A recent article on Bloomberg News demonstrates why I believe this recession will not be nearly as bad for most New Yorkers as the 1987 to 1992 or 2000 to 2003 recession in terms of their employment situation, but could be as bad as the 1970s for their standard of living and state and local taxes and services. “Jessica Walter didn't go to Harvard University to study cupcakes, but they're what she does since losing her job as a vice president in credit strategy at Bear Stearns Cos.,” the article reported. “’I want to teach kids to cook,’' said Walter, 27, who founded Cupcake Kids! in New York to provide birthday parties and cooking classes for children. `The goal is to have this be my full-time job and make enough to live.’'' Congratulations on joining the company of socially useful adults, Jessica! The bad news is that the impact of your work on society, as measured in dollars, is a lot smaller than it once was. The good news is there is a “plus” sign in front of it instead of a “minus.” The other bad news is that you and people like you, and your former firms, will be paying much less in taxes to the City and State of New York, who will now look to sacrifice someone else to make up for it.
In the 1987 to 1992 recession we had a crime wave driven by the crack epidemic; 9/11 turned what would have been a mild recession here into a deeper one. In addition, New Yorkers were much more dependent on finance for employment twenty years ago than today, before office automation and information technology wiped out hundreds of thousands of “pink collar” middle class office jobs, leaving a smaller number of massively paid professionals. Today “Wall Street professionals are trying new careers, and fetching smaller salaries, amid the elimination of 76,670 investment jobs in the Americas following the global credit crunch that started a year ago,” the article continued. Some are starting small businesses, or relocating to other countries, or going back to other regions, or teaching. These folks aren’t going to starve. Most of them will probably become very successful, or at least very happy, doing something else. Meanwhile, far more jobs are being lost elsewhere in the country. That’s where the real economic hardship will be.
Former Wall Streeters earning less money, however, will pay less in city and state income taxes even if, like Jessica Walter, the City of New York takes advantage of their new status as a person that does not matter (in a younger generation and self-employed) by hitting them with an unincorporated business tax and taxing them twice. “Traders and bankers who leave finance can expect to earn a fraction of what they used to make. Compensation for employees on Wall Street averaged $399,360 in 2007, compared with $62,390 for New York City jobs outside the securities industry,” Bloomberg News reported.
And Wall Streeters who retain their jobs are also less likely to be paid like princes in the future than in the past. “Half the people working in debt sales, trading or research in New York at the beginning of 2007 will have been fired by the end of this year or won't get a bonus,” according to Bloomberg News. Wall Street bonuses had purportedly been based on profits, but the subsequent losses show those profits were not real. Additional major financial institutions may either fold or be forced to be bailed out; shareholders may lose most or all of their investments; New York’s plutocrats may be faced with pissed off owners or pissed off taxpayers or both questioning their pay. They’ll be well paid in the future, no doubt, but perhaps no more than similarly bright, hard working and creative people in other industries.
Then there are the profits themselves. Remarks by Mayor Bloomberg confirmed something I had suspected — that the massive losses by financial firms can be written off against future profits, reducing the corporate income against which corporate income taxes are levied in the future until they are offset. “Financial companies worldwide have reported writedowns and credit losses of more than $500 billion since the start of 2007. Some Wall Street firms may pay little or no New York City or state taxes for years, Mayor Michael Bloomberg said this week. Some companies are seeking refunds from the city on taxes they paid ahead of time, saying losses have cut their tax liability to zero.”
And they will have less future gains to offset against those losses, because the next crisis in finance is not just losses from the past but finding something to make money on in the future. It may not be as easy to fleece people once again, which is where a lot of those “profits” came from. Other profits, and high salaries, were the result of sky-high productivity, with more and more money coursing through fewer and fewer hands, who needed only to take a few off the top to become enormously wealthy. Except that some of that productivity wasn’t real either. Some of those middle-class office jobs, now going, consisted of “non-revenue” work like assessing counter party risk, verifying the incomes of mortgage applicants, making sure the construction funded by a construction loan was actually taking place. Non-revenue, but as it turns out perhaps necessary. The twenty year trend of fewer and fewer people in finance making more and more money may reverse, and those some of this analytical grunt work is being outsourced to India, not all of it will be. More people means lower profits.
And how about the investment losses individual New Yorkers are suffering? Well investment losses work the same way as corporate losses — they can be offset against future gains — and to an extent wages — until they are cancelled out, reducing future taxes owed. So expect New Yorkers, even wealthy New Yorkers, to pay little or no capital gains taxes for two or three years after this one.
