For the city and state of New York, and for many other northern cities and states, the economic realities of the election are going to be felt very soon. They are both inevitable and harsh, and they will require new thinking and new policies on the part of our political leaders.
Whatever questions one may have about the underlying meaning of the new administration’s electoral mandate—whether the election should be seen as a floodtide of conservatism or simply as a demand to “throw the rascals out”—the economic content of that mandate, as well as the commitment of the new administration, is very clear. Economic growth and improved productivity are to be sought through significant incentives to private investment and savings. This, to speak generally, will be implemented by: 1) across-the-board tax cuts, possibly 30 percent over three years (the Kemp-Roth plan); 2) increased defense budgets; 3) offsetting reductions in non-defense programs. Such a program is intended to result in a reduced and balanced budget before the end of the presidential term.
Even if the incoming administration had second thoughts about certain aspects of this program, its newfound majority in the Senate and greater strength in the House have created a powerful dynamic working against any basic compromises of its goals. Super-imposed on the current economic situation, this program has almost automatic consequences for those in states like New York, regardless of ideology, regardless of party.
The current facts of economic life are as follows:
—a basic inflation rate of at least 10 percent, unlikely to be reduced during the next twelve to eighteen months;
—a federal deficit of about $50 to $60 billion for the current and coming fiscal years;
—a Federal Reserve policy of monetary restraint with a current prime rate of nearly 20 percent, pushing the economy back into recession;
—current imports of almost $100 billion per annum for crude oil (about ten times what they were five years ago), requiring high domestic interest rates to keep the dollar stable abroad.
In addition to the national and international situation, the regional structure of the US is undergoing great change. Between 1980 and 1990, decontrol of oil and gas prices will generate about $120 billion of added revenues to the energy-producing regions of this country. This is, in effect, a tax which will be paid by the consuming regions of the Northeast and Midwest in the form of royalties and severance payments.
An arc of economic crisis now stretches from Baltimore to St. Louis, consisting of older urban centers and older basic industries that are in serious difficulties. Cities like Philadelphia, Cleveland, Chicago, and Detroit are trying to cope with serious deficits while being tied to automotive and steel industries in similar straits. Unemployment rates of 5 1/2 to 7 1/2 percent in Texas, Arizona, and Louisiana can be compared with rates of between 8 and 14 percent in Michigan, Illinois, and New York. A recent study of the Conference Board, published in the Wall Street Journal, shows that metropolitan area residents of the Northeast already have the lowest standard of living of any region in the country. Their urban counterparts in the South have the highest. By measuring living costs and household incomes, the study shows that the standards of living of residents of New York and Boston are more than one third below those of residents of Houston, Dallas, and Atlanta.
Let us examine the interaction of forthcoming national policies on these regional trends.
I would assume that an immediate tax cut will be proposed of $35 to $40 billion. In addition one could assume increased military spending of some $10 to $20 billion. In order to reduce the added inflationary push of such a tax cut and defense increase, there will have to be at least partially offsetting budgetary cutbacks. Reductions of $20 to $30 billion in nonmilitary programs would seem to be a minimum and would still result in a federal deficit of close to $80 billion. In view of the Federal Reserve Board’s policy of monetary restraint this has to mean: continued high levels of interest rates, sluggish economic activity, and relatively high levels of overall unemployment. For the nation as a whole, the stimulative impact of a tax cut can only take hold when interest rates come down. This will take time.
At the state and local level, certain aspects of the new administration’s philosophy could be very helpful. These would include particularly its preference for making federal payments through block grants which would be available to the state and local governments without strings, for general purposes, instead of categorical programs, such as funds specifically earmarked for mass transit, housing, or other special purposes; its intention to reduce the level of federal mandate expenditures, such as special instruction for retarded children where the federal government mandates the expenditure without making funds available to the local unit of government to pay for it; and its recognition of the need for special assistance through the creation of enterprise zones. All these could provide important bases on which to reconstruct many of our current state and city programs. The general approach of recognizing the primacy of the state, in many important matters, should also be very beneficial.
The net immediate result, however, will be the contraction of any number of programs. Mass transit, housing, health, education, revenue sharing, etc., will all be financed on a significantly smaller scale than the public has been led to expect. Any hopes New York City had for the federal Treasury to take on a greater share of Medicaid or welfare costs would seem to be out of the question for the time being. For New York State generally, the outlook therefore has to be for shortfalls in the state and local budgets as a result of federal cut-backs—and, in the case of New York City, failure to obtain additional federal support—as well as continued sluggish economic activity. The pressures will be for reductions in local service, or for tax increases, or for combinations of both.
