THE URBAN FISCAL CRISIS

...The profits from this growth were, of course, "internalized"-private business firms made them and disposed of them as they saw fit...

...but, as a percentage of a steadily rising GNP, military spending has grown from 1 percent in 1936 to 4.2 percent in 1950 and 5.6 percent in 1974 (a calculation based on a highly conservative definition of "national defense expenditures...

...federal income tax rates have been cut three times since 1964...

...The contention that the urban fiscal crisis is a product of municipal "mismanagement" is a diversionary tactic...

...By 1974, 59 percent of federal budget receipts were accounted for by taxes on income and another 30 percent by social security taxes...

...The $46 billion aid total of 1974 is far less than the increase in SLG outlays for education since 1950 (over $60 billion), and barely exceeds the direct (unassisted) outlays of SLGs for health and welfare, which grew from $6.2 billion in 1950 to $44.6 billion in 1974...

...A recent New York Times series states that in 1974 the latter managed to collect $13 billion more in federal expenditures than they paid in federal taxes, whereas nine Northern states suffered a net loss of $20.5 billion...

...This has not prevented sunbelt representatives from opposing "bail-outs" and other forms of aid to troubled Northern cities on the ground of alleged regional inequities...

...The social costs of growth have been largely externalized at the expense of the public at large...

...and Edmund Muskie's political sensors lead him to pledge a "tough spending ceiling" and to admonish us against the delusion that problems can be solved "by simply throwing federal dollars at them...

...Furthermore, it should not be surprising that since the late 1940s the primary Keynesian tool for imparting fiscal stimulus to the economy to counter slump and stagnation has been military spending...

...A hypothetical trade-off for the years 1968-1972 between military spending and civilian outlays, constructed by a Lansing, Mich., public-interest research group, found that a reallocation of the Pentagon budget to civilian uses would have created about 840,000 additional jobs...

...And it has long since preempted the most fertile revenue sources, leaving the lower level government authorities in a position of fiscal inferiority...

...Passage of the 1913 constitutional amendment allowed the federal government to levy income taxes...

...mented communities of metropolitan areas into single political-fiscal units...

...At the same time, there have been tightening limits and, more recently, downward pressures on revenues...

...Nationally, the same trends are being played out on a broader, regional plane...

...SLG tax and debt powers were tightly constrained by law during the 19th century, and again in the 1930s, in response to periodic SLG defaults-eight states defaulted in the recession of 1837 and some 20% of SLG issues were in default during the 1930s-and out of fear of the recklessness that often characterized 19th century local government financial practices...

...Income, and power, are shifted toward the suburbs and ex-urbs...

...By 1975 over 30 percent of federal receipts came from social security, while the combined income taxes produced only 56 percent...

...The urban fiscal crisis is a reflection of national priorities on resource use and, more fundamentally, an intensifying struggle over income shares...

...States and municipalities have done just that over the past decade, but at the cost of much dissatisfaction and opposition...

...A 20 percent reduction in national defense outlays, which might well enhance national security, would provide an excellent starter...

...At present any further hikes in the traditional taxes would appear to be limited by business community threats to move away, to areas with "more reasonable tax burdens...

...New York City certainly has engaged in some questionable budgetary accounting practices, and its budget is also inflated by an inefficient use of manpower and by compensation levels (especially pensions) slightly in excess of that found in comparable corporate employment...

...SLGs have the responsibilities for civil society-by default-but neither the resources nor the breadth of political scope and vision, given the fact that modern urban problems are national in a literal sense...

...The corresponding gain accrued mainly to Georgia, Florida, Arkansas, Louisiana, Texas, Oklahoma, Arizona, New Mexico, and California...

...It was used by Nixon, not as a supplementary sharing device but rather as a substitute for federal responsibilities simultaneously terminated...

...Compared to total transfer spending, which climbed by nearly $140 billion, federal expenditures made directly for goods and services went up by $91 billion during 1950-1974...

...The most promising route to solutions almost certainly involves an expanded role for the federal government...

