“Racial disadvantage is a fact of current life. Urgent action is needed if it is not to become an endemic, ineradicable disease threatening the very survival of our society.” This is not a quotation from a speech by the head of the Urban League or the NAACP. It is part of the report by Lord Scarman to the British government dealing with the recent Brixton riots. The report concluded that the violence that spread to much of Britain after the Brixton disorders stemmed from decaying urban conditions and the problem of severe unemployment which falls “disproportionately heavily on black people.”

Decaying urban conditions are not, of course, limited to Britain; unfair distribution of burdens and benefits are not a monopoly of the Thatcher government. “The budget cuts are leaving serious and immediate human needs unmet. And, if the budget cuts continue as scheduled, the problem of the poor will worsen intolerably.” This is not a McGovern liberal speaking but a business executive, Richard Munro, president of Time, Inc.

It is impossible to speak of the New York economy without speaking of the national economy, of regional, racial, and industrial problems, of fairness and wealth, of greed and poverty. New York City, once again, faces serious problems; however, this time, they are not problems of its own doing. Quite to the contrary. Whereas the crisis of 1975 was, to a large extent, self-inflicted, the challenges facing the city now are the result of national policies and regional shifts not of our doing.

Since 1975, New York City has probably performed more credibly than any other unit of government in this country (beginning with the federal government) in the managing of its fiscal affairs. From an annual deficit of $1.7 billion in 1975, it went to a $250 million surplus this year. From a level of $6 billion in short-term debt in 1975, it will wind up this fiscal year with zero short-term debt. Wholly excluded from the credit markets in 1975, it returned to the short- and long-term markets this year.

None of this was accomplished by new economic theories. It was accomplished by courageous state and city political leadership and continued cooperation between business, labor, and government. Sacrifice was demanded from all the different elements among our citizens and if, as is inevitable, sacrifice is always greater among our underprivileged, at least an attempt was made to be fair and most people gave up something.

Balancing the city’s budget was not accomplished without paying a price. The price was a reduction of practically every major service. Whether it be police protection, sanitation, education, or mass transit, services have been eroded and, with them, the quality of our city life. The revival of midtown Manhattan, fueled by tourism and a weak dollar, cannot offset the decline in the other boroughs and cure the appalling condition of the South Bronx and of Bedford-Stuyvesant. However, reality dictated that first we had to get our fiscal situation in order; second, we would address ourselves to services and economic development. There was no painless way to pay for decades of fiscal abuses, deceptions, failures of will and leadership to which New Yorkers have been subjected by a succession of city and state political leaders. The only alternative to the course we chose was bankruptcy; that would have been far worse.

The city’s ability to keep costs under control, while revenues continued to rise rapidly, resulted in this year’s budget surplus and gave hope that the mayor, with the cooperation of the governor and legislative leadership in Albany, would finally have the means to devote to improving services and making a substantial investment in physical facilities. These hopes were dashed by a federal program of budget cuts and tax cuts which deeply slashed the city’s and the state’s revenue stream, a monetary policy which doubled our financing costs, and a steep recession which has the further effect of reducing our tax revenues and increasing our social costs. The result is a projected city budget gap of about $1 billion in fiscal 1983, further gaps down the road, and the state itself under considerable pressure.

Before discussing what actions are open to us to meet these problems and maintain the city as a place in which to live and work and bring up our children, let us look at the national environment in which we operate. New York City and New York State are tied to the same lifeline; it extends all the way through the Northeast and the Midwest, north of an are that reaches from Baltimore to St. Louis.

For the last twenty years, national budget, tax, and investment policies have encouraged migration of jobs and taxpayers to the Sunbelt from the northern half of the country. This migration was also encouraged by the high cost of local taxes and labor as well as by the unassailable proposition that life in the sunshine has its attractions. Compounding the effects of this migration, our energy-producing states vastly increased their revenues as a result of oil price decontrol, largely at the further expense of our region. The current program now pushes this destabilization further. Defense spending will help the Sunbelt while budget cutbacks will require both greater reductions of services and tax increases in the North, and this will further encourage investment and migration away from our region. The recession, coupled with fierce Japanese competition, has a greater impact on older industry, heavily located in the northern part of the country, increasing regional unemployment disproportionately.


