Finally some good news out of Albany. The Binghamton Press-Connect reports that according to Governor Paterson, without a change to the “orgy of self-interest” in state government, which will not happen, New York will be bankrupt in 18 months. “I'd say without a reversal of the traditional process of delaying trouble into the future, I'd say about 18 months away,” the Governor said at a meeting. New York might follow California “into receivership or some sort of development corporation.” He seemed to imply this would be a bad thing. But in bankruptcy, all the existing deals, favors, exemptions, contracts, and privileges would be swept away, and everyone would start over at zero. As painful as that would be, the more likely scenario is even worse — most of those privileges remain in place, and others — and younger generations — will be left with a level of taxes and public services and benefits so awful that no bankruptcy court or other body of reasonable people would think to impose it.
“Sacrifice is the key, Paterson said, and that includes everyone – citizens, state agencies, nonprofits and municipalities.” But consider who is not sacrificing. Taxes will eventually be raised on the “rich” — say those earning more than $100,000 per year — but only if they are working. Income taxes on the retired? They are proposed to be kept at zero, no matter how high that retirement income is. Pension benefits are proposed to be cut for new public employees, and perhaps (once again) wages as well. Those with less seniority may be laid off. But will those with seniority make any sacrifices? No. And how about debts? Those debts will be paid. Wealthy Republican voters have always been in favor of borrowing money to fund government rather than paying taxes, figuring that eventually the burden of debt service will cause public services for those less affluent than themselves to collapse. Meanwhile, affluent people who are unwilling to pay taxes love to buy municipal bonds, because those are tax free. So how much will municipal bondholders be asked to sacrifice? Nothing. Not today’s senior citizens. Not public employees with seniority. Not those who profited in the past and are keepign the benefits in the future.
There will be, moreover, no doing “more with less” in government. There instead will be a lot less done for a little less money, as tax rates are raised to offset the decline in taxable income. And those with special tax deals will remain in place too. No matter what the Governor says.
And what will this mean to the rest of us? I direct your attention to the chart to the right of the table in the attached spreadsheet. It shows the inflation-adjusted change in the S&P 500 in two secular bear markets, from 1966 to 1982 and from 2000 to the present. In each case an index is created, with the start of the bear market set to 100. Assuming the same pattern is to be followed, we are about at 1974, and can expect the stock market to go up by no more than the inflation rate for another eight years. The inflation rate is heading below zero, although the way things are going, a shift to sky-high inflation may follow. In any event, not much real wealth from the stock market can be expected for some time. I certainly wouldn’t expect an 8% return from a market value restart at 2000 levels, which is what New York’s public employee pension benefits are based on.
So we are in a bear market heading for 1982. What were things like back in 1982, at the bottom of the last bear market? Well, believe it or not the median home sale price in the New York metropolitan area was lower than the national average that year, according to the National Association of Realtors (see the data in 1980s copies of the Statistical Abstract of the United States). According to data released yesterday by that organization, the median home price in the New York area was more than double the national average. In 1979, the per capita income of the New York metropolitan area was 23% higher than the national average, compared with 36% higher in 2006. I guess the relationship between income and housing was a good thing about 1982, except for those who had purchased at higher prices. For all of New York State, per capita income was 12% above the national average in 1982, compared with 20% higher in 2006. Looks like if the past is repeated, our taxable income is going down.
And what were public services like in 1982? Well a prior gang of thieves had awarded rich pensions, causing pension spending to soar and spending on actual services to collapse, just like now. Large debts had been run up, with two referendums passed to build the Second Avenue Subway in the 1950s and again in the late 1960s, with the latter bond issue also expected to pay for an LIRR connection to Grand Central, but nothing had actually been built yet, just like now. In the 1970s fiscal crisis, although New York City almost went bankrupt, it didn’t. The debts and pensions, however unjustified, were paid. The special deals and privileges were kept. Taxpayers, service recipients, and future public employees were sacrificed. In 1982, the New York City subway hit bottom. The crack epidemic stoked the crime rate beginning a few years later.
So what happens now? Well for one thing, whatever happens won’t just happen to New York City. Once again, it seems that the political class has aligned its privileges with that of the executive class, all to be financed by Wall Street. Hence all the moaning about “taxing the rich” or else where will be “no choice” but to gut public services for the rest of us, since those privileges will not be given back. Except — remember the stock market chart — the rich don’t have as much any more. So they’ll have to grab more and more taxes from the rest of us — and gut public services.
I just read an interesting quote from Margaret Atwood’s Payback:
“It is remarkable how often the assumed debt of services in return for the citizen’s tax dollar is forgotten by governments at large. And once the money’s been spent, the people have no means of recovering the sums they’ve been forced to lend, since they aren’t the ones with the army. In a democracy, you can depose an unpopular leader by voting for somebody else. In a tyranny you can risk an armed coup of popular uprising. But in either case, even if you win the election or the coup or the uprising, you’ll still be out of pocket. In the very worst case, your children will be starving and/or uneducated, your water purification plant will still be unbuilt, your tax money will be in a numbered bank account in Switzerland, and your ex-tyrant will be sunning himself on the Riviera, surrounded by a high wall and a posse of expensive bodyguards. Or, in a democracy, your money will have vanished up the sleeves of your ex-leaders cronies via a bouquet of untended and overpriced contracts, and that ex-leader will be warming the seat cushions of a half dozen grateful boards of directors.” Or, I might add, some of the cronies may be retired to Florida at a very young age, never to even pretend to do anything for anyone else ever again.
What Atwood describes is not, in fact, the worst case. We are not just out of pocket for past tax dollars. I could live with that. We are also out of pocket for our future tax dollars too, and for more and more of them. They’ve been promised in exchange for the money that disappeared up various sleeves in the past. And the drain can only be stopped, if at all, through bankruptcy. Only then will the sacrifice be shared.
In the meantime, perhaps some of that stimulus money can spent on more lampposts along the Thruway between New York City and Albany. Because when the bill comes due and people figure out what has been done to them, they’ll need something to string the New York State legislature up from. “Though satisfying as an act of revenge,” Atwood warns, “this is a temporary thrill, and it still won’t restore your vanished money.” And by then, of course, the shrewd state legislators will already be in Florida. But if the right choice is made, I hereby apply for the job of receiver.