Why New York City Can Borrow Its Way Out of the Coronavirus Crisis
Bill de Blasio is right for once
This week, Mayor Bill de Blasio floated another idea that was widely panned. As New York City faces down the loss of nearly $10 billion in tax revenue from the COVID-19 pandemic and teeters on the brink of an economic depression, de Blasio asked the state for the authority to borrow up to $7 billion to cover operating costs.
It’s not an exaggeration to say that very few people like the idea of the city borrowing money for anything other than long-term infrastructure projects. Governor Andrew Cuomo, who is probably salivating at the idea of a $10 billion bleed from the municipal budget, has already shot down de Blasio’s request to borrow. With the exception of a few sympathetic state lawmakers, like Manhattan State Senator Liz Krueger, most other prominent Democrats and allegedly nonpartisan budget analysts are lining up against de Blasio—hard.
Borrowing and raising taxes—another solution Cuomo opposes—may end up as the only realistic means to keep New York City from sliding into the fiscal abyss. Most Democrats, however, cling to the increasingly remote hope that President Donald Trump will take care of all the city’s needs in the next stimulus bill.
“I am really concerned about just giving $7 billion to be able to spend without guardrails. … It can’t be a replacement for the difficult choices that are going to have to be made over the next five weeks,” City Council Speaker Corey Johnson, who hopes to replace de Blasio as mayor, said this week.
City Comptroller Scott Stringer, who also wants to be mayor, estimated de Blasio’s proposal would require the city to pay up to $550 million annually for the next 20 years, or roughly $11 billion for the $7 billion loan. “That $500 million means less for teachers, child care and restricts our ability to borrow for needed infrastructure improvements,” Stringer told the New York Times.
Borrowing to cover operating expenses—like funding public schools, hospitals, the police department, and most of what makes New York a major city—is largely frowned upon because it led to fiscal disaster in the 1970s, when New York City nearly went bankrupt. The causes of the fiscal crisis were complex. Though the narrative in the media has long held that profligate, free-spending liberals needed to be reined in by sober minds in Albany, the crisis was decades in the making. Suburbanization and white flight bled the city’s tax base. Blue collar manufacturing, a backbone of the urban economy in the first half of the 20th century, collapsed. Large banks, increasingly interested in foreign markets and making bigger bets, no longer wanted to loan money to the city. By 1975, the banks were willing to let the urban project fail. If not for a last minute decision by the city teachers’ union to buy up debt, New York City would have declared bankruptcy.
There are real dangers to borrowing that should be acknowledged. Stringer is right that, over time, the city must pay out interest and future generations end up funding services they don’t use. In the 1960s and 70s, budget gimmicks employed by Mayors Robert Wagner, John Lindsay, and Abe Beame precipitated the fiscal crisis. New York City’s budget does have real bloat that could be addressed. There are too many police officers, given the city’s historically low crime rate. Most city agencies have overpaid, high-ranking bureaucrats who can take pay cuts or be laid off altogether. De Blasio’s own staff budget, filled with patronage hires, should probably be slashed. I’m not opposed to asking City Council members to give back the underserved raises they voted themselves in 2016.
The opposition to borrowing comes from a few different places. There is the real acknowledgement that, over time, the city ends up owing even more money. Debts will take many decades to pay off. New York City is still paying off debts from the 1970s, as well as after 9/11, when Michael Bloomberg borrowed money to cover operating costs to stave off a deeper recession. No one, de Blasio included, likes the idea. But more is at play than that. Many of the elected officials and outside budget analysts frequently quoted in New York City media outlets are philosophically opposed to the idea of anything but shrinking the city’s $89 billion budget.
For them, reduction is a goal unto itself.
“Their basic strategy is to just borrow and beg their way to next January and hope for a new [federal] administration,” Nicole Gelinas, a senior fellow at the fiscally conservative Manhattan Institute, told Politico. “But in the long-term, and with the change of the city’s economic well-being, that is not going to get you very far.”
Andrew Rein of the fiscally conservative Citizens Budget Commission (the New York Times is one of the only outlets I have seen to actually identify it as “fiscally conservative”) said borrowing would keep the city from making “hard choices today” and therefore should be avoided. “Basically what you do is make future New Yorkers pay for your bills. It’s pretty clear to us that the city should not go there yet. There is a lot more that it could do,” Rein told the Times.