...Jellyby devoting life and resources to the faraway natives of Boorioboola-Gha-totally disregarding her household, in a pitiful state of neglect and resentment...

...It seems clear that the Pentagon is the source of most of this redistribution, the sunbelt states getting almost SO percent of military-research funds, over 40 percent of prime military contracts, and the benefits of federal funding of 140 military installations, more than the rest of the country combined...

...Lyndon Johnson channeled significant portions of defense and space contracts into his native Texas, and the Nixon "revolution" was a form of "southern strategy," whose bask ingredients were bigger and better military budgets, a thinly-veiled resort to racist voter appeals, and a not-so-benign neglect of the poor and urban blacks effectuated by a ruthless trimming of what little remained of the modest "Great Society" programs of the 1960s...

...they knitted woolen underwear for them rather than supplying them with M-16 rifles...

...SLGs on the other hand have been dependent upon property, sales and excise taxes...

...The process of retrenchment is well along across the country, with payroll reductions and diminished outlays for welfare, education and public works planned from Florida to California, from Medford, Oregon (pop: 33,900) to Greater Boston (pop: 3,386,000...

...The inability of the cities to meet the demands being placed upon them represents a complex of political decisions as to where the social surplus is to be allocated, which "excesses" are tolerable and which are not...

...Even transfer payments moved disproportionately in the same direction, with two out of three military retirees living in the sunbelt and drawing billions in retirement pay...

...In 1970, 4.8 percent of the first $7,800 of a person's income was taken as a payroll tax...

...In the nation at large the fiscal crisis of SLGs is exerting a deflationary effect that may not be fully understood in Washington...

...The most conspicuous short-term effect (and probable impact) over the next two or three years, however, is not a large number of defaults but a radical pruning of outlays and services in circumstances that call for more rather than less...

...The symbiotic relationship between the beneficiary states and the military establishment has been self-reinforcing, strengthening conservative political tendencies, which helps sustain large national military budgets and channel them into this friendly terrain...

...SLG purchases of real goods and services, as opposed to transfer payments, increased some ten-fold between 1950 and 1974 (federal purchases grew six times...

...The urban "crisis" is now sufficiently long-standing that it must be regarded as an American institution...

...The federal government was the natural focus of a coalescence of both these factors once the critical decision was taken by the Truman administration that a high level of arms spending would henceforth be necessary to deter "Communist aggression...

...The Power To Owe And Tax The federal government has broader constitutional freedom of action than state and local authorities both in raising revenue and in issuing debt...

...At least Mrs...

...President Ford proposed a further increase starting in 1977-to 6.15 percent-in his State of the Union message of January 1976...

...There is no economic growth factor inherent in national defense outlays: increases in population and per capita incomes do not call for a larger nuclear deterrent or conventional forces...

...and this huge resource drain, plus heavy reliance by Federal Reserve monetary managers on tight money and high interest rates to combat inflation, have made it drastically more expensive for SLGs to finance their needs through the bond market...

...A good part of the federal increases- and nearly two-thirds of its total outlays-have been in the form of transfer payments: programs like old age pensions, medicare, or scholarship grants that exert no public sector claim on current output, as would be the case with federal or state construction of mass transit facilities, or the purchase of a typewriter, or the services of a municipal garbage collection agency...

...Confining the stipulated revenue source to the old payroll tax represents a political tradeoff, in which the national administration agrees to step up benefits for the elderly and sick so long as the funding comes mainly from the pockets of ordinary low-and middle-income citizens in the traditionally regressive mode...

...The social security payroll deductions are especially burdensome to younger and lower-paid workers, who must pay immediately, and on their first dollar of earnings, half of the total 11.7 percent payroll tax rate-with benefits to accrue in the distant future...

...Some cities (Indianapolis, Phoenix, Houston and Dallas), have found it possible to take this route, extending their jurisdiction into the expanding suburbs by systematic absorption...