The side effects of the new economic program could be severely negative for the entire mid-Atlantic regional economy. Across-the-board tax cuts and rapidly accelerated depreciation allowances, as well as increased investment tax credits, are bound to accelerate the trend of manufacturing businesses away from this part of the country. At the same time, in the energy-producing regions—the Sunbelt, the West, the Southwest—cutbacks in the federal budget will be more than made up for by increases in revenues resulting from energy pricing. In those parts of the country, local taxes can continue to be reduced and services improved. But the drain of businesses and taxpayers away from the Northeast and Midwest would obviously increase, with inevitable results for their tax base.
What I have described here is far from a “worst case” scenario. It does not envisage further oil price increases as a result of the Iraq-Iran war. It does not allow for steeper defense spending as a result of possible future crises in Poland or the Middle East, nor does it take account of further inflationary pressures on food and other prices. Although it is impossible to predict the speed at which this scenario will unfold, its implications seem quite clear. They are the result of the inexorable logic of economic actions and reactions, of the zero-sum game of an economy in stag flation.
In New York, both the city and the state must have a strategy to cope with these trends. So must the region. That strategy must be part of a coherent plan extending over several years since expectations for increased federal aid seem at the very least improbable. The state and the city are partners in sickness and in health; for one to pretend that it can unilaterally pass on its problems to the other is both unrealistic and impractical. The city, like other localities throughout the state, needs relief from the relentless growth of welfare and Medicaid expenditures to stabilize its fiscal situation. The state, however, cannot provide that relief without finding compensating revenue sources. At the same time, the city and state must give priority to keeping those businesses here that are here, and avoiding their flight to other parts of the country.
This means keeping a lid on taxes related to business and removing as far as is practical those legislative and regulatory barriers that drive businesses from the state and the region. For instance, regulations that try to limit the maximum interest rate to less than the current market rate will only lose us loans and lenders, just as taxing capital gains at old rates in a new climate will cause capital to seek higher yields and a warmer reception elsewhere. At a time when federal regulations will be the subject of searching reexamination, the state should take the same opportunity to remove obstacles to growth while maintaining its social objectives.
At the same time, essential services in New York City must be maintained or strengthened to provide taxpayers with more satisfactory protection at home, more safety and better service in the streets and subways, and improved sanitation. To do all this, the city will, once again, have to try to offset wage increases with improvements in productivity. And to do that will require strenuous effort by management and labor to come up with genuine programs, such as the use of the two-man sanitation truck, to provide greater service at lower cost. Local tax increases, such as property taxes, will have to be modest and recognize existing inequities. Restraints on expenditures will have to take place without equivalent service reductions. If the city looks to the state for a plan involving phased state takeover of Medicaid or welfare costs for all units of local government, the state will have to offset the cost of such a plan by new revenues which are also tied to inflation and will not have an adverse impact on business. An increase in the gasoline tax, turning it into a sales tax, to make it deductible for federal income tax purposes, would fit such a requirement and would allow continued limitation on other local taxes together with maintenance of local services.
In summary, two very different points should be underlined on how state and local governments can deal with what lies ahead. First, some ways must be found to relieve the rising burdens of Medicaid and welfare to the cities, especially to New York City. Medicaid costs are now rising annually by over 15 percent. I do not believe that New York City can become credit-worthy, able to finance its costs on its own, and also deliver adequate services to its citizens, unless it can get some relief from its costs for welfare and Medicaid. No less important will be the ability of city governments to relate wage increases to real improvements in productivity. As far as New York City is concerned, this can only be done by a recognition on everyone’s part that the 1982 round of city labor negotiations will have to incorporate this concept as a cornerstone of the 1982 contract.
The second point to be underlined is that the need for regional cooperation among the states of the Northeast—long a matter of slogans and commissions—has now become truly urgent. It should be clear, for example, that a gas tax would far more rationally and equitably be imposed as a regional tax by New York, New Jersey, and Connecticut; yet the serious inadequacy of the existing state units to deal with regional taxation, economic development, and transportation still needs to be recognized.
From a broader political point of view, the election results are even more grim than the economic outlook. A recent editorial in the Wall Street Journal stated: “an electoral coalition of the south and west controls 276 electoral votes right now, enough to seal a presidential election without any support at all from the industrial north and north-east. And the lock will be tightened further when post-census redistricting awards fourteen more electoral votes to the Sunbelt. National candidates will more and more have to define their positions according to the social and economic conflicts of the Sunbelt rather than to those of the Northeast.” The signs of a fundamental political shift are all too clear.
