Imagine if construction crews had just bulldozed most of the Ground Zero wreckage a few blocks further down West Street – and then took this summer off. In effect, that’s how Albany and City Hall responded when, in the wake of 9/11, the state and city budgets plunged into the fiscal equivalent of a 10-story-deep, debris-filled hole in the ground.

Most of the 9/11 fiscal mess wasn’t cleaned up, just shoved into next year. And the resulting threat of tax hikes is casting a long, dark shadow over the Big Apple’s future.

Just two years after reporting record budget surpluses, the state and city now face budget gaps of $4 billion to $5 billion or more – shortfalls proportionately approaching those experienced during the much worse economic downturns of the mid ‘70s and early 1990s. And Sept. 11 is only partly to blame.

While the terrorist attack caused massive and heartwrenching loss of life and property, its economic impact so far has been on the scale of a medium-sized recession. Private employment in New York as of July stood 91,000 jobs below the July 2001 level – a big drop, but still not nearly as bad as the 1989-92 loss of 320,000 jobs (including a drop of 190,000 between July 1990 and 1991 alone).

And the latest city unemployment rate of 8 percent, while up over last year, also remains well below the double-digit levels of the early 1990s. (Keep in mind, part of the employment drop stemmed from a bear market on Wall Street and an economic downturn pre-dating 9/11.)

Looking ahead, most forecasts call for slow but steady job gains in the city over the next few years, with the pace of the increase depending largely on how the stock market fares and whether the nation as a whole experiences a double-dip recession. The billions of dollars in federal aid and private insurance money already beginning to flow into lower Manhattan – not to mention the Bush tax cut – certainly won’t hurt.

So the New York economy, while battered, is in surprisingly good shape approaching the first anniversary of the attack. But the same can’t be said for our political economy – the state and city budgets.

During the late 1990s, the two New Yorks became overly reliant on new capital-gains-tax revenues generated by a booming stock market. Both the state and the city essentially were counting on ever-growing stock prices to help prop up an expanding base of major new program commitments – guaranteeing trouble when the Wall Street bubble inevitably burst.

Still, thanks to the accumulated state and city budget surpluses, the effects of 9/11 wouldn’t have been nearly as severe if overall government spending had been held in check. But, though the national recession and stock market slump were already evident in the first quarter of 2001, the state and city failed to curb their budgetary appetites accordingly, before or after the attack.

For at least a few weeks after 9/11, state and city officials seemed to realize that this extraordinary event would demand extraordinary measures to get their finances under firm control. But as the shock wore off, they quickly returned to business as usual – avoiding tough decisions, exploiting every fiscal gimmick available and submitting inflated aid claims to Washington.

In January, despite what he called the “monsoon” effect of 9/11, Gov. Pataki unveiled a state budget featuring a $1 billion state funds spending increase. And before the Legislature adopted the plan in May, Senate Majority Leader Joseph Bruno and Assembly Speaker Sheldon Silver more than doubled that spending hike.

As a result, most of the state’s reserve accounts have now been drained, virtually wiping out the surplus except for a “rainy day” fund that is likely to evaporate next year.

The city’s new chief executive also managed to dodge significant spending cuts in his first budget. Mayor Bloomberg closed over half of this year’s $4.7 billion gap with gimmicks and non-recurring “savings,” topped off by $1.5 billion in onetime borrowing to pay operating expenses.

Despite much talk of budgetary “pain,” city-funds spending actually rose by another $800 million in the budget adopted by the City Council in late June. Predictably, the mayor just a few weeks later found it necessary to order deeper cuts to keep the fiscal 2003 budget balanced and to begin whittling away at an even bigger projected shortfall for fiscal 2004.

Anticipating next year’s state and city budget gaps, labor unions, subsidy-dependent nonprofit groups and their legislative allies are already pushing for major tax hikes. If they succeed, the city’s nascent economic recovery may yet return to a downward spiral reminiscent of the early 1990s.

Even trying to close just half of next year’s officially projected city budget gap with tax hikes means big trouble. The Manhattan Institute’s tax-policy-simulation model suggests that such a combination of hikes in property taxes and personal and corporate income taxes result in the loss of more than 100,000 jobs – worse than the net drop in the past year. More tax hikes on the state level would compound the problem.

So far, 9/11 has actually destroyed fewer New York City jobs in the early 2000s than did wrongheaded state and city policies in the ’70s and ’90s. We can’t expect the governor and the mayor to provide a guarantee against future terrorist attacks, but we should be able to expect they will avoid knowinglymaking the economy worse.

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About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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