For Cuomo, Johnson, Stringer, and most non-de Blasio Democrats, the solution to the coming fiscal disaster is to hope the federal government comes through with a lot of money. Cuomo has asked the Republican Senate and Trump to approve $60 billion in aid for New York State. It’s an ambitious ask and one that should, in a normal world, be answered without hesitation. The federal government can afford to bail out all the states wrecked by COVID-19. If New York State fails, it will tug down the rest of the nation with it, since it’s well-heeled New Yorkers who pay federal taxes and spend their cash on hospitality and tourism in poorer states.
But we don’t live in normal times. Mitch McConnell and Trump are deeply unreliable, with an innate and ideological hatred of the non-militarized public sector. Republicans in Congress are in no rush to take up the House Democrats’ latest stimulus bill, which would give Cuomo the federal aid he desires. The Republicans may do it in June or may do it never. Cuomo knows this. He is playing a cynical game that the local media and political class has mostly devoured wholesale—get the federal aid or make deep, painful cuts. Cuomo is setting us all up for drastic social safety net reductions. He will blame Trump and the federal government, shrug his shoulders, and do what he’s always wanted to do, which is impose austerity. It’s possible, too, that some federal aid for New York will materialize in the next round of stimulus spending. Any number that’s not the magic 60, however, could spur Cuomo to slash spending at unprecedented levels.
Right now, the New York intelligentsia seems to believe it’s more realistic for Trump and McConnell to bail out New York State than to find new revenue raisers, like tax hikes, or borrow money to keep the city afloat. But the assumption of federal aid is little more than a wish at this point. Gelinas, the Manhattan Institute scholar, nails de Blasio’s strategy best when she said his hope is for a new federal administration in January that will be kinder to New York. In the meantime, borrow. While Gelinas is dismissive of the approach, it actually makes a lot of sense. Why gut the city government now—laying off teachers and social workers, starving public hospitals and community colleges—when Joe Biden could be president in January 2021 with a Democratic Senate? It’s a more realistic hope than Trump and McConnell deciding that urban bailouts are now their modus operandi. Biden has already spoken of his interest in undertaking enormous stimulus spending to save the U.S. economy from a prolonged depression. President Biden would probably authorize enormous aid for New York City. And it could be here as soon as next year.
But what if Biden loses? Borrowing is a more reasonable course for New York City to take than deep budget cuts because, in the long-term, such reductions will only exacerbate the economic downturn. Thankfully, the field of economics has grown wiser to this reality since the 1970s. Or since the 2010s, when President Barack Obama’s fears over growing the deficit further led to a smaller-than-necessary stimulus bill following the 2008 crash. It’s important to remember that even Trump’s multitrillion dollar stimulus spending since March has far exceeded any that Obama undertook in his eight years. History has shown us there is no longer any reason to build an economic program around deficit concerns. The federal deficit has ballooned over the last 20 years while inflation remains low and interest rates approach zero. The United States can print all the money it wants to pay for whatever it wants and no one is going to stop loaning money to the world’s largest economy. Curtailing spending on social services, infrastructure, and local aid in the hopes of tamping down the deficit is a bit like bleeding out the face to spite the body. After the Eurocrisis, austerity was imposed on smaller, poorer nations, deepening their recessions as self-destructive budgets cuts cost an escalating number of jobs and demand for goods and services dropped off. The European Union’s response was an abject failure. Economists like Stephanie Kelton are right. If a government is in charge of its own currency, no inherent budget rule constrains it from spending more than it taxes. This is modern monetary theory.
New York City cannot print its own money. But by borrowing to keep the municipal budget not only functioning but robust at the levels it was pre-pandemic, city leaders can mitigate the worst effects of a catastrophic recession that can drag out, without any new revenue, well into the 2020s. Absent federal aid, borrowing, or new taxes, New York City will simply be a smaller, more impoverished city, with fewer jobs, diminished economic activity, and less hope of a quick recovery. Austerity is crippling. The calcified narrative of the 1970s is that the bankers got together to bleed city services and save New York. But the darkness following 1975 would persist for many years, with the working class and poor—those most reliant on the social safety net—punished most. Republicans in Washington, then as in now, didn’t want to rescue the city at all. It’s up to Cuomo, Stringer, Johnson, and the rest of New York’s leadership to understand the crisis in front of them and act in a way to literally save lives. They can do this by raising taxes. They can do this by borrowing money. They can’t do this by doing nothing.