The Reagan administration has talked of a program to help certain blighted areas in the inner cities—called “enterprise zones”—with special incentives. The events currently taking shape will turn this entire section of the country into one vast “enterprise zone.” Half of the population of this country will have to face up to industries in difficulty; urban decay, higher local taxes to pay for fewer local services, the flight of tax-payers, and social distress. The destablizing effect of current federal programs will ultimately hurt all parts of America, including those which, initially, reap the greatest benefits. However, by the time this is realized, it will be too late. A national administration which believes that tax policy should not be used to effect social change and that regional imbalances should be resolved by letting its citizens vote with their feet will not act early enough or forcefully enough to resolve these problems before they turn into crises.

A democratic society, to survive, must create new wealth and must see to its fair distribution; only thus can it maintain its greatest treasure, individual freedoms. The present program will create wealth for too few, and leave too many behind; ultimately our freedoms may be jeopardized.

Fairness is the ultimate test by which a democratic government is judged. But the legitimate need to encourage investment in order to improve productivity does not justify a tax bill catering to a variety of special interest groups, many of which will not create one new job or produce an additional ton of steel or barrel of oil. That does not meet the test of fairness. Nor is it met by budget cuts that fall most heavily on programs for the poor such as welfare, Medicaid, and food stamps while exempting indexed entitlement programs that benefit the middle class, such as Social Security, Medicare, and federal pensions.

The abuses and rip-offs of welfare which are rightly deplored are not limited to programs benefiting the poor; they are to be found at every level of government spending and for every purpose. They are not absent in a defense program scheduled to skyrocket to $1.5 trillion for sophisticated weapons systems destined for armed forces that are poorly educated, poorly skilled, and poorly motivated. Defending our vital interests is one of the country’s basic needs; fairness requires reinstatement of the draft. Common sense, as well as our budget and out economy, requires major cutbacks in new nuclear weapons systems and a buildup, at lower cost, in our conventional forces.

It is useless to talk about “turning this country around” and about new investment and job opportunities for all classes and all regions while we face federal budget deficits that are currently forecast to reach more than $400 billion over the next three years, and could well go higher. The level of these deficits almost guarantees that any economic recovery will immediately be choked off by rising interest rates, keeping our economy stagnating with high unemployment and inflation. At the national level, significant reductions in the growth of defense spending and entitlement programs, cancellation of the more exotic aspects of the recently passed tax bill, and new taxes based on energy consumption will be required to create an economic environment in which we can recover. We need, if not a balanced budget, a budget that is much closer to being balanced; we need lower interest rates; we need lower inflation and lower unemployment.

In our own region, New York City and New York State will once more have to collaborate to protect each other. The state cannot forget how close it came to being shut out of the credit markets in 1976 when the city had its brush with bankruptcy. The city cannot forget that the state furnished major budgetary and credit assistance for the last six years.

There can be no functioning State of New York without a workable City of New York and vice versa. To save the city means protecting the tax base, keeping the business and taxpayers we have, and, we can hope, adding to them. It means maintaining adequate levels of service despite budgetary pressures. It means better administration on the part of city managers, and cooperation on the part of the municipal unions. It means austere labor contracts supplemented by sharing gains if improvements in productivity are actually accomplished.


It should also mean major volunteer efforts on the part of New Yorkers, actively organized and led by the city administration. I have no doubt that many New Yorkers would be willing to volunteer to work if they were convincingly encouraged to do so and if in some cases minimal expenses were paid. Volunteers are particularly needed to work in our decimated libraries as well as in our schools, in relieving uniformed policemen and firemen from administrative chores, and in our hospitals. Such volunteer services should be organized by the city administration, with supporting funds from private sources, such as corporations and foundations based in New York. Volunteers will have to do often demanding work, as opposed to genteel fund-raising on Park Avenue.

