(Photo above, and caption “Mayor Michael R. Bloomberg argues that the financial crisis makes it important that he remain in office” from Thursday’s New York Times.)
This is a follow-up to our recent piece assessing whether there was truth to the Bloombergian argument that the financial crisis makes it important that he remain in office (Thursday, October 23, 2008, Bloomberg Qualified Financial Crisis Leader? He Can Learn Says Schumer!).
Wall Street Journal Weigh-in
On October 16, 2008 The Wall Street Journal ran an opinion piece, New York Will Survive Without Bloomberg: The mayor never bothered to prepare the city for any lean years, by Jason L. Riley, a member of The Wall Street Journal's editorial board. Mr. Riley marshaled numbers to make a cogent case that, based on his record, Mr. Bloomberg shows no special acumen to lead the city through the financial crisis.
Mr. Riley’s analysis of the numbers are in sync with our own thoughts about Bloomberg’s unsuitability to lead in this regard. We can also offer additional observations about other budget management concerns Mr. Riley did not talk about.
Bloombergian Lack of Perspective
We previously observed that as an insider Mr. Bloomberg’s likely lack of perspective is a threat to understanding or navigating through the Wall Street meltdown and its budgetary aftermath. We noted Mr. Bloomberg’s failure to see the crisis ahead of time and what looks like an infatuation with Wall Street preoccupations that may well explain it.
What Was: “Good Economy” With Caveats
First, here is some good number news from Mr. Riley that must be followed up with caveats. Mr. Riley points out that Mr. Bloomberg has had “record revenues to work with.”
Between 2000 and 2007, New York's tax receipts grew by 41% after inflation. "That's something that's never happened or come close to happening in the city's modern history," says Nicole Gelinas, who follows municipal finance at the Manhattan Institute. This windfall had everything to do with the Wall Street bull market, . . .Economics, Perceptions & Elected Chief Executives
Let’s for a moment consider Mr. Bloomberg’s popularity. There is a self-flattering school of political thought that says that politicians rise and fall based on political ideas and movements. This may be partly true, but deflating the importance of the great-ideas and great-men theories of history is the observable lockstep relationship between economics and the election of presidents. How the public perceives economic conditions is apparently quite important. For an interesting read on this (extracts set forth below) go back to 2003: Economy & Business; With Change in Consumer Confidence, So Goes the Presidency, by Daniel Akst, December 1, 2003.
Although economists may debate the extent to which presidents influence the economy, there is no doubt that the economy influences presidential elections.
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. . . what counts more than the economy is how people feel about the economy, when they feel it and how optimistic they are.
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The Conference Board, a business research group, started conducting regular surveys of consumer confidence in the late 1960's, and since then, the data are clear: when the board's Consumer Confidence Index in the September before a presidential election is at 100 or above, the incumbent party wins the popular vote.
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It seems that the level of consumer optimism at midterm correlates strongly with the outcome of the next presidential race.
''When consumers feel more optimistic about the future than the present, the incumbent tends to stay in office,'' said Lynn Franco, director of the Conference Board's Consumer Research Center.
We suggest that as with the chief executive of United States, so with the Mayor of New York. Though we have also suggested that most of Mr. Bloomberg’s mistakes are long-term mistakes that will take time to come home to roost (Coming to Terms With Mistakes, Wednesday, October 1, 2008), the economy during his tenure was good until now. A good economy may be perceived as even better than it is if, during that time of plenty, surpluses are lavished on services rather than set aside for harder times. Unfortunately, the political reward in saving for a rainy day may be meager.
Borrowing Against a Rainy Day
Whatever has been asserted about Bloomberg saving certain funds for a rainy day, Riley makes the case that he essentially did the opposite.
. . .and everyone knew that the rate of growth was unsustainable. Instead of using the flush-year surpluses to put New York's fiscal house in order, however, Mr. Bloomberg mostly squandered them.Meditating on Bloomberg’s characteristics, we worried that his misguided affection for the goals of Wall Street would lead him to pursue what was best for Wall Street instead of what was best for the rest of us. Every day now we are hearing about the aftermath of the leveraged-debtors-gone-wild Wall Street orgy. We should have no doubt that Wall Street loves to make money midwifing debt into existence. During his tenure Mr. Bloomberg visited Wall Street to issue a lot of city debt. Mr. Riley is disappointed:
His handling of the city's debt is particularly disappointing, if not irresponsible, since debt-service payments are legal obligations that can't be suspended during economic slowdowns.In thinking about Mr. Bloomberg’s Wall Street borrowing that exacerbated the city’s debt burden, we can’t help but remember that his business is selling services like his Bloomberg financial terminals ($1,500 to $1,800 per terminal per month as of 2005) to those same Wall Street denizens. Many firms times many terminals. Too cozy.
Since 1990, debt per person in New York is up by 185%, exceeding inflation by 118 percentage points and exceeding tax revenue growth by 27 percentage points. By most measures, New York has higher per-capita debt (about $7,000) than any other city in the nation. And while the problem obviously predates the current mayor, the future burden has worsened substantially on his watch.
Instead of cutting other parts of the budget and using the city's swollen coffers to service debt and pay for capital projects out of operating spending, Mr. Bloomberg chose to increase borrowing. Between 2000 and 2007, debt grew by 5.7% annually and will continue to grow by 5.9% annually over the next four years. By increasing the city's debt obligations while doing nothing to decrease the city's overdependence on income tax revenue from Wall Street wages and bonuses, Mr. Bloomberg has exacerbated a bad situation.
