Monday, March 02, 2009

Stimulus to Provide Bonanza

For State and City Budgets.

Will It Bring Fiscal Reform?

Henry J. Stern
February 13, 2009

The economic stimulus bill will provide immediate relief for part of New York State and City’s fiscal distress. It will stave off disaster for at least a year.

It will do nothing to cure the chronic structural imbalance that is now greater than ever due to the collapse of the banks and the stock market.

The emergency we face makes this a good time to do something about the long-term problems which threaten to overwhelm the state and city, whose budgets are already strained by falling revenues. However, the temporary relief we will receive from Washington is more likely to be consumed by the state legislature in a way that does not address the current fiscal reality and the dysfunction of the state's economy.

With the national government piling up debt by the trillions, state and local debt rising by the billions seems like small potatoes. But while the federal government has the power to borrow until it runs out of lenders, the state and city do not. There are legal requirements that the state and city balance their budgets each year, but as we have learned from the term limits controversy, legal requirements can be abrogated if they cause inconvenience to people with sufficient power.

It is clear to us that shared sacrifice is the key to extrication from overwhelming budget deficits. That would involve contributions by the principal players, public employee unions and taxpayers. So far, there has been no sign that any union will give back even a nickel in wages, benefits, privileges or immunities. Though between eighty and ninety new taxes, fees and tolls have been proposed, they face opposition from those who would primarily be affected by them in both the short and long run.

The two relatively neutral parties in the annual tug-of-was over the budget are the Independent Budget Office and the Citizens Budget Commission. Each has come up with a batch of suggestions on how to reduce the budget gap. Some of those suggestions are better than others, and different cuts or taxes impact different groups to varying degrees.

Mayor Bloomberg’s attitude toward the IBO menu of proposals is evident on p2 of yesterday’s Post, at the close of an article by David Seifman, City Hall bureau chief. We quote: “The changes would require agreement from the unions, which Mayor Bloomberg indicated wasn’t likely. ‘Unless you can find the other side willing to do it … it’s just wasting your breath.’”

It is difficult to see how the unions are likely to make any voluntary sacrifices on their own. For one thing, union officers are periodically threatened by potential opponents, who accuse current officials of selling out to management, whatever the actual circumstances may be. When the insurgents take over union leadership and at some point reach agreements with management, they too are accused of selling out by the next ambitious assemblage of potential union leaders. That is the way of the world, particularly in public employee unions, where no one deals with the realities of competition and potential bankruptcy. Those whose income derives from sales of products voluntarily purchased by the public, rather than taxes on the public involuntarily paid, are likely to differ on goals and tactics. Private sector unions want their employers to remain in business, if only so they can continue to pay them their salaries, benefits and pensions. There are no comparable external restraints on the demands of public employee unions, since there will always be candidates for office first to elect and then to intimidate.

Another factor is that, because of the stimulus bonanza, there is no immediate imperative for the unions to reach any new agreements with the city in 2009. Most contracts have already been renewed for multiple years, at generous terms formulated before the economic collapse. As time goes by, those contracts look better for the employees and worse for the city treasury, but most of the new deals are simply matches of increases received by other locals, and are not freshly negotiated.

As long as no, or very few, employees are laid off, and layoffs are confined to the newly hired and are temporary in nature, what incentive is there for a union to modify rights and privileges that have been won (earned, as labor prefers to say) over a long period of time? For the city to expect give-backs, there must be a direct and immediate need for those givebacks, as, for example, ocurred during the city’s close encounter with bankruptcy in April 1975. The fact that New York City will deliver less service with fewer employees is of relatively small concern to labor, compared with their own economic interest in high wages, paid health care, early retirement, generous pensions, and lack of any reward or distinction based on quality of performance (an important but under-reported union aspiration).

The situation is complicated by the fact that this is an election year, and the mayor will be a candidate for a third term. One of the many disadvantages of third term eligibility is that it gives the special interests, unions, nimbys, and pressure groups of all kinds another crack at the mayor, whoever he may be. How can anyone be expected to deal dispassionately with the largest interest group in the city, public employees, when they have such an important voice in deciding the mayoralty? The mayor does not ask others for money, but he does ask them for votes. On the other hand, his rivals will ask for both money and votes.

Under these conditions, it is unlikely that any significant measures will be taken to increase productivity, or that similar efforts will succeed in improving municipal performance or efficiency. It is probable that the state authorities will shovel out stimulus money until it is exhausted, raid whatever reserves that may have been established, and then borrow all they can under one loophole or another to postpone reckoning with reality. If the economy does a 180 degree turn, and 2010 is a year of milk and honey, it is possible that reality can be pushed further into the future. We do not know of any economist or other seer who has made such a prediction.

To say that “the day of reckoning is at hand” suggests a bearded old man wearing a sheet, issuing a tired warning to people who are enjoying their lives without a care for the future. Nonetheless, it is increasingly unlikely that the day of reckoning can be postponed indefinitely in the interest of our immediate comfort. We have already imposed trillions in the national debt on our descendants, and the city and state deficits could become a proportionate burden to state and local residents.

This is not like spotting a wisp of smoke curling out of Vesuvius. Today’s problems are more visible, and more widely recognized than the early warnings in 79 A.D. But there is a yawning gap between awareness and action. As far as action is concerned, we might as well be in Pompeii.


#535 02.13.2009 1170wds

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