The Financial Crisis That Spawned Austerity, Corporatized the Democratic Party and Gave the World Donald Trump

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Yves here. This is a very good interview, but IMHO it gives short shrift to how ex Goldman co-chairman, later Clinton Treasury Secretary Robert Rubin, his many proteges, such as Larry Summers and Jack Lew, and of course the Clintons and Obama were the heirs of the neoliberal policies that were road tested in the New York City fiscal crisis.

One point omitted from this account is that the deep 1973-1975 recession hit New York City even harder than the rest of the country. Fixed commissions on stock brokerage transactions were deregulated on May 1, 1975. In those days, Wall Street revenues depended heavily on stock commissions. Although discounting didn’t start immediately, the one-two punch of a deep bear market and lower commissions on what trading damaged an already-weak securities industry hard and the city took the knock-on effects.

By Jacob Sugarman, managing editor at AlterNet. Originally published at Alternet

As Donald Trump stages his own inane production of the Watergate scandal, firing the official tasked with investigating his administration as he would a contestant on “The Apprentice” and inadvertently admitting to obstruction of justice, a bill is wending its way through Congress that threatens the lives of the sick and the vulnerable. The American Health Care Act could strip more than 24 million Americans of their health insurance over the next 10 years, generating perhaps the greatest transfer of wealth from the middle and working classes to the rich in U.S. history. Its passage in the House last week represents not only a breach of the public trust but the triumph of conservative lobbying efforts for the better part of four decades. What many may not know is that its architects’ political ideology was born in one of the most liberal cities in the country, if not the world.

In 1975, New York was teetering on the brink of collapse, as deindustrialization, an exodus of affluent taxpayers and a worldwide recession left it unable to pay for the robust social services it had carefully grown and developed since World War II. The big banks, including Chase and First National City Bank (now Citigroup), were eager to lend the city money until they weren’t. At the behest of New York’s creditors, the state established an Emergency Financial Control Board, effectively removing power over the city’s budget from then-Mayor Abe Beame. As journalist and historian Kim Phillips-Fein argues in her new book, Fear City: New York’s Fiscal Crisis and the Rise of Austerity Politics, this presaged a government-wide capitulation to big business and a transformation of what it means to be not just a New Yorker but an American. “The crisis,” she writes, “saw a group of almost universally white elites remake life in a city that was becoming increasingly black and brown.”

Fear City is both an illuminating history of some of New York’s darkest years, and a book of ideas. What does a government owe its citizenry? How have we come to accept budget cuts and layoffs as the only recourse for a mounting deficit? Why is there “no alternative” to the neoliberal economic model, as Margaret Thatcher famously sloganeered in Great Britain? These questions have been made more urgent by the devastation visited upon the city of Detroit and the Commonwealth of Puerto Rico, to say nothing of the national trendlines that have accelerated since the Reagan administration. For Phillips-Fein, austerity is very much a choice, and it is our responsibility to challenge its inevitability.

We spoke at NYU’s Gallatin School of Individualized Study about the legacy of the city’s near-default and our culture’s strange nostalgia for the decrepitude of 1970s New York. When I found her in her office, she was dashing off an email to her students for a class titled, “Capitalism in the 20th Century.”

This interview has been lightly edited for length and clarity.

Jacob Sugarman: New York’s fiscal crisis appears radically, even willfully misunderstood by liberals and conservatives alike. To this day, officials are still blamed for their gross budget mismanagement. Can you explain how one of the wealthiest cities in the world found itself in such financial straits?

Kim Phillips-Fein: It’s best to think about fiscal crises as expressions of underlying conflicts. There are revenues and expenses, but the budget is a pressure point for much broader social forces. It’s the final conclusion of a story, in a way. The problems of New York in the ’70s were the same problems facing cities across the country: deindustrialization, suburbanization and white flight. They came to bear on New York with special force partly because it had developed an unusually generous welfare state after World War II. The public sector expanded considerably, with a network of more than 20 public hospitals, free tuition at City University, an extensive set of programs in the public schools for art, music and athletics, and the largest mass transit system in the country, among other services. New York increased Medicaid and welfare spending at the same time its population and employment were decreasing. This continued into the 1960s during the War on Poverty. But toward the end of that decade, federal funding began to dry up and that laid the foundation for a fiscal crisis.

