New York City: The Birthplace of Reaganomics

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With President Obama’s announcement that he’d like to cut hundreds of millions of dollars from the federal budget, there’s now something of an actual, real-life bipartisan consensus in Washington, D.C., about what America needs now: less government spending. The Washington Post’s news story about Obama’s plan compared it to Ronald Reagan’s budget-slashing efforts in the eighties; so, in an unhappy blog post, did Paul Krugman. That’s not surprising: Almost every account of American politics that mentions the post–Great Society backlash against government spending will cite Reagan. But the first large-scale test of small-government economic principles actually occurred several years before Reagan’s presidency — right here, under a Democratic administration in godless, liberal New York.

Though the fanatic pursuit of smaller government and lower taxes wasn’t unheard of earlier in the twentieth century — see Barry Goldwater’s run for president in 1964 — the Republican party at the outset of the seventies predominately tended toward positions on taxes and the budget that we might now think of as liberal. In 1971, Richard Nixon called himself “a Keynesian in economics.” Under President Ford the highest income bracket was still taxed at a rate of 70 percent, and the budget kept growing as much under Nixon and Ford as it did under Kennedy and Johnson. But while Ford was overseeing a still-expanding government, New York City was already cutting spending at drastic rates.

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. One of creators of Big MAC was William E. Simon, who was Gerald Ford’s Treasury secretary at the time; while his boss was relatively moderate, Simon’s work with the city gave him a chance to put his small-government beliefs directly into practice, and he’d later found a free-enterprise advocacy foundation and become a trustee of the Heritage Foundation and a member of the Hoover Institute. In 2007 the Washington Post called him “a legendary architect of the modern conservative movement.” Another key MAC player was Citibank head Walter Wriston; the experience was his first foray into the public sector, and afterward he chaired Ronald Reagan’s Economic Policy Board and became a member of the Manhattan Institute’s Board of Trustees.

“In a lot of ways New York was a model,” says labor historian and Queens College professor Joshua Freeman, “for this idea that we can’t afford this way of life and that the [social welfare] system doesn’t work, that it’s broken. That the public sector can’t do everything, and that the private sector can do most things better.” Thirty-five years later, the public sector is in crisis again. And though modern deficit hawks like Paul Ryan and Chris Christie might not realize it, when they advocate big cuts to government spending, they’re using a playbook that was written in New York.