The Streets Were Paved With Gold
On the west side of Manhattan, once called Hell’s Kitchen, a storefront church’s neon sign flashes the message “Sin will find you out.” That should have been the title of Ken Auletta’s new book on the New York City fiscal crisis, because that is his theme.
The sins of New York! An old story. Auletta introduces his version with a summary of Poe’s “Masque of the Red Death,” suggesting that New Yorkers reveled as death (in the form of financial doom) entered their midst. To flesh out his lengthy metaphor, Auletta provides details of life in today’s New York:
$300 per couple buys entry to a masquerade party at the mirrored and varnished discothèque Régine’s, where one can buy scrambled eggs and caviar for $19, Chivas Regal for $90, or—for the abstemious—a bottle of Coca-Cola for $6.
Better yet, wander down Fifth Avenue in pursuit of the “appliances of pleasure.” No, this does not mean sadomasochism has reached the Avenue. Auletta is referring to $4,900 Patek Philippe watches (the economy model), $35 boxes of Belgian chocolates, and $750,000 co-op apartments.
One block east on Madison, shop at boutiques paying rents of $50 per square foot and charging $235 for a child’s dress and $65 for jeans.
The sins of the beautiful people are many, but provoking New York City’s fiscal crisis is surely not among them. Why then does Auletta, a fine New York journalist, introduce his book on New York with the excesses of its inhabitants? First, he is grappling with a perennial question. Were the city’s troubles caused by factors beyond its control, such as population migrations, an imbalance in federal aid, a decline in its manufacturing base? Or were its troubles of its own making? He believes the latter.
Second, Auletta is disturbed that what Mayor Koch calls a renaissance—which Auletta says is confined to Manhattan—will lull observers into concluding the city’s troubles are over. “Manhattan,” he says, “is thriving.” But Manhattan fiddles while the other boroughs burn. To those people in the hinterland who always believed the city’s fiscal problems were the just due of its moral depravity, Auletta offers support. The city worsened its problems by the self-indulgence of its citizens, the short-sightedness of its leaders, and the native arrogance of both.
Finally, while Auletta identifies himself in his introduction as a New Yorker, born in Coney Island of an Italian father and a Jewish mother, he writes with the missionary fervor of a Midwestern Protestant. He is distressed by what he sees as the city’s blind revelry in the face of financial doom in 1975, a revelry that has started up once again with the influx of enormous private wealth to the city. He writes with the pain and the passion of one offended by sin. New York City is his Sadie Thompson.
Auletta has worked hard on this book. He has looked at countless studies, and has tried to make sense of the conflicting data and warring opinions. But ultimately the book fails because his own description of what happened to the city is hopelessly garbled. He cites anything and everything as a cause of the fiscal crisis: the suburbs, rent control, union power, growth of pensions, moral obligation bonds, shortterm debt, the transit strike, medicaid, taxes, pay parity, redlining, and Nixon. Of course, in this he isn’t precisely wrong. Somehow the city did manage to turn every trend against itself. New York City started out after World War II with the same problem every industrial city had: how to convert its war economy to a peacetime economy. Only, as usual, New York’s problem was a little worse, and it handled it a little less well.
Take rent control, a serious topic that Auletta mauls with gossipy trivia. For much of its history, the basic fact of life in New York has been its odd status as a renters’ town. New Yorkers rent. They don’t buy. (Until recently, they had no choice.) After the war, the city faced a serious housing shortage exacerbated by landlords prepared to charge gouging rents that would have forced thousands to move involuntarily, causing a huge displacement of population. The city yearned for stability. It chose to continue rent control. Fair? No, probably not. The city placed the cost of maintaining a stable population on a single group of unpopular New Yorkers, landlords. The city thus hurt its property tax base, destroyed some neighborhoods, discouraged investment in real estate, and generally prolonged the grand New York tradition of “you can always get something for nothing.”
Auletta cites figures showing that 15 percent of current rent control families could pay more. (“A lot of shooting would be required to remove all the comfortable people enjoying rent-control privileges in buildings along Central Park West and South, up and down West End Avenue and Riverside Drive, up the East Side, down lower Fifth and upper Park avenues, and across the river in Brooklyn Heights.”) Only 15 percent? Seventy-five thousand out of 2.1 million apartments does not make the case that rent control is ruining the city.
Were Auletta to provide more data about this 15 percent—say, how well-to-do they are, where they live, what tax revenues the city forgoes on their account—he could make an analytic link with the fiscal crisis. Instead, as a sort of Rona Barrett of the policy, he pruriently delves into the rents and housing accommodations of various well-known New Yorkers.
The president of the American Stock Exchange, for example, pays $661 for an eight-room apartment in Yorkville. By how much is he, or his fellow victims singled out by Auletta, damaging the city’s tax base? If his apartment is worth $850 per month (Auletta’s lower estimate) and if the standard rule-of-thumb holds true that 25 percent of market rent goes to taxes, then his landlord should be paying about $212 per month in taxes and is probably paying $165 per month. Auletta doesn’t show any connection between the rent-controlled upper-middle class and the fiscal crisis—there is one, to my mind—and so fails to justify all his underground gossip on the subject. (Auletta does oddly suggest that if fewer rich men lived in luxury rent-controlled apartments, then “perhaps more upwardly mobile black families would live” in the city rather than in Scarsdale. By what reasoning would he expect this?)
