Banks and Beggars in New York City
LEKACHMAN, ROBERT
SWALLOWING BIG MAC Banks and Beggars in New York City BY robert lekachman Let us brood together for a space upon the latest of Fun City's summer festivals, the "rescue" of the metropolis by a...
...No, the causes of this summer's crisis are as familiar as its indicated but unlikely solution...
...Of course Albany takes its revenge—not, to be sure, on Washington, but on its own cities...
...But then, oh horror, someone might have to tell the banks the till was empty...
...In exchange for this dubious favor, the Mayor would have to agree to Big Mac supervision of the city's financial affairs...
...The heroic tale begins mysteriously this spring when the large banks, which during the Robert F. Wagner and John V. Lindsay administrations had been cheerfully marketing or buying for their own portfolios each year's assortment of municipal bonds and notes, gravely stirred themselves to warn that the investors of the land would no longer swallow additional pieces of city financial paper...
...The city, they cried, was in imminent danger of default...
...Worst of all, the unions?Albert Shanker, Victor Gotbaum, Ken/McFeeley, John DeLury, and company—were robbing the citizenry blind...
...The parks are becoming too filthy to walk in...
...But here one really ought to pause for reflection...
...The bankers and the newspapers had been complaining so loudly that someone believed them—most notably President Ford, who took the occasion of his visit to Belgrade to deplore the city's fiscal practices to that wizened old capitalist Josip Broz Tito...
...Whatever their reasons, David Rockefeller and his few peers suddenly announced the presence of the wolf at the door...
...Over the last generation, for example, it has seen the arrival of massive numbers of blacks from the South and Hispanics from the Caribbean basin...
...What to do...
...Returning to reality, I find it hard to believe the average resident of New York would be worse off now and in the near future if the city defaulted on some of its debt...
...To begin with, New York has traditionally been the destination of immigrants from other lands...
...So tax revenues shrink, and crime rates and welfare caseloads soar, while the country suffers its worst economic crunch since the end of the 1930s...
...Affluent suburbanites who work in Manhattan and enjoy the restaurants, theaters and concerts it offers in unique profusion, pay city income tax at rates approximately one-sixth of those levied on residents of the five boroughs...
...New York's financial health will be miraculously restored on the day welfare is completely Federalized, full employment returns as a national policy, commuters are assessed their full share of the tax burden, and the state not only doubles its contribution to the City University but revises some of its other assistance programs and pays for the city's courts...
...At the same time, state aid legislation routinely shortchanges New York City...
...Almost immediately this scenario went awry...
...No wonder...
...New York bankers bought $250 million of the new bonds and traded $100 million of maturing notes for another $100 million of Big Mac paper...
...The bankers might well have loaned the city enough to carry it over until next year...
...Unless he is an insomniac or a prodigy of energy, his chances have now dropped close to zero...
...No more reassuring demonstration of the business community's confidence in the future of New York could be imagined...
...The Metropolitan Museum of Art has reacted to reduction of its municipal subsidy by closing on Tuesday as well as Monday...
...The City University, historically the route of social and financial mobility for successive groups of poor and ambitious youngsters, will gradually decay into a second-or third-rate institution, miscalled a university...
...Almost uniquely in the country, the cities in this state pay 25 per cent of their welfare costs...
...The Legislature appropriates $2,500 per student in the State University but only $1,200 per City University registrant...
...At worst, they might actually never get some of it...
...September will require a miracle of at least equal size...
...By their action they hope, as Felix Rohatyn, financial adviser to the corporation, has put it, to persuade the out-of-town skeptics to invest in the next batch of Big Mac securities and ultimately in the city's own notes and bonds...
...The state graciously advanced the city $120 million of aid due later in the year...
...Enter on cue the Municipal Assistance Corporation (MAC), or salvation by the right and mighty...
...The city would continue to collect property, sales, income, and business taxes...
...If anybody thought otherwise, all he needed to do was read in the New York Times about retired sanitationmen living it up on huge pensions...
...In sum, we are experiencing a substantial redistribution of resources from families in average or worse circumstances to affluent investors, bank stockholders and other un-needy citizens...
...If the bankers believed their Washington friends, the financial tide in New York City was likely soon to shift...
...So we have seen a flood of hardships: Bus and subway fares are scheduled to go up September 1. Most of the municipal unions have "voluntarily'' accepted a scaled deferral of contractually promised wage hikes...
...Federal and state aid under existing regulations, however inequitable they happen to be, would add to available cash...
...Although some middle-income city residents are being injured by these austerity measures, the principal losers are low- and moderate-income families...
...Banks impress by imposing sacrifices, and the more vulnerable the people who must do the sacrificing the better...
...Out there in the hinterland, where suspicion of New York is a popular hobby, nobody wanted Big Mac securities...
...The reactionary economic policies of the Ford Administration and the cowardice of Congress have further aggravated matters...
...New York City is going through a genuine crisis, but it is not the one we have been brainwashed to believe in...
...Few human beings can conscientiously teach 12 or 15 hours a week of college classes and simultaneously do the research and publication upon which continued employment depends...
...Finally, the banks agreed to pick up whatever could not be absorbed in open-market sales after interest rates were raised to between 10-11 per cent...
...It is true that an individual who successfully files for personal bankruptcy is relieved of his debts and given the chance to make a fresh start in life unharassed by his creditors...
...Wage deferrals and freezes are the equivalent of reductions in living standards at a time of a 7-10 percent inflation that shows signs of new acceleration...
...But nobody asked me or any of the other voters...