JS: Anyone who lived in New York in the 1970s, and many who didn’t, recognizes that infamous Daily News headline of Gerald Ford telling the city to ‘drop dead.’ How did his administration and the broader conservative movement exploit the crisis for their political ends?

KPF: First, a lot of people would say the kinds of programs New York was spending money on in the ’60s and early ’70s were pointless, foolish and irresponsible. They were things the city shouldn’t have been undertaking in the first place. I don’t believe the programs were inherently inefficient or a boondoggle. The city was trying to remedy real racial and economic inequality, and it was being pressured to do so by civil rights and rising public sector labor movements. But the right framed this as the city just wasting money, that it was going to no cause whatsoever.

Second, I think conservatives have used the fiscal crisis to say, “Liberalism just can’t work.” It crystallizes the idea that the welfare state is unsustainable and doomed to failure. I’m not arguing that the financial pressures weren’t real, but city officials simply didn’t know how they would play out at the time. Talk of their irresponsibility and naivete has dominated the political discourse ever since. It’s how Ford described it at the time.

JS: Let’s fast-forward to 1975. The banks have stopped lending New York money, and the city establishes an Emergency Financial Control Board to avoid default. Why is this such a seminal moment in American politics?

KPF: The Emergency Financial Control Board was a state agency, and the key thing about it was that it gave control over the city’s budget to people who weren’t elected by New Yorkers. The mayor and the comptroller were on the EFCB, but the other people were state appointees and included several businessmen. Power was taken out of the hands of the politicians.

JS: What kind of toll did the board take on civic life? It seems as if New Yorkers are still living in a city formed by those budget cuts.

KPF: The fiscal crisis caused the layoffs of tens of thousands of city workers and shrunk New York’s workforce by as much as one-fifth. Transit fees rose. City University began charging tuition. Hospitals and clinics were closed. Daycares lost their funding. Drug treatment programs were shuttered. A host of extracurricular school programs were radically diminished or shut down.

What made these cuts so destructive was that they were enacted very quickly in a very haphazard way. There were people being laid off, and then rehired, and then laid off again. It was very chaotic, and part of the underlying message was that the public sector was weak, unreliable and unsustainable. You should not look to the city government to actually build institutions that could make a meaningful difference in your life.

JS: The crisis not only transformed the ways in which we looked at city government, but state and federal government as well. Was this the death knell of the Great Society?

KPF: I don’t think that’s an exaggeration at all. One of the things that struck me as I was researching this book was the amount of national attention to this story. It wasn’t seen as just a local problem or a local crisis. People thought that the bankruptcy of New York would have a profound effect on the national economy, that it would affect the bond market for cities and states across the country, that it would make the United States look bad in the Cold War.

JS: They weren’t wrong. The Soviet Union played an excellent troll.

KPF: Right, yeah. The New York Times reported on Pravda’s gloating about how Moscow would never go bankrupt. European leaders, the chancellor of Germany, were all very concerned. It really was a national story with deep philosophical implications. Ford himself took it there, saying in his famous speech, “We can’t bail New York out. Who will bail out the United States of America? Look at its entitlement programs, and cut them back, and if not, we will be in the same straits as the city.”

People saw the crisis of New York as the problems of American liberalism and the inevitable failure of the Great Society, and maybe even the whole vision of the New Deal.

JS: Ford’s neglect has been well-documented, but I was surprised to learn that Jimmy Carter was reluctant to send federal funds to New York after the blackout of 1976. To what extent were liberals complicit in this seismic shift toward austerity, and how did the fiscal crisis reorient the Democratic Party?

KPF: Carter did provide some money, but he didn’t want to label New York a disaster area, which would have meant federal aid was more easily available. It was similar to Ford, because he wanted to say the upheaval that followed the blackout wasn’t a natural disaster. It was the city’s fault. But the role Democrats played in enacting austerity both on a municipal and federal level was striking. Within the city, you could see this really clear reorientation of what it meant to be a liberal. Previously there had been at least some skepticism toward the power of business and a feeling of solidarity with social and labor movements. After the crisis, people who identified as liberals began to recognize the importance of recruiting and using government to aid business. They reasoned that unless they did so, there would be no funding for social programs. There was a very clear change in their political rhetoric and their sense of what the purpose of government really was.