...Since the employer's half of the payroll tax is probably passed on to the public via lower wages and higher prices, the tax is far more onerous than the regular income tax for the bulk of American families...

...THE URBAN FISCAL CRISIS EDWARD S. HERMAN and RICHARD B. DU BOFF A short-term manifestation of institutionalized decline Most of America's large cities have been suffering from deep-seated, cumulating disorders for decades: spreading blight and slum conditions, expanding pools of the chronically unemployed, increasing crime and insecurity, and a steady exodus of business and the more affluent...

...Federal aid to education, far and away the largest SLG expenditure, has been extremely modest-the $46 billion SLG aid total of 1974 includes $1.7 billion for primary and secondary schools, which is less than 5 percent of SLG outlays for local schools...

...The gap between the financial capacity of SLGs and the service demands on them had become so wide by the 1960s that the federal government was gradually forced into the picture indirectly via increasing grants-in-aid, revenue sharing and a certain number of direct federal programs...

...for mass transportation, $348 million...

...Their growth-related outlays on schools, highways, police, fire, sanitation, parks and recreation, and water supply jumped from $14.2 billion to $109.7 billion in 1973- almost eight-fold...

...Under the impact of regional and class conflicts of interest, and log-rolling accommodations, federal aid has also suffered from a tendency to spread benefits widely rather than concentrating on points of need...

...Finally, the fragmentation process (suburbanization and the escape of those able to do so from the problems of central cities) has created conflicts of interest among local political units that make voluntary consolidation ever more difficult...

...The latest installment in the continuing dismantlement of federal welfare programs is the decision by the Ford administration to cut manpower training funds-during a period of compelling need for them-in 14 of the 15 largest municipalities in the country...

...And while total outlays of the federal government are higher than those of SLGs (in 1974: $299 billion versus $206 billion), actual purchases of goods and services by SLGs substantially exceed those of the federal government ($192 billion, against $110 billion in 1974...

...Per capita expenditures of SLGs rose five times over this period...

...Less well known is the importance, and relatively more rapid increase, of SLG spending...

...With given rates, rising personal and corporate incomes yield increasing tax revenues...

...And for much of the most recent period military outlays averaged above 7 or 8 percent of GNP...

...The social implications of this frank declaration may be glimpsed from some proposed cutbacks for 1976: outlays for New York City parks down 67 percent from 1975, roads and highways down 43 percent, schools down 30 percent, culture and recreation down 22 percent, plus a $600 million slash in capital expenditures (no new schools will be started...

...But by far the biggest federal transfer expansion has come through social security -reflected in a rise of transfers to individuals of $90 billion between 1950 and 1974...

...Secondly, it would still not encompass a large enough territory to capture all important spill-over effects and to preclude inter-area competition...

...Modern technology, and above all the continued spread of the automobile, have had a severe impact on the city and its environment in the forms of increased congestion, pollution, waste disposal problems, the uneconomic sprawl into the suburbs and a decline of public transportations systems...

...The older states and cities thus suffer from both an overall job loss and an unfavorable regional pattern of federal resource allocation...

...Similarly, while per capita assessed property values are still lower in the cities of the southern and western states than in the northeastern and north central states, between 1961 and 1971 they doubled in the former while increasing only 56 per cent in the slower growing states...

...Principles & Possibilities Of Reform The technical problems of relieving the urban crisis ''are difficult, but theoretically manageable...

...In its own way, the federal government has been incomparably more wasteful than New York or Detroit over the past 20 to 30 years...

...As a solution to the more deep-seated urban malaise, this route presents several difficulties...

...Total federal aid to SLGs was up from $11 billion in 1965 to $46 billion in 1974...

...In our Bicentennial year Gerald Ford sees it as a political plus to recommend a big boost in military spending and a slashing of social outlays on a wide front...

...Consolidation could be forced or encouraged by state and federal authority, but it offers no ready panacea for the urban crisis...

...Federal resources allocated to socially negative boondoggles, most often Pentagon-inspired, have set a standard for waste unduplicated by SLGs...