To carry out such programs would obviously require the cooperation of the city’s unions. However, the unions must understand that jobs would not be taken away from them but that services would be improved in the city at little or no additional cost. That could be to everyone’s benefit. The use of civilians in clerical jobs of the Police Department, allowing for greater use of trained, uniformed policemen on the streets, is another departure from business-as-usual that both the city and its unions should be willing to try.

In addition, making the city’s expense budget go further will require New Yorkers to behave better. The fact that the city is filthy is not just the fault of the Sanitation Department; it is also the fault of those many New Yorkers who make it filthy. The fact that traffic is appalling is not just the fault of the Police Department. It is also due to the fact that many New Yorkers do not seem able to read “No Parking” signs or to distinguish red from green. Vandalism on the subways and buses, broken fire hydrants, filthy streets: these are not simply the result of poverty, racial discrimination, unemployment. They are the result of a breakdown in civility, and civility to a great degree is a community responsibility. Those who should be concerned about it include the political leaders, the churches, the press, and television. It is not simply rhetoric to say that this is a time when New Yorkers will have to show the best in their characters, when they will have to make conscious efforts to live together less selfishly: they will have to rally to keep this city going because the money available will be inadequate without major community efforts.

Efforts to improve economic development will have to focus on boroughs other than Manhattan. Maintaining and improving the factories that we have, creating office and clerical space in Brooklyn and Queens to relieve the pressure that has pushed up costs in Manhattan, setting up industrial parks in the Bronx and Staten Island: those should be our priorities. The Port Authority should sell the World Trade Center and reinvest the proceeds in those kinds of projects. We do not need to provide additional tax abatements for office buildings and hotels in Manhattan. That program was once useful to encourage investment in construction, but it has accomplished its purpose.

Most emphatically, we do not need a skyscraper on top of the St. Bartholomew Church. The emphasis should now be shifted away from midtown real estate and toward encouraging productive activities in the crumbling neighborhoods away from the center. If the Reagan administration is serious about its “enterprise zone” concept for the inner city, let us have a test in New York City. At the same time, inner-city school systems should become linked directly to any new programs for economic development. They should at least enable youngsters to perform the jobs that are available or are to be created.

And, yet, without a doubt, money will still be our overriding problem. A billion-dollar gap in 1982 is harder to close than a billion-dollar gap was in 1976. We had more fat on our bones then; the economic climate was more benign; interest rates were lower; our economy was booming; the state had greater resources and the federal government was sympathetic. Today, we may have to raise the local taxes that are least damaging to our economy as well as negotiate labor contracts that cannot match the rate of inflation. The levels of municipal employment cannot increase; on the contrary, reductions in the city labor force cannot be ruled out.

Critical to the city’s future is the willingness of the state to assume the local share of Medicaid. Medicaid is not just a New York City problem; every county in New York State has reduced services or increased property taxes to keep up with soaring Medicaid costs. A phased, four-year takeover of the local share of Medicaid by the state would ultimately save the city over $1 billion annually; similar savings would occur in every county of the state. It should be coupled with ruthless cost control by the state to eliminate the more outrageous current abuses. Other services could be maintained; other taxes held steady or reduced.

Naturally, the state, already wounded by the federal tax and budget programs, cannot undertake this effort without raising new revenues itself. It is, however, in a better position than local governments to do so. A state-wide increase in the gasoline tax of seven cents pergallon would raise $400 million per annum; it would not drive a single business out of the state. Furthermore, it would be partly paid by people from outside the state—transients, tourists, interstate truckers, etc.—and it could be deductible from federal income taxes. The time to impose a gasoline tax is when the market price is headed lower; this will probably be the case in 1982. The likely price decline could well absorb the major part of the tax. At the same time, Connecticut and New Jersey will be facing budgetary problems of their own. Here is an opportunity for three governors to recommend a regional program involving a single tax on gasoline, which, though undoubtedly unpopular, could nevertheless not be regressive.