This was a battle being fought in the national Democratic Party as well. Carter spoke in the late ’70s about how we can’t look to the government to solve all our problems. There was this desire to define the Democratic Party as not critical of business but open to the market, interested in deregulation and finding ways to reinvent and slim down the state, as you’ll later hear Al Gore picking up. This all culminates in the Clinton administration, but that shift began with the fiscal crisis.

JS: Donald Trump lurks between the pages of ‘Fear City’ and finally shows himself toward the end of the book, like the creature in a monster movie. How did New York’s financial turmoil help launch his real estate career, if not his celebrity?

KPF: Trump was a young man in 1976, but he was already a wealthy guy interested in getting into Manhattan real estate and breaking out of his father’s empire of tens of thousands of outer borough apartments. He accomplished that with the Commodore Hotel deal. The Commodore Hotel was near Grand Central Terminal, and it had been owned by the Penn Central Railroad, which itself went bankrupt in 1970. The hotel was becoming decrepit and dilapidated, and it was going to be closed down. Trump proposed a deal whereby he would essentially purchase it, sell it to a state agency and then lease it back with the Hyatt Regency on the condition he paid a reduced property tax. The New York Times actually did a story on this last fall and found that Trump and Hyatt have cost the city upwards of $350 million.

In a very literal way, his career in Manhattan real estate was launched by the fiscal crisis and its aftermath. Trump was a canny operator taking advantage of a desperate city, but it’s also important to acknowledge the city actively pursued him. These kinds of deals were supposed to be the wave of the future. Officials really thought they would send a signal to the whole business community. Of course they did not generate the kind of good jobs or steady economic development that people thought they would. What they did was divide the city between the extremely rich and the public sector.

JS: Trump speaks often of the ‘carnage’ in the inner city. It’s almost like he’s describing the worlds of Escape from New York (1981) and Death Wish (1974). How much is his understanding of urban life a product of that time?

KPF: I think it’s still shaping his sense of things. He seems to believe cities are violent, lawless places, and the role of business people and executives is to impose order upon them. Given the pivotal nature of that moment in his own life, maybe that makes sense, but he is channeling that sensibility about the city’s dangers, with all of the racism implicit in those ideas from the ’70s and ’80s. But these weren’t fringe ideas at the time. They were embraced by the liberal establishment. Mayor Abe Beame was praised for bringing business executives into his administration. The business sector was supposed to be strong because it wasn’t democratically accountable.

JS: Not everyone shares Trump’s conception of ’70s New York. As you note in your book, there’s quite a bit of nostalgia for that broken, dilapidated city.

KPF: The 1970s saw the birth of punk, hip-hop, the downtown arts scene and performance culture. Beyond that, I think there is a real longing for a New York that was less unequal and hierarchical. There was a very open conflict about the future of the city, and a sense that there was a different future available.

JS: Forty years later, a different future seems almost unimaginable. How does this absolute faith in austerity take root, and what can we do to combat it?

KPF: Those are great questions. One of the criticisms of Fear City is that it fails to lay out some of the alternatives. I would punt slightly by saying I’m a historian, and my job is to illuminate the ways in which the choices were made. But I’d like to think the book is raising a set of questions about what people owe to each other. How can it be that in the one of the wealthiest cities in the world, in one of the wealthiest countries in the world, we can say, we can’t pay for teachers, or we can’t pay for homeless shelters, or we can’t pay for decent public hospitals? What should people in a city, in a community, in a country, be able to expect from each other?

In my research, I found that fear—of bankruptcy, of chaos and upheaval—made people do things that they otherwise would have thought were impossible. I think the only way to confront that feeling of paralysis is through political organization and action, the articulation of alternatives and the strengthening of citizens’ public relationships and connections to each other. Actual politics can save us.

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  1. skippy

    I thought Adam Curtis last doco suggested a different set of factors, in which, the bond thingy was used to leverage the public sector in a mercenary 11th hour bargaining ploy. The entire ploy was never about stimulating economic activity or socially beneficial outcomes, but, too push a puritan ideological outcome, which first and foremost guarantied profit for those pushing the agenda.

    disheveled…. same thing that happened in Miami, a blind eye was turned until the unwashed got caught in the crossfire in broad daylight screwing with retail operating hours….