This brings us to the possibilities for economic and political cooperation between the Northeast and Midwest. I have already mentioned the continuum of economic crisis and decay that stretches today from Baltimore to St. Louis; our older cities, our older industries, our hardcore unemployed are all tied together in the same depressed economic pattern. This entire portion of the United States, which I would call “older America,” shares similar burdens: a shortage of energy; dependence on older industries on which foreign competition has had a heavy impact; large urban centers dependent on significant federal aid programs to support large numbers of unemployed minorities and illegal aliens; less and less capacity to attract the younger technocracy wishing to work in the Sunbelt.
Although this part of the country is old when compared to the younger America of Houston, Phoenix, and Los Angeles, it must be remembered that it still includes more than 50 percent of our manufacturing capacity, our most important financial and cultural centers, our biggest harbors. “Older” does not mean decrepit. Who could argue that Paris cannot compete with Houston even though they are hundreds of years apart in age? A city or a region can age vigorously if carefully thought out national policies encourage it. But the implications of disproportionate and overrapid shrinkage in such an important part of the country as this one inevitably include social dislocations and tensions that promise to be bitter: fast growth at the expense of the older states will be far from an unmixed blessing for the Sunbelt regions of the nation.
The older parts of America must have a coordinated political and economic strategy addressing itself literally to survival. For politicians of the older America, the approach to the economic and social crisis they face should be as bipartisan as foreign policy used to be and for the same reasons. Unless we can change the direction of the political economy during the next five to ten years, there may be little left in the way of industry and productive life to be saved. Governor Carey of New York, a northeastern middle-of-the-road Democrat, and Governor James Thompson of Illinois, a midwestern middle-of-the-road Republican, should quickly sponsor a meeting of northeastern and midwestern governors and legislative, business, and labor leaders to set an economic and political agenda for the 1980s. This should address itself to:
—changes in federal formulas to offset the regional shifts of national wealth owing, among other reasons, to oil price decontrol: one such change could relate federal payments for such programs as Medicaid to need rather than population.
—assistance to older industries in the form of special tax credits and regional structures aimed at giving credit and other types of assistance to industry to administer such aid.
—special finance assistance to urban centers with high unemployment both in yearly budgets and in building up their capital. Both industry and cities could be helped by a regional development corporation partly funded by the states, partly by the federal government. Such a corporation could provide assistance to cities for their capital programs, as well as help to restructure ailing large businesses in need of assistance in this region.
—a fair share of defense and synthetic fuel program contracts and sub-contracts. Unemployment carries with it enormous inflationary as well as social costs. Therefore, large government programs such as defense or synfuels should carry mandates that would require a certain percentage of the work to be performed in areas of high unemployment such as the Northeast and Midwest.
—a coal-based energy plan where investments in new production as well as new transport and harbor facilities would have a favorable impact on the region.
Such an economic agenda must be carried out in large part by the congressional delegations of older America who are going to be involved in the day-to-day bargaining that makes up national legislative policy.
I hope that President-elect Reagan meets with considerable success. As an American, a businessman, a parent, I want a stronger America, peace, renewed growth, lower inflation. Even though I am skeptical of the current conservative vision and the new economic theology that goes with it, the voters clearly want to give it a chance and I believe that is a healthy thing. What has been tried recently has obviously failed. We must, however, be realistic about the implications of the current program. In its early stages, in this part of the US, the pain of spending cuts and continued inflation will far exceed the pleasure of tax reductions. In its later stages, the benefits of stimulus and increased defense spending are likely to benefit the rest of the country disproportionately, leaving older America more and more in the shadows and increasing the disparities and tensions between the regions. It is well to remember that the decade of 1960-1970, in which we enjoyed a high level of sustained economic growth, also witnessed the largest loss of jobs to other regions suffered by New York City and State, and set the stage for the crisis of 1975; the experience of the other states in the Northeast was similar, if less acute. Although we cannot prosper unless the nation does, it is quite possible for the nation to prosper while we watch from a distance.
President-elect Reagan has indicated the need for special recognition of this situation by his plan to create enterprise zones and other tax benefits directed to the inner city. If this idea is more than a token, if the new enterprise zones are to be set up in areas of real need and not spread throughout the country, if the benefits in those zones selected are substantial and flexible, then this idea could become part of a general program which could have great promise. It might offset the powerful tide running against older parts of the country. But those are big “ifs.” And unfortunately, we do not have the luxury of either waiting or dreaming. New York City must immediately proceed to amend its financial planning to reflect current realities, as must the coming budget preparations of the city and state and the states nearby take those realities into account.
The country’s problems are so deepseated, domestically and internationally, economically and socially, that even temporary and partial solutions (and that is probably the best that can be achieved) will, in my view, be beyond any one man, one party, one ideology. They will require an enormous bipartisan national effort. They cannot succeed while a major part of the country drifts off into the shadows. A great question facing the new administration and the country is whether this disastrous drift will now be allowed to take place.
January 22, 1981