...so cherished that no national commitment has ever been made to cope with it with any of the dedication applied to sending a man to the moon or waging war in Vietnam...

...so that the general revenue of the federal government is derived mainly from a progressive tax rate system strongly responsive to economic growth...

...it merely redistributes income from one sector of the private economy to another...

...but the process is far from complete, and now it encounters among the electorate a hardening of resistance to any new taxes whatsoever...

...New York City, of course, has already absorbed wholesale reductions of workers on the City payrolls, as well as hikes in taxes and transit fares-although financier Felix Rohatyn, chairman of the Municipal Assistance Corporation and a principal architect of the financial "rescue" attempt warns that "the pain is just beginning . . ." In coming years New York will have to undergo "the most brutal kind of financial and fiscal exercise any community in the country will ever have to face...

...New York City's unemployment rate-11.7 percent, or two-fifths above the national average-will undoubtedly rise, taxable incomes will fall, and the budget crisis may stand no closer to being resolved...

...from 1960 to 1974 their combined share of the nation's personal income rose by 2.5 percentage points, from 23.7 to 26.2 percent...

...Jellyby and her friends were harmless to the natives...

...On several occasions the executive branch has stepped up the defense budget in the face of impending recession, a policy sure to gain quicker acceptance than, say, a countercyclical proposal to initiate a large-scale program of low-cost housing and urban rat control...

...The irony is that many novel federal programs from the New Deal through the Great Society were begun because of the ineffective performance and corruption of local government and the essentially sound belief that only a public body with the resources, and the capacity for taking a unified national view of costs and benefits, could deal with the demands of unemployment, urban decay, pollution, and the deterioration of regional transportation networks...

...Only San Diego is slated to receive more funds over the next year...

...Of all Americans living below the federally-defined poverty level, 27 percent resided in central cities in 1960, 37 percent in 1974...

...This view was-and is-valid, but since the Second World War the federal government's role has become largely one of a military entrepreneur...

...As whites flee the cities, blacks continue to move in, and the latter now comprise one in every four city dwellers (against one in six in 1960...

...Per capita incomes remain lower in these southern and western "rim" states, but, with the exception of California, they have been increasing faster than per capita incomes in the older northern and eastern states...

...One of the few federal programs with massive funding over an extended period has been highways-i.e., one in which a powerful congeries of auto and oil companies, real estate and construction businesses, and building trades unions provided a critical support base...

...Meeting State and Local Needs It is generally known that government outlays (federal plus SLG) have grown faster than private expenditures over the past several decades...

...These are substantial sums, and it may seem ungenerous to cavil about their adequacy...

...Recent national administrations have encouraged, and taken political advantage of, these trends...

...A restructuring of federal taxes to allow more room for state and local taxes would help-especially closing the gaping loopholes for the affluent and terminating the use of the regressive payroll tax to finance social security...

...Our postwar growth surge greatly enlarged demands for ordinary public services (sewers, schools), but it also generated an ever larger demand for offsets to the negative by-products and "spillover effects" of modern free market expansion...

...The resultant higher fax yields have in effect permitted the role of the (mildly) progressive corporate and individual income taxes to decline...

...America's population grew from 152 million to 211 million (39 percent), secondary school enrollments doubled, real gross national product more than doubled, and real per capita personal incomes rose 85 percent...

...In fact, with Congress inclined to adjust benefits upward to offset price inflation, this "fund" is perennially in deficit, and outlays from it will increasingly be met out of general tax revenues on some sort of ad hoc, year-by-year basis...

...This might appear to be a notable contribution to human welfare, and conservatives have pounced on it to prove the adequacy (or excess) of federal support for the "welfare state" and the reasonableness (or insufficiency) of expenditures for national defense...

...In 1972-73 the cost of municipal services per person was $141 in growing cities, $240 in declining cities, and $637 in New York City...

...The statistics cited above show how very little the federal government did to alleviate the urban-focused burden of growth: it increased its nonmilitary services at the rate of little more than $1 billion per year from 1950 to 1974...

