Is New York the Next Detroit?
Mayor Mike Bloomberg is warning that whoever succeeds him will need to deal with New York City's public pensions, lest the city turn into … yes, you guessed it, Detroit. Detroit is clearly going to be the universal warning to feckless politicians, the metaphorical destination for all mismanaged cities, playing much the same role in the popular consciousness (and the newspaper cliché book) that Beirut played in the 1990s.
“Avoiding the hard choices is how Detroit went bankrupt,” he said in a speech Tuesday, according to the New York Post. Bloomberg, the founder and majority owner of Bloomberg LP, the parent of Bloomberg News, thinks that his successor as mayor will have a unique window to act, because all the major public sector unions are currently operating without a contract.
Under New York state law, public sector workers are forbidden to strike -- but can keep working under an expired contract for as long as they want. In some upstate cities, workers haven’t renegotiated their contracts for years; they’re contentedly working at the old wages while the soaring cost of their pension and health-care benefits wrecks the budgets of the cities that employ them. This has been less of a problem downstate, because unlike upstate, the cost of living in the New York City area keeps growing, eventually forcing workers back to the table to renegotiate. But four years of recession and low inflation mean that workers can skate by on old contracts, rather than sit down to negotiations in which they would probably have to make concessions on benefits.
For all the craziness of New York’s public sector union laws, bad fiscal management seems unlikely to consign New York to Detroit’s fate. New York is actually pretty well managed, thanks in part to state laws that make it relatively difficult to play games with pension accounting and similar expenses. And the crazy public sector worker laws exist entirely because downstate politicians want them to stay; upstate state legislators would have repealed them decades ago, if they had their druthers. If the laws threaten to bankrupt New York City in the same way that they have bankrupted Buffalo and Rochester, the laws will be repealed.
The real risk for New York -- the city and the state -- is that the region follows Detroit’s economic fate. The city is incredibly dependent on one industry, finance. In 2011, 23 percent of the salaries paid in New York City came from the securities industry -- perilously close to monocropping, especially when you consider the ancillary jobs that cluster in New York to be close to the finance industry: law, consulting, IT and other services. And that doesn’t include the other businesses that are supported in large measure by highly paid finance and auxiliary workers: the world-class restaurants, theaters, clubs, boutiques, artisanal cheese makers, and so forth. Those in turn are part of what attracts the city’s other major industry, tourism.
If finance shrinks, so does New York’s economy … and the pensions and benefits that are reasonable and prudent today become unreasonably expensive.
Could this happen? It’s hard to imagine. On the other hand, in 1955, it was impossible to imagine that the U.S. auto industry would be laid low by a bunch of Japanese companies that could barely manufacture a motorcycle. Changes in U.S. law do seem to be diverting more financial work into other countries: not just regulations such as Sarbanes-Oxley, but visa restrictions that make it hard for citizens of many countries to come here to work or do business, and tax laws that can make it incredibly expensive to send your American workers abroad.
That’s not to say that all of these laws are bad -- one of the things that foreign firms object to is the strictness of our accounting standards, something I think is all to the good. But it does raise the possibility that New York could stagnate, either because finance moves elsewhere or because the global financial industry stops being a reliable source of gargantuan paydays.
If either of those scenarios happen, New York is in deep trouble. Fifty years ago, the city had a diverse commercial and industrial base, but over the decades, it has specialized almost as much as Detroit did. Essentially, they’ve followed the Pudd'nhead Wilson strategy: “Put all your eggs in one basket … and then watch that basket.” This can reap enormous returns in the good years. But it leaves you tremendously vulnerable if anything happens to the basket.