Keep the red ink flowing

| NY Torch

In an op-ed called “Keep the Money Flowing,” the Daily News‘s Errol Louis says that the idea that “federal, state, and local governments all need to cut spending” is a “dangerous myth.” Louis quotes economist James Galbraith in saying that state spending cuts, specifically in New York, “will accelerate the decline of the economy.” Louis argues that “we need sensible spending, delivered on an emergency basis — and only government is big enough to handle the task.” In addition to warning against drastic cuts in public services, Louis suggests that states and cities start job-creation programs to make up for private-sector job losses.

New York State and City, with their $121 and $60 billion budgets respectively, passed the mark of “sensible spending” long ago. If they hadn’t done so, our state and local government likely would not face the severe crisis they face today. The high state and city income taxes New York levies crowded out businesses that make a reasonable, steady profit long ago. Instead, our high-tax structure attracted one of the only industries that could make an unfathomable profit year in and year out, enough to pay those high taxes: a leveraged-up, unsustainable Wall Street.

The best chance New York has to recover its economy is to attract new types of private-sector businesses. (What kind? Who cares, as long as they are legal.) During the downturn, businesses might be attracted to New York as nosebleed residential and commercial property prices fall to more reasonable levels.

New York shouldn’t work against this opportunity by raising taxes. But in the face of deficits that could range from 5 to 10 percent of the city and state’s operating budgets over the next few years, the only conceivable way through which New York could ramp up spending in the public sector, as Louis suggests, is through levying ever-higher taxes. (And no, New York can’t expect much from Washington. It won’t fly in Preoria to send much federal tax money to the home of the fat cats who, in the public’s perception, created this mess for the rest of the country.)

Louis is correct that neither the state or the city should drastically slash vital public services, though, because visible services cuts would harm what’s left of the tax base. That’s why it’s good to start cutting the budgets now, so that city and state officials can figure out what and how to cut, protecting areas like the police department and sanitation collections, for example. Waiting a year and cutting randomly in a panic with anxious bondholders breathing down our necks is not advisable.

Further, Louis is not wrong that states and cities like New York should invest in infrastructure, but he is wrong about the reason and the method.

Louis says that such investment is most valuable, particularly in a downturn, because it creates jobs. In fact, infrastructure spending is most valuable because efficient roads, mass transit, and the like create the base on which the private sector can grow.

Because good infrastructure is valuable, that means that city and state stewards should make sure every dollar goes as far as it can, which means not treating infrastructure as if its first goal were public-sector jobs creation.

It’s also true that states and cities should invest in infrastructure during a downturn, but not, again, primarily because it creates jobs. They should do so because it’s cheaper to do so in a downturn: projects aren’t competing with the private sector at boomtown high prices for labor and materials.

However, New York will struggle to make such investments now, because it never tackled its long-term spending problems during the good times.