In addition, the state must cut itself loose from federal tax schedules cutting deeply into its revenues. The coming legislative session in Albany will be critical for New York City; but more than just a budget item is at stake here. The city’s ability to finance itself is at stake and, with it, the state’s financial situation itself.

Since 1975, the Municipal Assistance Corporation has provided most of the city’s financing requirements; MAC has, so far, raised nearly $8 billion while the city nursed itself back to health. Although the city has recently reentered the credit markets on its own, on a modest scale, its inability to gain satisfactory credit ratings from both main credit-rating agencies casts serious doubts on its ability to be self-sufficient by the time MAC ceases to function.

MAC’s legislative authority to finance the city ends in 1984, or when MAC has raised $10 billion, whichever is earlier. It should neither be increased nor extended. MAC was originally created to raise $3 billion, then $5.5, then $8.8, now $10 billion. It is now more than enough. From now to 1984 is the flick of an eye. The city’s inability to obtain the credit ratings it needs is directly related to the uncertainties surrounding its future budget-balancing ability; the clearest answer would be Medicaid.

The state should recognize that failure to address the Medicaid problem in 1982 in order to avoid the issue of taxes will bring on once more the problem of the city’s financing the following year. The state in the far easier year of 1976 was almost unable to effect its spring borrowing because of the unresolved nature of the city’s financing problems.

The political temptation in 1982 will be to postpone the problem, to avoid taxing now, and to be forced to borrow later. That is the kind of thinking that created our problems in the first place. If there is no resolution of the Medicaid issue in 1982, then the legislature should come up with new ways to provide the $1 billion per annum of new financing required by the city beginning in 1984. The city is unlikely to be able to do so on its own and MAC cannot and should not be called upon to try; we have borrowed enough for several generations. The ability of New York City to finance its capital needs is vital to the state since our economy makes an enormous contribution to the state. Letting the city crumble will not help the state.

We are not asking for the impossible. The irrationality of the tax rebellion typified by Proposition 13 has given way to thoughtful reassessments of its effects. Voters are increasingly willing to face up to some tax increases to maintain services and the amenities that make life more agreeable. What they rightly object to are waste, rip-offs, and incompetence in government; those do not have to go together with taxes. “Supply-side” economics, as practiced in Washington, creates deficits that can still be financed by federal borrowing; at the state level, there can no longer be deficits, and borrowing may be impossible. Fewer taxes mean fewer services.

We must be realistic about the future. We cannot, at the city and state level, stem a national economic tide running away from us. That requires political change in Washington. Change may not be long in coming. A liberalism incapable of fiscal self-discipline brought about a radical conservatism conspicuous for its selfishness and insensitivity. The need for investment does not justify a wholesale raid on the treasury. The need for development of natural resources does not justify writing off the environment. A new federalism does not justify condemning half this country to becoming a slum.

The coming year will mark the fiftieth anniversary of the election of Franklin Roosevelt. A well-to-do aristocrat, he was incapable of standing by idly and witnessing misery and unfairness. FDR saved capitalism in this country by intervening in the name of fairness. The Reconstruction Finance Corporation, a modern version of which will, I am convinced, have to come about soon; the TVA, still functioning, however controversially; the FDIC, the only present protection of the savings banks—all these are examples of what can be created by an active government to bring relief to the poorer regions of the country, put people to work, protect savings. Although not politically fashionable today, FDR could be very fashionable tomorrow.

John Kennedy was once referred to as an idealist without illusions. In this age, illusions are a luxury we cannot afford, whether they deal with a new magical economic formula or with the reach of American power in a chaotic world. Most of us claim to have ideals but we must ask ourselves how they apply to our own reality. Surely we must be concerned with the human rights of Andrei Sakharov. But we must also be concerned about the rights and opportunities of millions of unemployed, underskilled, undereducated in the inner city, and in older industries, condemned to a future with very little hope. It is easy to be righteous about what happens in Russia; it is harder to do something about what happens here and now, and to do something about it on a limited budget.