...Federal aid has responded to differences in need, but a significant proportion of federal resources have been allocated on other bases...

...Most of this lucrative direct tax harvest is then utilized by Washington to develop its military establishment...

...Through time, and with burgeoning SLG needs, many of these restrictions have been relaxed...

...The cities, and especially the urban cores of the northeast and midwest, are turning into the repositories of the poor, the blacks and other victims of a society whose labor markets are shaped by the initiatives, and requirements, of private profitmaking...

...Even hi the field of health and welfare the more substantial assistance of the federal government has typically matched SLG contributions, and in the context of mounting demands SLGs have had to foot an enormous bill...

...An irresponsible federal government can get away with its mismanagement because of a greater taxing capacity, control over the Federal Reserve and the money supply, and its resultant ability to support with ease a volume of debt almost twice as large as that issued by the aggregate of SLGs...

...Of this total, $65 billion (71 percent) took the form of greater military outlays...

...The income-generating base of core cities declines as white families and businesses move outward...

...This 1974 total includes general revenue sharing payments of $6.1 billion, urban renewal funding of $1.2 billion Medicaid payments of $5.8 billion, EPA subsidies of $1.6 billion (mainly for the construction of waste disposal facilities), and public assistance payments of $5.4 billion, among other outlays...

...What is more, social security transfers have been closely tied to social security payroll taxes, possibly the most regressive of all major taxes imposed in the United States today...

...The political problems are severe-and may even be un-solvable in the immediate future...

...First, it would still not improve the overall fiscal capacity of SLGs relative to the federal government...

...But they are the exceptions...

...Only Washington has the operating scope to take into account spill-over effects, and it has the resources -tax capability and debt issuing powers-to meet urban needs...

...Still, they must be considered in the context of the huge demands being imposed on SLGs...

...only $26 billion was allocated to increasing non-defense expenditures...

...Altering this picture will require mass organization arising out of grass roots interests and purposes, prepared to combat the overwhelming impact of corporate enterprise on national priorities...

...Between 1960 and 1974, the share of aggregate personal income going to the New England, the Middle Atlantic, and the East North Central states (Ohio, Indiana, Illinois, Michigan, Wisconsin) dropped from 50.2 to 46.1 percent, or by 4.1 percentage points...

...These made up 78 percent of SLG tax revenues in 1950, a proportion that was only marginally reduced during the long economic boom that followed...

...Comparable funding has never been available for metropolitan and interurban transport systems (in 1974 federal aid for highways totaled $4.5 billion...

...Washington soon took up the option, and by the late 1920s personal and corporate income taxes had become the mainstay of the federal fisc (displacing customs duties and excise fees...

...Barring war, defense expenditures ought to fall relative to gross national product...

...On January 8 the Labor Department acknowledged that there had been a significant drop in funding of these job training programs for the nation's inner cities...

...New York City, for instance, lost 1.6 million whites to its suburbs between 1955 and 1975-and gained 1.5 million poorer blacks and Puerto Ricans...

...For Reagan and Ford, also, federal cutbacks and "consolidations" of programs are thinly veiled attempts to reduce social expenditures under the rhetorical guise of "decentralization" and reducing the "burden" of government...

...But the urban decline and fiscal crisis are not confined to New York City...

...This lopsided expenditure pattern prevailed during a quarter-century of exceptionally rapid economic growth...

...it dropped to 94 percent by 1974...

...It would allow the federal government to take over entirely the public assistance budget of SLGs, and to begin investing in public transportation systems and urban reconstruction...

...A transfer payment, however, does not directly affect resource allocation...

...Not only are such taxes regressive, they are less sensitive to economic growth than income-based taxes-which means that rates must be sharply escalated if they are to produce more revenue...

...At bottom, the real problem is that the American socio-economic system does not readily respond to mere human need, even at home, that cannot be geared closely to the private profit-making process...

...The thankless task of meeting the demands of the civil society fell chiefly to SLGs...

