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The Coming Emergency and What Can Be Done About It

What is the outlook for American society and, more specifically, how can our society adapt to an economy in distress? It is a vast question that I can only speak to from a rather limited, but nonetheless eye-opening, experience, as chairman of New York’s Municipal Assistance Corporation. But, in brief, I would say that the outlook for American society is highly uncertain and that it cannot, in the long run, adapt itself to an economy in distress.

Austerity and democracy do not walk hand in hand in the United States, except in wartime. The near-bankruptcy of New York City created in 1975 something like a “moral equivalent of war” for city and state politicians, as well as business and labor leaders. Before then the city had, for years, plunged toward disaster. Year-to-year deficits were papered over by accounting gimmicks; pension plans were underfunded; industries were driven away by high taxes and low productivity; borrowing was more and more relied on to finance operating deficits while capital programs were starved; the political leaders refused to face reality: all of these made disaster inevitable.

It was only when this became apparent, when month after month one bankruptcy deadline after another had to be faced, that Governor Carey called on business and labor to join forces with government in order to devise a program that would head off the crisis and bring the city back to life. The programs that accomplished this were initially harshly deflationary, them followed by a gradual shift to moderately relaxed fiscal policy and support of business, which led this year to New York City’s first truly balanced budget in memory.

It is worth analyzing what we were able to do in New York as well as the limits beyond which we could not go, under the severest kind of pressure, since New York is, in certain respects, a mirror of the US. There is after all little difference between New York City’s mounting year-after-year deficits from the mid 1960s to 1975 and the fact that the national budget has been in balance only twice during the last fifteen years; little difference between New York City burying its operating expenditures in its capital budget and the $15 billion annual financing of the US government that is “off-budget” (i.e., the loan guarantees and similar commitments that do not appear in the budget); little difference between New York City having driven business south and west as a result of high taxes and low productivity and the US driving business abroad for the same reasons; little difference between New York City selling short-term notes to finance its deficits and the US financing with the shortest of all notes, namely demand deposits of OPEC oil producers; little difference between New York City’s sky-rocketing pension costs and the requirements that social security be adjusted to the cost of living (COLA). New York City faced actual bankruptcy by its inability to pay off its debts when they came due; the US is facing the national equivalent of bankruptcy in the form of uncontrolled inflation requiring increasing levels of national debt to be paid off in currency worth less and less.

Looking back over the last five years in New York, during which a deficit of $1.8 billion annually was brought to zero with a minimum of social disturbance, one can see two distinct phases. First came the brutal shock of actions intended to stop the hemorrhaging: these included a wage freeze coupled with deferrals of past increases; a 20 percent reduction in the work force; increases in transit fares and tuition at City University for the first time in 120 years; reduction by the banks of interest rates paid by the city and extension of the time period of the city’s loans; shifts in pension costs from the city to the unions; increased taxes and the creation of a state-run control board to pass on the city’s budget.

These programs, most of which were negotiated or set in motion by the Municipal Assistance Corporation, were coupled with limited federal credit assistance. They enabled the state-created MAC to provide a total of $7 billion of long-term financing to the city, both to refinance past accumulated short-term debts as well as to finance its increasing deficits and increasing capital programs over the period. The large initial layoffs of city employees were followed by a period of limited attrition and then by a stabilization of the work force at its present level; the wage freeze was followed by a two-year labor settlement at 4 percent annually.

But then austerity had to yield to the reality of society’s pressures, and a more recent settlement was made at essentially market rates between management and labor. Tax increases were replaced by tax cuts designed to favor businesses. Harmony was broken by a transit strike this spring. Increasing social tension in the ghettos of Harlem and Bedford/Stuyvesant culminated in ugly demonstrations to block the closing of just one facility of the city’s sprawling municipal hospital system. Civil service reform is still politically impossible and real progress on improving management and productivity is largely confined to rhetoric. Some of the city’s essential services have deteriorated.

Still, what saved the city was a limited period of austerity, imposed under the direst of threats, followed by gradual relaxation while a prosperous city economy, together with inflation, generated the growth in revenues to bring about a balanced budget. From 1975 to 1980, the expenditures of New York City grew in the aggregate by less than 10 percent, while the state’s expenditures grew by 35 percent and the federal government’s by 80 percent. The secret of our success, both at the city and state level, temporary though it may be, was to clamp a lid on expenditure growth while business activity and additional state and federal aid generated enough revenue growth to allow us to survive. As John Kennedy said: “A rising tide floats all ships.”