    1. Moneta

      Everything is so blatant, yet barely anyone talks about it or even notices.

      For example, in the early 2000s, Air Canada spun off its loyalty program Aeroplan which soon got converted into an income trust. Somewhere along the way it got renamed to Aimia.

      Fast forward to this week, Aéroplan annonces it is creating its own loyalty plan and going its own way. Aimia stock tanks by more than 60%

      No one seems to notice that all of this did not create economic growth. It’s all financial engineering. From my perspective, just another type of grifting.

  2. Disturbed Voter

    Lack of Federalism. The county must give unlimited credit to the city. The state must give unlimited credit to the county. The nation must give unlimited credit to the state … and the peculiar dollar privilege must give unlimited credit to the nation.

    At least post 1971 and the shaking of DeGaulle’s government in 1968. America is special like that. Going off the international dollar standard, in the context of infra-Nato conflict and Cold War has a lot to do with this story. Of course back then, we didn’t have magic spreadsheets.

    1. Yves Smith Post author

      I’m not sure what you mean, but the refusal to assist NYC in even a token manner was at odds with the Nixon policy of revenue sharing. One f Nixon’s innovation was recognizing that the Feds could collect taxes at much lower cost than states and cities. He may even have has an intuitive sense of MMT, that the Feds could run deficits if the economy wasn’t plagued by inflation. So his program was that the Feds would give money to states and cities, with the only restriction being anti-corruption supervision. The notion was the Federal government could better raise the dough, but states and local governments had a better sense of local needs, plus could deliver services in a more streamlined manner. Plus (and I do not recall if this was another perceived bennie), you’d have more innovation and experimentation, and successful approaches over time would be copied elsewhere.

      Reagan killed revenue sharing.

      1. Disturbed Voter

        It is a historical curiosity … I assume Nixon/Ford didn’t assist NYC … because it was in some way, on their enemies list. Of course since then, monetarism has been a balancing act of petrodollars vs inter-state exchange (as determined by national debts) or by infra-state trade (as in the EU). Of course, since 1971, this has all been state-managed markets aka cartels, like OPEC … not a classic free market. Fabian statism continues to grow.

        Yes, proper Federalism (in shared revenues) had its benefits, since local bond issues were frequently defeated. Purely local tax raising, would have led to a much more restricted funding for statist activities.

  3. Jim Haygood

    “I’m not arguing that the financial pressures weren’t real, but city officials simply didn’t know how they would play out at the time.”

    This airy, blanket disclaimer will serve admirably for public pension managers a decade hence, when another Municipal Assistance Corp on a national scale will be needed to clean up the wreckage.

    They just didn’t know, poor dears. :-(

  4. Don Midwest USA

    Who selected Barack Obama?

    Way back in 2006, the junior senator was the only US senator at the kickoff of Bob Rubin’s Hamilton Project. Here is a link with the short video and a rhetorical analysis of his speech. He also thanks Bob for educating him on economics

    Obama at the Hamilton Project, 2006: “This is not a bloodless process.”

    There are links for other rhetorical analysis of his speech

    A couple of days ago on a tweet came a link of John Kiriaaroacho interviewed by Ron Paul in April.

    ron paul interview of john kiriiakou. John was sentenced to 30 months in prison for outing the CIA torture program. A one year FBI attempt during W Bush’s presidency was dropped but as soon as Obama was elected in 2008 he sent Eric Holder off to get John. FBI spent years to get him and he plea bargained rather than spending his life in prison. Obama used espionage act – could have killed one with that charge

    Again I ask, who selected Obama?

    Intimidation of anyone who worked for security agencies to keep their criminal behavior under cover

    1. Loblolly

      I too want to know this. The lightest research shows his brief astonishing trajectory to the presidency was clearly powered by external forces and unseen hands.

      Plainly put he was a quisling and is receiving his unjust reward as we speak. Laundered through book deals and speaking fees.

      He promised America “Hope and Change” during some of the lowest days in many American lives. People were losing their homes and jobs. We had Americans soldiers, family members, overseas fighting an unjust war. We desperately needed the hope Barrack Obama was holding out to us.

      What we got instead was Nancy Pelosi taking impeachment off the table, an accelerated transfer of wealth to the wealthiest and a pathological lack of concern for the suffering of the American people. All of it glossed over with pithy oratory and more empty rhetoric.