...Of course these cuts, which come on top of earlier, 1975 spending decreases and personnel layoffs, may eventually be self-defeating...

...This tax has been increased seven times in the past ten years to pay for enlarged benefits, on the fiction that all recipients of social security at one time or another contribute to an insurance fund that will cover their subsequent benefits...

...Military spending provides a still more important example of how political conservatism and resource al-locatiqn interact to penalize the older urban agglomeratibm and reward the "sunbelt" states...

...These outlays, however, are determined by "non-economic" factors...

...The federal government has been preoccupied with the "larger picture," in a way reminiscent of Dickens' Mrs...

...Military expenditure is also a job-loser overall...

...Any effort by municipal governments to ward off budgetary disaster by increasing taxes simply accelerates the exodus of the better-heeled taxpayers...

...Kirkpatrick Sale's Power Shift hypothesis (see Commonweal, November 21, 1975) appears to be supported by the most recent data on personal incomes and taxable property...

...The inevitable financial squeeze has raised the specter of default, which in turn has driven up borrowing costs of state and local governments (SLGs) or rendered their bond issues virtually unsalable-adding further to their fiscal difficulties...

...In 1960, 67 percent of Washington's budget receipts flowed in from individual and corporate income taxes, 16 percent from social security contributions...

...One proposed solution to the urban crisis is metro-politanization, i.e., the consolidation of all the frag...

...One significant federal transfer item is grants-in-aid revenue sharing to SLGs, which increased by $39 billion from 1950 through 1974...

...The breakdown of the 1930s and the burning of the cities in 1967 could elicit national programs, but usually patchwork in planning, under-funded and petering out in the absence of renewed crisis...

...Revenue sharing, tied more effectively to need, can also be a useful short-term expedient for allowing SLGs to participate in the superior tax resources of the federal government...

...Their problems have been exacerbated by inflation, by militant and effective bargaining on the part of proliferating state and municipal unions (4.5 million of the 11.6 million state and local government workers now belong to unions or educational associations), and by recession-induced increases in welfare obligations...

...The upshot is that the "military-industrial complex" has been able to divert to its own ends 61 percent of the increase in federal purchases since 1950...

...A decision at the federal level to spend money on the military thus leads to a specific geographical pattern of job opportunities that benefits particular areas and bypasses and damages others-the latter including the Northeast and Northcentral states...

...corporate business and the ruling elements of both major political parties for armed forces capable of protecting, and enlarging, America's sphere of economic interests, which is the most extensive in history (see Du Boff and Herman, "Corporate Dollars and Foreign Policy," Commonweal, April 21, 1972...

...Despite greater recourse by SLGs to income taxes in the postwar period, 72 percent of SLG tax revenues still came from the traditional property-sales-excises sources in 1973...

...The military-in-dustrial-oil-leisure complex sections of the country have been growing more rapidly than the older regions...

...The current fiscal crisis is the short-term manifestation of our institutionalized urban decline, as city managers try to grapple with forces over which they have very little control...

...Such measures are bound to have a negative multiplier impact, beginning with a f urloughed city employee who buys less food and clothing, fewer city purchases of supplies from firms which must then retrench, and so on...

...We have seen that taxable assessed property values have increased more rapidly in cities of the sunbelt states, while at the same time they have required fewer or less expensive municipal services than many of the older declining cities...

...A second factor is the power of interlocking vested interests within industry, labor, the universities and the military to command resources and jobs...

...One is the perceived requirements of U.S...

...Median family income in central cities was 105 percent of nationwide family income in 1960...

...The federal government has the revenue capability, but it lacks the social purpose: its eye is currently on Angola and its purse strings have long been loose only for national "defense...

...Establishing such organizations, de novo, or via a stunning transformation of American trade unionism, should rank high on the public agenda for the 1970s.ank high on the public agenda for the 1970s...

...in January 1976 ffig rite was up to 5.85 percent Of the first $15,300, whether the worker in question earned $5,300 per year, or $153,000...