OVER the last two years, it has looked like New York would have to adjust to living without so many golden eggs from the Wall Street goose. But now Wall Street profits are booming again — so we can relax, right?
Wrong. This is an empty boom that’s based on government subsidy, not economic reality. Goldman Sachs and the rest are benefitting from conditions that can’t last — the two big ones being zero interest rates and the implicit backing of the federal government in the wake of last fall’s bailouts.
These conditions let Wall Street make big, speculative bets with borrowed money — which was the recipe for the grand financial party of the last decade and for last fall’s meltdown. It can’t last — and it temporarily prevents the financial sector from coming up with a new, more sustainable formula. That may mean lower profits.
The danger is that Wall Street’s last manic party may give city and state politicians the excuse to avoid getting the government’s financial house in order.
In his report on the city budget Monday, Comptroller (and mayoral candidate) Bill Thompson outlined the continued impact to the city’s $59.6 billion budget from the Wall Street meltdown: Tax revenues have “evaporated.”
Two years ago, the city expected to reap $37.3 billion in tax revenues for the current fiscal year (which started four weeks ago). Today, it expects to take in just $35.3 billion for that same fiscal year. And that includes what the recent sales-tax hike is to bring in; without it, it’s a 7.8 percent drop in expected revenues.
Personal-income-tax collections, in particular, are expected to be down 37 percent over two years, and won’t return to 2008 levels for five years.
These taxes are a measure of how much wealthy Wall Street workers and investors have lost, since more than half of this money comes from the richest 1 percent.
Yet has the city cut spending in line with lowered expectations?
No. City outlays are down only 4.3 percent from previous expectations. And Mayor Bloomberg just finished giving the workforce 4 percent annual raises (albeit getting some modest cost-cutting union concessions).
Plus, the biggest long-term problems are getting worse.
Over the next three years, tax revenues should rise 15.3 percent. But spending will jump 20.5 percent, driven by pensions (up 14.5 percent), health care (up 17.7 percent) and debt service (up 21.6 percent).
This leaves deficits of more than 11 percent of city revenues. And some of the cuts the mayor has made — such as trimming the police force — may be unsustainable.
Bloomberg and the City Council, as well as state pols, may be cheered by the fact Wall Street firms are hiking bonuses. It’s quite possible that instead of the continued double-digit drop in personal income taxes, we’ll see a double-digit spike this year.
Again, there’s no reason to expect that spike to last — the Federal Reserve can’t keep interest rates at zero forever, and Washington can’t keep bailing out Wall Street — our federal deficit won’t let it.
But a spike, even a short-lived one, is all that the New York political world needs to pretend that everything is fine — even though uniformed workers can still retire well before they are 50, teachers and almost everyone else can retire at 55, and city workers still don’t pay any of their own health-care premiums.
Plus, the teachers want a big raise, too, like everyone else got.
The mayor should be doing a full-court press on Albany “leaders” to enact pension reform over union objections. But a Wall Street mini-boom may make such badly needed initiatives seem less urgent.
Meanwhile, Wall Street is as unsustainable as it ever was.
New York needs a healthy, innovative Wall Street — not one that’s running on government subsidies just like poor Detroit. An illusory boom harms New York’s ability to adjust to a reality that remains inevitable, if maybe further away.
That’s a shame, because, as Mayor Bloomberg noted Monday, people won’t want to come to New York or to stay here if they don’t have a job. Our growth rate in people seeking jobs is nearly twice as high as the nation’s. Many of these people often create their own jobs, to the city’s benefit.
But they’ll have a harder time if a pretend boom on Wall Street crowds them out, while the city and state keep piling on the taxes — and cutting the police force and other truly vital areas — in order to keep on funding city government’s own unsustainable ways.
Nicole Gelinas, a contributing editor to City Journal, blogs at nyfiscalwatch.com. Nicole@city-journal.org