      The party eight years later is diseased and divided, rife with self-serving apparatchiks and clueless idealists. Barack Obama, Hillary Clinton and their paymasters destroyed the Democratic party. We owe them nothing and any narrative that comes from that shambling golem and subsequently pushed by the media is false on its face and against the interests of the American people.

  5. dcblogger

    Carter did provide some money, but he didn’t want to label New York a disaster area, which would have meant federal aid was more easily available. It was similar to Ford, because he wanted to say the upheaval that followed the blackout wasn’t a natural disaster. It was the city’s fault. But the role Democrats played in enacting austerity both on a municipal and federal level was striking.

    No wonder Kennedy won the NY primary in 1980.

  6. RabidGandhi

    Tangential, but it’s striking what a voracious whirlpool of vomitory suckiness Alternet has become. The introduction to this article– a random Trump squawk that could easily have been composed by dumping the last 3 months of Kos in an algo– has bugger-all to do with the interview: 38 seconds of my life I will never get back. Said intro does have one link, however, that I was stupid enough to click on: the admittedly evil AHCA could “perhaps generate the greatest transfer of wealth” [weasel words in original]. Why yes Mr Alter, I would be interested in seeing those numbers, so (lamentably for my delicate digestive track) I clicked on the Whirlpool of Suckiness so the rest of the NC commentariat won’t have to. To spare you all the horror: it leads to an Alternet article that merely summarises some claims R. Maddow made on her show. While this article does indeed contain the very phrase quoted in the link, “greatest transfer of wealth”, in lieu of the slightest smattering of evidence to back up this claim we are given four links to more data-bereft MSNBC refuse and a link to call a congresscritter. Furthermore, by clicking on the aforementioned link, the righthand side of my monitor became contaminated with the most bruisingly braindead headlines: “A Coup in Real Time? Historian Says Comey Firing Is Trump’s ‘Open Admission of Collusion With Russia” … “Donald Trump’s Financial Ties to Russian Oligarchs and Mobsters Detailed In Explosive New Documentary from the Netherlands”! [“see I told you so!” cackles W.R. Hearst in the background].

    The good news is I expect most of the commenters here cleverly followed what I assume Yves’ intent was in posting the interview: by posting it on NC we don’t have to risk our computers and bodily entrails being contaminated by venturing into the fact-free zone that is Alternet.

    Adding: I saw Phillips-Fein speak and look forward to reading the book.

    1. HBE

      Yes, agreed alternet has gone downhill quick.

      I would now describe it as kos lite, it seems to have become a waypoint for liberals who don’t want to overdose on too much kool-aid (kos) but still enjoy the taste too much to give it up.

    2. marym

      Thanks for the warning about the links. I only click on links to the tabloid blogosphere formerly known as left occasionally hoping to find a link or reference to a better source for whatever its headline is claiming.

      As far as the wealth transfer, it has also been documented elsewhere.


      Look beyond the bill’s quasi-mandate and tax credits, and the Obamacare replacement bill is a $600 billion tax cut, with the benefits going almost entirely to the wealthy. To pay for its spending, Obamacare included several taxes on couples making more than $250,000, like a 3.8 percent surtax on investment income and a 0.9 percent surtax on wages. Last year, those levies brought in about $27 billion, according to Wall Street Journal analysis of IRS data. Repealing them would cost about $275 billion over the next decade; which is to say, it would transfer $275 billion from public-health spending to the richest 1 or 2 percent. Other provisions, like repealing the limit of flexible spending accounts and expanding health savings accounts, will also disproportionately benefit the rich.

      Citing the congressional Joint Committee on Taxation Politifact rated “mostly true” a statement by Bernie Sanders about a $275B tax cut to the top 2%, saying it would be to the top 4.4%

      1. RabidGandhi

        Jiminy, I hate to be in the position of defending the AHCA, but that Atlantic article not only is way off, but it provides no basis whatsoever for arguing that AHCA might “perhaps generate the greatest transfer of wealth…in US history”.