It must be remembered that our imposition of extreme austerity was temporary, that it was essentially imposed by outside forces—i.e., the state, the federal government, and the workings of the bond market—that it required the courageous political leadership of the governor, as well as a true social contract with business and labor. The people of the city were willing to make real sacrifices as long as they believed that those sacrifices were relatively fairly distributed, that there was an end in sight, and that the result would be a better city, a better environment, and a better life. What we did in New York City was completely alien to the concepts of “No Growth” and the “Zero Sum” society so fashionable in economic circles these days.

Americans today are confused and dispirited. They have seen our country, over the last twenty years, dissipate its world-wide economic, military, and spiritual leadership at a more rapid rate than any other major power in history. They are accused, with some justification, of being wasteful and lazy by political leaders whom they perceive at best as inept and at worst corrupt; they hear business leaders calling for belt-tightening and conservative orthodoxy from the comfort of their corporate jets. No wonder people are dispirited.

The United States today, like New York City in 1975, is on the edge of crisis. Financially, militarily, spiritually we are like an airplane about to stall. The answer, however, does not lie in a simple acceptance of “less for everybody”; I would invite economists of the no-growth school to walk in the South Bronx and convince people there that a reduced standard of living is required to curb inflation. I believe that most Americans, just like New Yorkers, would accept a limited period of austerity provided they are assured that we are in a crisis that justifies it, that their particular group is not bearing an unfair share of the burden, and they have a clear sense of how their sacrifice will ultimately lead to a better life for themselves and their children. This requires courageous political leadership with a program that has the following objectives:

A. Opportunity for private employment for most Americans who want to work;

B. A strong currency with reduced inflation;

C. A military policy that will insure US security against any aggressor.

Just as New Yorkers accepted a period of higher taxes, lower services, and, in many cases, loss of income for a perceived goal, i.e., the solvency of the city, so now Americans in the rest of the country would, in my view, accept a period of austerity if they really believed there was serious prospect of change. They have no reason to believe it at this point. The presidential campaign has offered little hope in that connection. At this writing it is clear that whoever is elected, we are condemned, because of uncertain leadership and a Congress unwilling to face responsibility, to stumble from inflation to recession and back, with each stumble worse than the one before. I do not believe that our society will stand the strain over the next four years. Our next president will face an emergency during his term of office, either internationally or domestically, possibly both, and the real issue now is how it will be faced.

It seems to me that we face different types of critical problems today:

  1. Problems like that of energy, which should have been apparent for years, where solutions are obvious, but to which the political structure cannot respond.

  2. Problems of inflation and productivity, about which there is a great deal of theoretical—one might say theological—controversy, and very little knowledge, in which the spectrum of professional opinion is exceedingly broad, and therefore no political consensus can even begin to be formed.

  3. Problems of our security vis-à-vis Russia. We do not seem able, at a cost of $140 billion a year, to project a credible sense of the US as a world-wide power. At the same time, we seem incapable of continuing a process of reduction in weapons competition by ratifying SALT II.

  4. Problems like those in the Middle East, which is vital to our security and our economy, where governments tend to be irrational in conduct and far removed from the exercise of our power.

  5. Problems like employment and education in the urban ghetto, which have baffled all attempts at improvement, and which will, with continued “benign neglect,” have consequences that are anything but benign.

  6. Problems like the great shift in wealth from the Northeast and Midwest to the energy-producing areas of the US, as a result of price decontrol. This trend will ultimately turn the country into “have” and “have-not” regions. One has only to look at Canada for its political implications and to be mindful of the fact that Canada does not have our existing social strains. This is a problem the political leadership resolutely refuses to acknowledge.

  7. The problem of the West and the third world, which must be faced by a coherent policy of the Western nations, a willing OPEC, and a realistic third world, none of which exists today. Western technology must combine with OPEC financing to help the third world. It is beyond the West’s capacity to bear any but a small part of the financial costs of third world development.

  8. The problem of the coming capital shortage, which will be created by at least three forces: the enormous financing requirements of the US government; the equally enormous financing that American industry will require to increase productivity and create energy independence; and the drain on our economy of a $100 billion annual payment to OPEC for imported oil. Nonetheless, our economic leaders deny the possibility of a capital shortage.

  9. The problem of our relations with Mexico and Canada, which both pose large risks and large opportunities for the US. Mexico, with its oil resources, its fast-growing population, and its distrust of the US, may be our most important long-term foreign policy problem. The potential benefits of a North American Common Market should be explored. But this is not even being discussed peripherally.

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