Public Employee Press

Book review

The 1970s fiscal crisis: right turn for the city

“From Welfare State to Real Estate” by veteran labor writer Kim Moody is essential reading for students of New York City.

The book focuses on the fiscal crisis of the mid-1970s, when New York City appeared to be on the brink of bankruptcy, and how its solution has shaped the city right up to now.

The crisis was popularly attributed to excessive spending on welfare, the “bloated” municipal workforce, cheap public transportation, free public higher education, and a vast network of public hospitals and public housing.

Moody offers evidence that contradicts this view and points instead to the “contract, supplies, and equipment line of the budget — the focus of pork barrel politics” — which grew by 620 percent from 1961 to 1975. Interest on the city’s debts grew by 350 percent, and by 1975 these two items totaled $3.1 billion, one-quarter of the entire budget.

Perversely, the real source of the problem — the city’s bankers and real estate moguls — were allowed to fashion the solution. Their program? Cut services for poor and working people. Cut taxes for the wealthy. Privatize as much of the public sphere as possible.

The city laid off about 50,000 employees, deferred pay increases for the survivors, and scaled back rent stabilization and welfare and closed hospitals. Tuition started at CUNY. Property and commercial rent taxes were lowered, and the flow of funds from the stock transfer tax ended.
Moody argues that the municipal union leaders, led by DC 37’s Victor Gotbaum, badly misread the situation and panicked because they confused bond default with municipal bankruptcy.

The union leaders might have felt that default would lead to full-scale bankruptcy, which they had to prevent because it could have wiped out workers’ savings in the pension system, eliminated collective bargaining and imposed more layoffs. To avert this perceived danger, they helped finance municipal recovery by investing huge portions of the pension funds in Municipal Assistance Corporation bonds.

Their fears were unjustified, says Moody. The required majority of the city’s creditors would not have permitted bankruptcy, because their new ability to dictate city financial policies was far more appealing.

Buying MAC bonds put the unions in an awkward position at the bargaining table. They “could ill afford to put pressure on the city’s finances as it was their members who stood to lose in the event of default,” Moody writes.

The business elite successfully used the fiscal crisis to demolish the city’s progressive social spending and replace its post-World War II liberal-labor government with the likes of Ed Koch and Rudy Giuliani.

Moody provides a debatable but excellent history of one of the earliest large-scale applications of neoliberalism, a political and economic system that frees capital from the restraints and costs of progressive legislation. Its principles continue to guide New York City as the social safety net is shredded, private development projects are heavily subsidized with public funds and the gap between the rich and the rest of us becomes a chasm.

— Gary Goff
2nd Vice President
Local 2627