No one knows what rent control has cost the city. The Federal Reserve Board, for example, claims that rent control costs the city $250 million a year in taxes. Some claim less, others more. Because the city has had controls for thirty-five years, it’s impossible to speak clearly about “market rents.” Further, most landlords can get economic rents from most tenants without the rents being subject to the market, particularly in Manhattan’s wildly inflated market. Traditionally, the selling price for a rental building is based on the total rent received. Thus rent control lowers the value of the property in a tight market. But the reverse is also true. For the past few years in New York, the apartment market has been soft. The guaranteed rental increases under the new rent stabilization system have increased property value to owners, frequently above the market. Like almost everything else in New York, rent control is a messy, difficult subject, filled with conflicting data, patent evils and benefits, and surrounded by raging emotions.
The same could be said of the other “causes” of the fiscal crisis listed by Auletta: e.g., greedy unions, overpaid civil servants, excessive borrowing. Raging emotions, however, impede analysis, and it is impossible to discuss Auletta’s book without first doing what Auletta never does: try to reconstruct what happened.
One can choose from any number of dates for the origin of the city’s fiscal crisis. My favorite—others will quibble—is 1961, the year the city first chose to borrow money to pay its ordinary, day-to-day, or “operating,” expenses.
The legitimate reason for a city to borrow for short periods of a year or less is to make revenues flow evenly alongside expenditures. Cities must spend regularly but receive their revenues irregularly.* In 1961, however, Mayor Wagner used a contingency fund—a kind of rainy-day account—as security to borrow short-term to meet his deficit. He was not borrowing legitimately. By 1965, the contingency fund could no longer cover his deficits. He borrowed money against future revenues expected from the federal and state governments, issuing what are called Revenue Anticipation Notes (RANs). RANs are a perfectly respectable short-term debt instrument, but they must be based on real, not imagined, revenues. Wagner began the practice of guessing at future revenues rather than relying on the previous year’s actual receipts. Wagner closed his last year’s budget gap with $56 million in RANs and left office.
While Wagner set the city on the path of borrowing to pay for operating expenses—a sin if there ever was one, to return to Auletta’s theme—he virtuously kept the city’s expenditures nearly level from year to year. This is important, because the city’s revenues—from city taxes and federal and state aid—were also level from year to year. Mayor Lindsay’s contribution to the city’s downfall was in continuing the still rather venial, if reprehensible, Wagnerian practice of illegitimate borrowing, while more than doubling expenditures between 1965 and 1972.
The fateful year 1969 came in the middle of Lindsay’s mayoralty. This was simultaneously the last good year for the city’s economy and the beginning of the national recession which hit the city much harder than the rest of the country. By 1974, the city had lost 300,000 or 9.6 percent of private jobs. Lindsay partially made up for this loss by increasing municipal employment by 6.3 percent. He continued to increase his expenses, although not by the enormous leaps (a 19 percent increase in 1967, for example) of his earlier years. In doing so, Lindsay was pacifying powerful forces in the city, particularly the labor unions Auletta finds so greedy. But he was increasing his expenses at a substantially faster rate than his revenues and he made up the difference the only way he knew: borrowing.
Lindsay had two ways of borrowing to pay operating expenses. First, beginning in 1968, he shifted some operating expenses—salaries and training programs—into the capital budget, which is the budget set up to build and maintain the city’s plant. It is largely supported by long-term borrowing, which makes sense because it finances long-lasting structures like bridges, schools, and government office buildings. The next generation of taxpayers will pay for what they use. Lindsay’s practice of paying current salaries from long-term borrowing is like a family’s taking out a thirty-year mortgage to pay its grocery bill. This device got so out of hand that by 1975 the capital budget contained over $700 million in such expense items, roughly half the total budget. Second, by 1970, he had $420 million in outstanding RANs, uncovered by state and federal aid. He paid them off with new borrowing. From here forward, the city was unable to pay off its short-term debt at the end of the year. By 1975, it had $4.5 billion in outstanding short-term debt (and another $7.8 billion in outstanding long-term).
For example, by the time New York State's fiscal year began on April 1, the state had forwarded to the city only one-fourth of the education aid it owes, while the city had spent over 60 percent of its education budget. Thus each year the city has had to borrow short-term about half a billion dollars to cover the difference between its expenditures on education and its receipt of state aid.↩
For example, by the time New York State’s fiscal year began on April 1, the state had forwarded to the city only one-fourth of the education aid it owes, while the city had spent over 60 percent of its education budget. Thus each year the city has had to borrow short-term about half a billion dollars to cover the difference between its expenditures on education and its receipt of state aid.↩