At the same time, we must take care that a backlash against the pseudo-conservatism of the 1980s not create a new swing driving us toward reflexive formulas on the left. In England, the reaction to Mrs. Thatcher’s Darwinian conservatism was the extreme left Labour leadership of Tony Benn and Michael Foot. One disaster was creating another one. The voters, as usual, have more common sense than the political leaders. In England, the Social Democratic Party is making huge strides, proving that when the main parties go to extremes, a moderate new force (be it center left or center right) can emerge. In the United States, tomorrow, we must find a way to create passion for moderation.

We are in a serious recession today, with unemployment threatening to rise above 10 percent; we take consolation in the fact that the prime rate is down to 15 percent (still higher than it was at the beginning of 1981), and that the rate of inflation has been reduced. It may be that the current economic experiment will succeed after all—that six months from now the tax cuts, lower interest rates, lower inflation will contribute to turn the economy around to a phase of noninflationary growth. I pray that it does. But I believe the odds against this happening are too great for comfort unless major corrective steps are taken and that if the administration’s program does not succeed, the risks are formidable.

For the last two decades, every recession has progressively eroded our economic and social structures. We enter this recession with many of our largest companies in weak financial condition, several on the brink of insolvency. This puts at risk not only employees, stock-holders, and creditors, but also thousands of retirees as a result of the fact that pension plans are underfunded by billions of dollars. Our savings institutions, with portfolio losses in the hundreds of billions, rely on an FDIC with less than $10 billion in present capital. The international banking system, strained by a recession throughout the West and the third world, must face up to potential crises ranging from a default on Poland’s external debt of more than $25 billion to the need to finance third world requirements of $70 to $80 billion in 1982 alone. For the first time in two decades Europe and the US simultaneously are in recession.

Our cities and states, in serious financial difficulties—with the exception of the handful of energy-producing states—are being asked to absorb deficits passed on to them by Washington, and social costs created by the recession. Over $400 billion in federal deficits are being forecast for the next three years. They would increase our national debt by almost 50 percent from the present level of $1 trillion; the per capita debt of the country would be three times the per capita debt of New York City in 1975. The ratios of risk to reward are not good; too many things have to go right, in too many places, to avoid trouble. If they do not, the likelihood of serious and lasting damage is great.

The next twelve to eighteen months are likely to be the most dangerous that I can remember in my thirty-odd years in the banking business. We have learned to live in the shadow of international violence. During the last twelve months we have witnessed the drama of the hostages in Iran and the murder of Anwar Sadat. Poland seems on the verge of disintegration and the Middle East is a tinderbox waiting for a match. And yet we resolutely choose to ignore the possibility that a national economic emergency, which has long been threatening, might soon be upon us, with its inevitable social implications.

If this were to happen, it should not be the subject of partisan gloating; such an emergency would have distinctly bipartisan origins. The recession dispenses suffering without regard to race or class; middle-class white workers will suffer along with poor blacks and Hispanics. As unemployment grows, the call for government action will grow with it. There may well come a day soon when, on the national level, conservatives and liberals, Democrats and Republicans, will have to forget their ideologies, their theories, and their prejudices. They may have to join together just as New Yorkers did in 1975, and, with the cooperation of government, business, and labor, intervene vigorously where intervention may be required—to save our cities, to save our industrial and financial institutions, to save the regional balance of our country and the social balance of our society.

This would clearly require sacrifice on the part of all, but would also be fairer for all. It may mean rethinking our free-trade policy. Especially where Japan is concerned, a degree of protection may be justified if it is used to give threatened American industries the breathing space in which to develop the kinds of productive investments and policies the Japanese themselves have been able to carry out. It may also mean reconsidering our lack of a wage-and-price policy, rethinking our defense policy, creating an industrial and regional policy. But, in the last analysis, such new approaches may be required in order to do what FDR accomplished fifty years ago, namely to save the free enterprise system, our individual freedoms, and our human dignity.

This Issue

January 21, 1982