Mr. Riley also takes Bloomberg to task for spending that far outpaced inflation (presumably spending funded by the aforementioned debt).
Between 1975, when New York faced its last fiscal crisis, and the Giuliani era, city spending rose by just 9% after adjusting for inflation and population growth. Mr. Bloomberg's 2008 budget is nearly 50% larger than the one he inherited from Mr. Giuliani in 2001.Cons in the “Pro” of Real Estate Development: Perfect Budgetary Storm?
Mr. Riley found fault by focusing on Bloomberg’s official budgetary borrowing, but there are things to consider that could combine, perfect storm fashion, with the squandering Riley identified to deepen problems. Mr. Riley attempts to evenhandedly balance the ledger of his Bloomberg assessment:
The mayor also deserves praise for his aggressive pro-development policies, such as rezoning large swaths of the city where industry is not coming back.In actuality, this may not be entirely good news. Mr. Bloomberg’s real estate development policies may represent another form of squanderous borrowing.
Industrial Assets Decommissioned and Carelessly Sacrificed
We don’t want to sidetrack into the question of whether so much land associated with the industrial sector of the city’s economy should have been decommissioned. Certainly it was important to make a shift, but it is important to do these things intelligently and not reflexively. The elimination of a sorely needed graving dock (dry dock) in Red Hook to create an IKEA parking lot was a mistake. It eliminated high-paying jobs while replacing them with a similar number of much lower-paying jobs. If it was essential to have IKEA (with its parking lot), we could have had both IKEA and the graving dock. The city is now looking at spending a billion dollars to replace the sacrificed dry dock. (See: Brownstowner’s June 23, 2008, IKEA Dock Destruction: 'Billion-Dollar Boondoggle'? And the New York Post’s IKEA Berth Pangs, City Dock Deal a $1b Blunder, by Rich Calder, June 23, 2008) This reflexively silly sacrificing of assets is, of course, a concern, but it is not our foremost concern in terms of the approaching budgetary perfect storm.
We could also mention, as we have before, the gratuitous failure to preserve for adaptive reuse worthwhile historic former industrial buildings like the Ward Bakery Building. (Sunday, October 19, 2008, Building the Right Landmarks Case; Wrong Building)
Yes, while the city collected in extra income during the Wall Street boom, the city was, as Mr. Riley notes, insensibly increasing its borrowing out of proportion to legitimate future prospects. At the same time, we have also been having a real estate bubble fueled in part by the Wall Street bubble. (Interesting that the national real estate bubble has been blamed for the Wall Street bubble and here we say that the New York City real estate bubble flows from Wall Street’s. Truth is, the Wall Street bubble, which is layered over the national real estate bubble, is an entirely different, probably less productive bubble. It is much more due to the creation of derivatives, hedge funds and default-swap instruments than to inflated home prices.)
Up-Front Collection of Real Estate Bubble Benefits
Like the Wall Street bubble, the NYC real estate bubble has temporarily benefitted the economy. The trouble is that we have been collecting the financial budgetary benefits up-front. The real estate transactions have generated huge up-front revenues in the form of things like mortgage recording taxes, real estate transfer fees, and salaries and “points” paid to the multiple transaction professionals and participants.
Through programs like 421-a we are going to have created all at the same time the influx of a huge amount of new real estate which, by virtue of real estate tax abatements and exemptions, will be off the tax rolls for an extended period. Because of the extension of the 421-a deadline to December 31, 2007 a new crop are just now coming on line. The buildings are being built now, but we have not yet experienced the increased demand for services they will generate. This is another kind of borrowing against the future that Jason Riley did not identify. There should have been an assessment as to whether this kind of borrowing against the future made sense. If it was once assessed to make sense, the Wall Street meltdown could retrospectively change how that assessment balances out.
So, Mr. Riley was probably too kind to Mr. Bloomberg, not taking into account these other things Riley probably did not consider.
Third Term Likelihood Under New Political Label?
Mr. Riley suggests that because of his approval ratings Mr. Bloomberg “is almost certain to win a third term” upon running again. We are not so sure. We think that there is plenty of time for the shift in the economy and a further examination of Mr. Bloomberg’s record to significantly affect his popularity. However, Mr. Bloomberg rechristened himself “an Independent” in June of 2007. (He has now been a Democrat, an Independent and a George W. Bush-supporting Republican.) That change is likely to have tactical value. It could likely mean that he will be challenged next election by a candidate on each of the major parties’ lines. Defeating an incumbent is always difficult, but defeating a well-bankrolled incumbent in a three-candidate, vote-splitting environment is exceptionably challenging. Maybe this is something Mr. Bloomberg considered in June of 2007, though at the time people ruminated instead about whether something was intended in terms of the presidential race.
More Considered Reflection Valuable
We ought to have discussed Mr. Riley’s opinion piece in our prior discussion of Bloomberg’s financial crisis leadership qualifications. His marshaling of numbers with respect to the city's debt would have been particularly valuable to add to what I wrote, but as we noted in our earlier piece, the calculated rush with which Mr. Bloomberg and Speaker Christine Quinn pushed the term limits extension through the City Council was not intended to leave time for considered reflection.