Wall Street and New York: Imperfect Together
Back when the housing bubble was beginning to deflate, I sat around a table listening to a bunch of policy types discuss what a financial conflagration might do to the greater New York area. At the meeting, two Wall Street economists soothed the crowd by confidently observing that the wizards of New York finance would reinvent themselves by finding yet another profitable new way to do business before the slump got too deep.
That was back in January of 2008, before we lost Bear Stearns and Lehman Bros, before the term ‘zombie banks' entered our lexicon, and before the federal government felt it necessary to pump some $800 billion of TARP money into the financial industry to prevent other essentially insolvent brokerages from collapsing. Today, Wall Street still hasn't discovered its next profit model, employment is once again shrinking in the financial sector, and New York City, no longer with federal stimulus aid to lean on, is looking at a $4 billion budget gap nearly four years into the downturn.
I was thinking of that 2008 meeting last week as I watched local New York union members head down to Zuccotti Park to provide support to Occupy Wall Street. Nothing that I've read coming from union leaders suggests that they understand the extent to which the supercharged, increasingly risk-taking Wall Street of the past 30 years has burnished their members' ranks and pay, giving local municipal and service union workers in New York among the highest levels of compensation anywhere. Those union leaders, protesting without a hint of irony against the gravy train that has brought them their supper, barely understand the extent to which the whole edifice of the New York economy and local government budgets depend on a Wall Street that may already be gone.
Although the financial sector has been central to New York's life ever since the days when brokers met at a coffee house in 18th Century lower Manhattan to trade stocks, Gotham could also rely for a long time on many other industries. Until the 1960s, the city boasted 1 million manufacturing jobs, a robust construction industry, and a great port that dominated East Coast shipping traffic. When those sectors began declining in the late 1960s even as the stock market stalled, New York government quickly reached the brink of insolvency. The 1970s became a lost decade in the city in which 600,000 jobs, or 16 percent of its employment, disappeared, including nearly 100,000 government jobs.
What emerged in the late 1970s was something entirely different, a city powered almost entirely by finance. From 1978 to 1988, New York gained back 400,000 jobs, including nearly 90,000 government jobs, but a study by the New York office of the Bureau of Labor Statistics estimated that Wall Street was responsible for 70 percent of that gain. When the era of junk bonds and heavily leveraged buyouts that provided investment firms with huge M&A fees started to unravel in late 1987, Gotham's economy crashed again, losing some 325,000 jobs.
Wall Street did find another super profit center in the 1990s, raising money for the technology boom. Gotham even seemed to be cultivating a more diverse economy, adding some 140,000 Internet and New Media jobs. But after the tech bubble burst it was clear that much of that growth was again a product of legerdemain on Wall Street, which had lured (suckered?) investors into pouring billions of dollars into tech firms without a profitable business strategy. At the time, the chief investment officer of a Wall Street firm told me he thought his and other firms wouldn't recover any time soon because they had clearly betrayed their customers and in the process lost their confidence for maybe a generation.
But he didn't count on the eagerness of investors around the world scrambling for better returns to buy into the mortgage securitization business that Wall Street began peddling so heavily. Again the boom burnished New York City and indeed the whole state. By 2007, financial workers, who made up just 3 percent of New York State's workforce, were contributing 20 percent of all income taxes the state collected, according to the Manhattan Institute's E.J. McMahon. New York City's revenues, meanwhile, grew by 41 percent, or $11 billion, from 2000 through 2007, largely thanks to Wall Street. The city's top 1 percent of earners, largely finance execs, paid half of all income taxes in New York.
No big city in America collects taxes or spends money like New York, thanks to Wall Street. On average, the city gathers in 75 percent more in taxes and fees per $100 of income and profits than America's other large cities, according to a study by New York's Independent Budget Office. That money, among other things, supports a $23.9 billion schools budget for about 1 million kids, a rate of spending per pupil far higher than most American cities.
Tax revenues generated by finance have also supercharged union pay. The average New York City municipal worker earns about $105,000 in salary and benefits, according to the Citizens Budget Commission of New York City. And, lest you think that most of that money goes to white collar workers, City Journal's Nicole Gelinas has estimated that the total average cost of employing a sanitation worker in New York City is a staggering $144,000 a year.
Private sector union members do well, too, in the ebullient New York economy, thanks to Wall Street. One union aiding the Occupy Wall Street protests is Local 32 BJ of the Service Employees International Union. Their last contract, made with the owners of 1,000 office buildings in New York City, was a four-year deal in which the average janitor's wage jumped to $47,112 annually, the highest in the nation. The union's 30,000 janitors, doormen and maintenance men who work in the city's 2,300 residential buildings earn on average just slightly less, $44,000 annually, although building owners say that with benefits, their median compensation is actually $68,000 annually.
How do building owners afford those salaries for unskilled jobs? In the office market they do so by charging Wall Street firms pricey rents. The average cost of office space in new buildings in Midtown Manhattan is a whopping $100 a square foot, and finance firms rent far more of it, fully one-third of all office space, than any other industry.
Still, despite these dizzying numbers, New York has been staring at a gigantic bust for 30 years precisely because Wall Street's business has become so volatile. City tax collections from Wall Street are already down by 50 percent since 2008. Wall Street's share of state tax revenues is off a third. And now, rather than recovering, Wall Street is losing jobs again.
Even worse, the message of Occupy Wall Street, that America needs to rein in the finance sector, may be resonating. What will New York City do without the Wall Street of the last 30 years? How will the city, and its unions, learn to live on the same kind of budget as other cities? I suspect many people in New York don't have the slightest idea how.