apply such broad-based cuts to the 4 percent unincorporated-business tax, which he (rightly) flagged in his speech as confusing and too far-reaching. This tax, as he noted, falls on independent workers and small firms – including the small investment firms that could be Wall Street’s future.
Small companies and owner-operated firms could be the future of New York as we possibly move away from huge investment banks playing with vast amounts of other people’s money.
All in all, Thompson’s comment about “excess spending” was a breakthrough – and something rarely, if ever, heard from elected officials in New York City.
Mayor Bloomberg, for one, once called New York a “luxury product.” Problem is, luxuries are the first thing people cut back on: In September, spending at US luxury retailers plummeted by double digits from last year’s level.
And people uninterested in buying a luxury purse probably won’t want to keep paying “luxury taxes.”
Nicole Gelinas, a contributing editor to City Journal, blogs at nyfiscalwatch.com.