Joe Flood, a terrific writer, has written a short piece that traces today’s austerity-mania to the era of New York city’s near-default:
In the early seventies, New York had been the closest thing in America to a welfare state. It offered free colleges, a vast public hospital system, and a heavily subsidized public transportation system (35-cent subway tokens!), and it paid its large contingent of unionized public employees well, if not handsomely. But Wall Street and the national economy cooled off in the late sixties and early seventies, and to bear the expense, City Hall began borrowing — eventually making itself liable for $12 billion worth of municipal bonds. By the spring of 1975, with the economy still worsening and bond interest adding up, the city found itself on the brink of default.
To prevent bankruptcy, (Democratic) Mayor Abe Beame and the state and federal governments formed a consortium of real estate executives, financiers, and political power brokers called the Municipal Assistance Corporation (a.k.a. “Big MAC”) to hold the city’s purse strings. MAC issued bonds to pay the city’s bills, but also fundamentally changed the way the city taxed and spent. Labor unions were publicly excoriated, wages frozen, and thousands laid off. Tuition was imposed at city colleges, hospitals were closed, and subway fares were hiked. On the other side of the ledger, corporate taxes were eased, the stock-transfer tax all but done away with, and real-estate tax assessments lowered, all in the hopes of attracting large corporations to Manhattan.
The men who instituted New York’s response to its fiscal crisis helped trigger the conservative revolution of the coming decade, with its nationwide cuts to social programs and easing of taxes on businesses and high earners.
A few small observations:
(a) I’m not sure if “nationwide cuts to social programs” are an accurate characterization of the Reagan era. I think that conservatives certainly wanted to rollback various social programs in those years, and Reagan explicitly called for devolving virtually all federal social programs to the states, but as Paul Pierson famously argued in Dismantling the Welfare State, these efforts achieved limited success at best. And as William Voegeli observes in his brilliant book Never Enough,
Adjusted for inflation, per capita federal welfare state spending was 77% higher in 2007 than it was when President Reagan took office.
Note that this number refers only to the federal welfare state. Many social services are of course offered at the state and local level, where we’ve seen the bulk of the increase in U.S. public spending in recent decades. Consider the following from my colleagues at Economics 21 noted in January:
Measured from the end of the Korean War (1953) to the year before the financial crisis (2007), federal spending had actually declined as a share of GDP, from 20.4% to 19.6%. Since the 1960s, federal spending has exhibited no persistent upward or downward trend. Periods of rising federal expenditure have been followed by periods of declining outlays, measured relative to GDP. The federal government has grown substantially over the entire period, of course, but this growth has been roughly in line with that of the overall U.S. economy. By contrast, over the past 60 years, state and local government expenditures have doubled as a share of the economy, from 7.7% of GDP in 1950 to 15.5% in 2009. Since 1950, state and local spending has grown at an 8.1% annual rate, fast enough to double the size of state and local government every 8 or 9 years. [Emphasis added.]
To be sure, not all of this spending has been devoted to social programs. But enough of it has to cast doubt on Flood’s observation. There have been brief moments when very mild retrenchment has interrupted the broader movement towards increased social welfare expenditures.
I don’t think Flood is really talking about New York city as a precursor to Reaganomics, but rather as a precursor to today’s austerity politics, or “root-canal economics,” on the right. My guess is that some editor is to blame for the title of the post. At the heart of Reagan’s 1980 — as opposed to his 1976 — vision was a marked departure from the Goldwater-Taft approach, with its focus on balanced budgets and rolling back the welfare state. Rather, it was a sunnier, non-zero-sum, debt-friendly vision centered on tax cuts that was reconciled to New Deal social programs. It was, in my view, great politics and not always sound economics, insofar as it didn’t place a heavy enough emphasis on reforming the public sector to make it cheaper, better, and (as a byproduct) smaller.