New York also benefited from an unsustainable real estate boom, driven by low interest rates and speculation, that inflated tax revenues. Buildings and complexes that were held by the same owner for decades were flipped two or three times, with the city, state and MTA each taking a cut in real estate transfer taxes with each change of hands. It is certain that commercial real estate investment sales will fall back to normal levels; in other parts of the country it has fallen to just about zero as no one is willing to invest in commercial mortgage backed securities anymore. The MTA, in particular, could have a large share of its tax base wiped out.
Virtually all of this reduction in tax revenues has yet to occur. In fact, because Senator Obama is threatening to increase federal taxes on capital gains, lots of wealthy people are selling their winning investments and taking those gains now at lower rates, temporarily increasing city and state income tax revenues this year — and leaving the losses for next year. And this year’s personal income tax revenue is based on Wall Street bonuses paid this January, which were based on Wall Street profits in 2007, back when there were profits. Next January there will be fewer such bonuses, which the state will find out in mid-April when quarterly tax revenues come in. This time text year revenues will be falling off the table.
New York City, New York State, and the MTA had a temporary tax revenue windfall that is not likely to recur for a decade. In fact, for the next three or four years tax revenues are likely to be far lower than they would be normally. It would have been terrible if our elected officials had taken that windfall and blown it all, leaving us with no reserves going into this difficult period.
In fact, they have done something worse. Convincing themselves that the windfall level of revenues would continue (or just pretending, more like it), they have already handed out tomorrow’s money to their supporters. Teachers will retire at 55 instead of 62. Taxes were lowered and money was borrowed. Spending soared not only in categories and places where it was low (like NYC schools) but also in categories and places where it was high (like Medicaid and schools in the rest of the state). MTA fares were held below the rate of inflation. Toll booths were removed in the suburbs. STAR checks were sent. Revenues were sucked out of the future, and costs deferred, to pay for it all.
Faced with a crisis, some will no doubt call of New York City and New York State to “do more with less” the way businesses supposedly do. That is nonsense. In recessions, businesses do less with less. Their revenues fall because demand for their goods and services fall, and the workers who are laid off would otherwise have had nothing to do. Moreover, the least valuable workers are those who are let go in well-run non-unionized companies. And, faced with an extreme situation, private companies renegotiate their debts, pensions, and retiree health benefits, often going through Chapter 11 if needed. Businesses don’t pay for the past when they don’t have enough money for the present and future.
In the public sector, in contrast, when tax revenues fall, the demand for public services, benefits and spending goes up. People suffering recession-induced economic hardship switch from parochial schools to private; those who have their cars repossessed switch to mass transit; those who lose health insurance end up on Medicaid or in public hospital emergency rooms; those who can’t afford a vacation take the kids to the local beach or pool or take out books at the public library; those without income end up on unemployment and public assistance. Housing busts bring arson, job market downturns bring crime.
And public spending that provides zero public services and benefits has the first claim on whatever tax dollars are left. Debts are paid first, and the cost of debt service could soar with higher interest rates, which have been unusually low for a decade. Retired public employees do not have their pensions reduced, are not asked to contribute to the cost of their health insurance, and are not asked to pay state and local income taxes. The mandatory cost of public employee pensions could soar even higher as the pension funds admit investment losses. And goldbricking public employees in seniority sinecures are neither laid off nor made to start working again. Put a “teacher” who succeeded in getting out of the classroom back in, and they can respond by simply not teaching. All the political posts are on top of that. So a five percent reduction in revenues would cause a ten percent reduction in the number of actual workers the city and transit system could afford to employ, leading to a twenty percent reduction in the work they do.
And as for higher taxes, the “tax the wealthy” fraud being put out there is a joke. It isn’t wealth that is being taxed, it is income, and the taxable income of the wealthy is going way, way down. The result will be a massive tax increase on the income of everyone from top to bottom, described as the “inevitable” consequence of “circumstances beyond our control” but in reality an offset to all the money those who matter politically have sucked off the top, and no one would even dare to suggest they give back. All while wage income continues to fall relative to inflation, and not just for ex-Wall Streeters. “Shared sacrifice?” There is no such thing in New York. As the Russian proverb puts it, “the shortage will be distributed among the peasants.”
New Yorkers are less economically dependent on the financial sector that ever before, but the budgets of the City and State of New York and the MTA face disaster without an unsustainable financial boom continuing indefinitely. No wonder those who talk about the coming crisis were not believed back then, when it could have been averted, or even now, when it is inevitable and already happening in other parts of the country. New Yorkers are much less likely than in past recessions to be hurt by the economy. But they are much more likely to be hurt by their governments, as a result of all the debts the generations and cabals in change have run up handing out favors to themselves.