Default

Key to New York City's rebirth

"[If the federal government let New York default, it would be] the ultimate immorality that a federal government could practice on its people during these times of financial crisis."
—New York Governor Hugh L. Carey

"If we go on spending more than we have, providing more benefits and services than we pay for, then a day of reckoning will come to Washington and the whole country just as it has to New York."
—President Gerald Ford

We go to press amid increasing clamor for federal aid to help New York City stave off a default. New York owes $12.3 billion, and has had four close brushes with default since last spring. Without a federal bailout loan or loan guarantee, it is virtually certain that New York will be unable to pay its bonds and other bills which fall due in December. President Ford has, so far, taken a tough stance opposing a bailout, but there are emerging signs that he may back off from his recent vow to veto any federal bailout of New York City.

New York City is on the decline. Its deterioration has been accelerated by a combination of factors—primarily the city's astronomically high taxes and destructive rent control laws. New York City has an assortment of more than 25 different taxes, including an 8 percent sales tax (highest city sales tax in the U.S.), an 8.5 percent real estate tax (if you own a $20,000 home, your taxes are about $1700), a city income tax (for individuals and corporations), and taxes on just about everything else the city can find to tax. Because of rent control, many landlords can't raise rents enough to cover taxes and other costs, and many unprofitable buildings are simply abandoned (landlords are walking away from more than 30,000 apartments every year). Real estate tax delinquencies reached $220 million in fiscal 1975, and some 25 percent of all apartment buildings are already in default this year.

City spending and taxation have been increasing at a galloping pace, and have driven numerous businesses and people out of the city. Spending (now over $1 billion every month) goes mainly for welfare (some 960,000 residents, 1 out of every 7 New Yorkers, is on welfare), education (nearly one-third of the 75,000 employees of the bureaucrat-laden board of education do not teach), debt service (high interest is paid on short-term notes to finance current expenses) and salaries and pensions for city employees (from 1961 to 1974, while the city's population declined, the number of full-time city employees soared by 100,000 to a total of some 300,000). What is breaking the city is not merely subsidies to the poor (the cost of welfare and charity for 1975-1976 is $3.4 billion), but New York's generous subsidies to the middle class (including approximately $7 billion a year, or 60 percent of the budget, for high salaries and extravagant pensions for largely middle class city employees, who are the best paid in the country—as well as free tuition at the city university and rent control, which benefits not the poor who move too frequently, but the middle class).

Although New York City banks strongly favor a bailout—as holders of large amounts of New York City securities, they stand to incur significant losses—many business leaders welcome a default as a "good thing" for the country.

Outside of New York, the public doesn't seem too enthusiastic about any costly bailout. The prevailing public attitude toward taxation was shown by the November elections, in which the voters turned down $5.87 of the $6.33 billion bond measures that were on the ballot across the United States. As Time reported, "A stunning 93% of the bond proposals across the country were thumbed down." A Harris poll taken in November found that the American public favors federal loan guarantees by a 69 to 18 percent margin, if the city "balances its budget and such a plan would not cost the taxpayers any money." Harris pollsters did not mention that Mayor Beame had turned down a $2 billion loan from Arab sources, which was payable in 20 years at an interest rate of 8.85 percent, because it required a guarantee by New York City banks. Obviously many people have been lulled by Abe Beame's claim that a federal guarantee wouldn't cost federal taxpayers anything. Tell us, Abe, if the guarantee were truly without risk, why don't the New York City banks—or Nelson Rockefeller, for that matter—provide the guarantee with their funds?

What does REASON propose? We're strong advocates of allowing New York City to default. The consequences of a default would be positive and healthy. Instead of a bailout, which would benefit primarily the banks and wealthy investors who chose to buy New York City bonds—at a high yield—we believe it just for those who voluntarily put themselves in the position of lending money to the government to bear the risk of a default. Since these banks and investors never offered to forego their profits when times were good, we're hard put to see anything fair about them insisting that we now share their losses.

Whether or not the city defaults, times are going to be rough in New York for awhile. But sooner or later, the city will be forced to change its ways and abandon its big-spending, high-taxing style. The financial crisis in New York was inevitable, and it presents an historic opportunity for reform for the aging metropolis: default.

A bailout would not only prolong the agony and trigger rampant inflation, it would eliminate the pressures for long-overdue internal reforms, and by calling for increased taxes, would accelerate the exodus of business and middle-class residents from the city. City residents should not be forced, by higher taxes, to sacrifice for the sins of New York City politicians. And, to avoid rewarding chronic irresponsibility, we should not let the big spenders in New York get the big spenders in Washington into the act.

Here's our program for reform, led off by default:

1. Radical tax reform. Last year, New York City residents and businesses paid $19 billion in federal taxes, and received back $8 billion from the federal treasury. If this federal tax ripoff could be eliminated, the city would get a fresh breath of life. New York City taxes, too, must be drastically curtailed, so that the city can attract—instead of repel—productive inhabitants.

2. Eliminate rent control. Rent control is a primary cause of the city's problems and rents should be immediately decontrolled.

3. Cut city services and allow competition. There is no sound reason for the city to provide services which can be supplied by private firms more efficiently, more cheaply—and at a profit. Let the city's flourishing block associations (which aren't obligated to pay off city bonds) voluntarily contract for their own services—such as fire protection (as is done in cities in Arizona with the highly regarded Rural/Metro Fire Department Inc.), garbage collection, education and even police services (as currently is done in over 50 California cities which contract with county sheriffs).

Instead of politicians yielding to powerful city labor unions in costly city-wide settlements, communities could choose from services provided by competing private contractors, and financed voluntarily rather than by property taxes. Such a fundamental approach to reform has been advocated by Emanuel S. Savas, formerly first deputy city administrator under Mayor Lindsay, and now a professor of public-systems management at Columbia.

4. Impose liability on politicians for maladministration. Fiscal gimmickry and phony bookkeeping have been a way of life for top city officials in New York. The attorney for the New York State Legislature's Select Committee on Crime concluded that "recent city borrowings have relied upon massive fraud." Any politician who was involved in such borrowings should be held personally liable to repay those who were fraudulently induced to invest in city notes.

New York can become a more livable city again. Let's keep it out of the hands of the politicians, and give meaningful relief to the real victim of the city's financial crisis: the city taxpayer.