...or, as Council of Economic Advisers Chairman Alan Greenspan more portentously phrased the same insight, that the American economy was entering the zone of a turning point...
...Yet nobody appears to know exactly what the bankruptcy of a major metropolis might entail, though one shining fact is self-evident...
...The tenured faculty will work harder...
...The salaries of municipal workers are not out of line with other large cities or our own suburbs...
...What to do...
...The rate of return on 15-year bonds would be the equivalent of a taxed 30 per cent income from an ordinary corporate security...
...On August 12 the Times, which until that redletter day had blamed the politicians and the unions for the city's financial woes, discovered somewhat belatedly that welfare is a national problem costing local taxpayers a cool billion dollars each year...
...No one expects that they will ever see the money they are "deferring...
...Class sizes will rise in the grade and high schools...
...Mayor Beame might seem as good a mayor as Richard Daley if the state, like Illinois, picked up the local welfare tab...
...The chance for such outside participation would have been better if the banks, major corporations and life insurance companies headquartered in Manhattan had voluntarily chipped in and taken up the August issue by themselves, without recourse to the assortment of expedients actually resorted to...
...To continue dreaming, the city should be allowed to annex Westchester and Nassau, as once it was allowed to swallow Brooklyn...
...New York would have to accept for a decade and a half an extremely heavy burden of debt service...
...As the Times editorially warned, weekdays and Sundays, the beloved city under Mayor Abe Beame trembled on the very brink of bankruptcy, a fate worse than death...
...With no great enthusiasm, the New York banks are buying more Bic Mac bonds than they had probably planned to acquire...
...As prosperity returned, unemployment and welfare costs were bound to diminish and tax collections ascend...
...But our financial overlords, it appears, do not impress investors and other bankers by taking even minimal risks or acting even coin-cidentally in the general interest...
...A 42 per cent hike in transit charges is a stiff regressive tax...
...At best, they might have to wait for their money...
...In August it was touch-and-go for a while, but Big Mac eventually managed to assemble enough bits and pieces to avert an August 22 default...
...SWALLOWING BIG MAC Banks and Beggars in New York City BY robert lekachman Let us brood together for a space upon the latest of Fun City's summer festivals, the "rescue" of the metropolis by a coalition of concerned bankers and business types...
...The municipal hospitals, community colleges, public libraries, and parks serve primarily a low-income clientele...
...And yet the city is an unrecognized and uncompensated agent for the education, acculturation, assimilation, care, and support of these hordes of newcomers...
...Indeed, I still find the timing of the crisis a mystery...
...Lesson one in the primer of vulgar Marxism is the rich get richer and the poor get poorer...
...As the story line read, over a period of years New York would stop cooking its books, refrain from short-term borrowing to cover current expenses, economize on services, improve productivity, and reap as its reward a return of confidence that would permit borrowing at decent rates...
...Funds had been shifted between capital and expense budgets in ways that would outrage the ethical standards of such of the famous public accounting firms as were not currently under indictment for similar connivance with their corporate clients...
...Thus most of Big Mac's first issue, to save New York in July, ended up in local hands...
...Layoffs of city workers have been substantial...
...Apparently the naive types who run Chase Manhattan, Morgan Guaranty and Citicorp shockingly discovered that New York's budget was jammed with gimmicks: Prospective revenues had been routinely exaggerated, and certain expenditures maliciously underestimated...
...There would be money enough, in other words, to pay some of the city's bills...
...Since cops, firefighters, sanitationmen, bridge-tenders, and sewer workers are physical types, addicted, when irritated, to demonstrations, mass illness, job actions, and small-scale riots, the municipal workers would probably receive their paychecks...
...One insight led to another...
...Although the sales tax and the stock transfer tax would be pledged to redeem these bonds as they came due in future years, the State Legislature each year would have to appropriate the actual money...
...Given a choice, I would rather go broke in good company than suffer the Egyptian captivity of Ma Bell, the banks and the life insurance companies...
...Four city-employe pension funds picked up $165 million...
...As initially billed, MAC, or Big Mac, on whose board sat businessmen and academics but no union representative, was to market $1 billion of its own securities in July, August and September, for a total of $3 billion...
...State Controller Arthur Levitt broke down and committed the Teachers' Retirement System to a $25 million purchase...
...Yields in excess of 9 per cent would be offered to investors who bought Big Mac paper...
...Many of their unten-ured colleagues will lose their jobs in a desperately bad academic labor market...
...Nor, guarded claim, is there any particular reason to believe our teachers, policemen, firefighters, and clerks are any more inefficient than their colleagues in Chicago and Philadelphia—notwithstanding the City Council's having authorized the Mayor to commit what Albert Shanker has accurately termed "a unilateral abrogation of collective bargaining by the city which will affect the rest of the country for years to come...
...With some heat, the newspaper's editorialist noted the discrepancies: Federal contributions cover 80 per cent of Mississippi's welfare costs and only 50 per cent of New York State's outlays...
...Before these two actions, the average young instructor had only slender prospects of gaining tenure in his department...
...In the City University teaching schedules will increase 15 per cent but salaries will be frozen...
...I need hardly say that louts like me are not privy to the deliberations such a picture may have provoked in the highest banking circles...
...High unemployment, a national disaster, has been deliberately deployed,as an anti-inflation weapon...
...In the spring, Moody's even reaffirmed its A rating for New York bonds...
...What was the panic...
...After all, the official Washington line had been that the recession was over...
Vol. 58 • September 1954 • No. 17