        First of all, the Atlantic article is only about tax cuts: it assumes taxes fund spending (spoiler: they don’t); but furthermore it does nothing to analyse how either those tax cuts or the AHCA’s other (god awful) provisions would transfer wealth upward (they very well may, but since Atlantic and Alternet are allergic to data…). Secondly, it’s main point, as you quoted, is that

        Repealing [the taxes Obama enacted to offset the ACA] would cost about $275 billion over the next decade; which is to say, it would transfer $275 billion from public-health spending to the richest 1 or 2 percent.

        which they have presumably calculated using the lame CBO method of no multipliers. Still, even with those numbers $27bn would be less than 0.2% of GDP and 0.7% of the federal budget. How could that possibly result in a larger wealth transfer than, say for example, the GFC?

        I assume the Atlantic article and the Alternet introduction were written to give liberals ammo for arguments with Republicans, but how could such evidence-free bile possibly help in an argument? Quite the contrary, arguing “It’s gonna be the worst evah because Rachel Maddow said so” is the best way I can think of to lose a debate.

        1. marym

          Obamacare levied some taxes on higher earners and allocated some spending for [a rent-extracting approach to] health care. The AHCA does the opposite.

          I’m no fan of Maddow or the ACA , and I think I understand the argument that taxes don’t fund spending, but until there’s a way for that argument to gain more traction I don’t see anything wrong with pointing out who benefits and who loses from that discrepancy.

          Neither the Atlantic article nor the remarks cited from Sanders call it the largest or greatest anything. Maybe that’s why Alternet didn’t cite them.

        2. Moneta

          Actually there is a link between taxes and spending… when they cut taxes, they typically cut spending.

    3. JerseyJeffersonian

      Indeed, Rabid Ghandhi, I was tempted to forego reading the post when the gateway to the interview was a “cisLiberal” buy-in to the Great Roosian Plot Against ‘Murica. Sigh. Cognitive capture originated and shepherded by the same crowd who brought us the very NeoLiberalism that the author purports to critique. Pray tell, how can you both accept the poisonous propaganda of the NeoLiberal/NeoConservative Borg, and credibly critique it. I have my doubts that being their useful idiot helps with that enterprise…at all.

      Now, I bring along a dump truck of salt as prophylaxis against those elements that I do not find intellectually defensible, but I find myself increasingly turning to the Paleoconservatives and the AltRight for alternatives to the Borg Thought that rules both the “liberal” and “conservative” wings of the Uniparty. I feel absolutely no guilt in doing so; somebody who wants to accuse me of Crimethink for attempting to thereby escape the Borg’s Matrix can go pound it.

    4. witters

      “A Coup in Real Time? Historian Says Comey Firing Is Trump’s ‘Open Admission of Collusion With Russia”

      That’s the ‘evidence-based’ historian Tim Snyder (he has the most aggressive type 3 strand of Putin Derangement Syndrome, the one that just eats out the cortex) I know I shouldn’t, but I feel sorry for the poor man. He’s no longer an historian, and he’s barking mad.

  7. Ep3

    Great post.
    My perspective was that in the 60s and 70s, New York was dying, while new places were being born. Detroit, California, Miami, Chicago. People said “hey, New York is not the center of the universe, there are these other places that are new and modern and can provide everything we get from New York, and more”. The crisis then became “we can’t let New York become second fiddle to these other places, something needs to be done”. That’s when you have the beginning of the destruction of these other locations, but without the concern over their collapse. Then you have this return to New York as being the shining city on a hill. As the author says, liberalism was destroyed in NY and drastic measures were taken to fix everything. Compare that to Detroit. What was done to fix that? New York did not file bankruptcy, the decline was stopped before it got that far. But Detroit was allowed to collapse. Then the bones were picked clean.

    1. Carla

      Detroit was not “allowed to collapse.” Detroit’s collapse was carefully calculated. I highly recommend to NC readers “A $500 House in Detroit” by Drew Philp.

  8. HBE

    What I wish was discussed in more detail in the interview was how NY “developed an unusually generous welfare state after World War II.” at the state level.

    This sounds like post new deal development and implementation of a program that actually benefited Labor. I imagine strong unions played a strong , but what other factors led to this?

    1. oho

      and the benefits of tbe various Clean Air Acts hadn’t shown itself yet…..all the pre-1975 archive film show all the old big cities covered in black soot.

      not to mention the smell of leaded gas exhaust from cars with no catalytic converters

  9. Susan the other

    KPF said “real politics can save us.” Maybe policy and planning, city planning specifically, can save cities by not allowing money to be misspent. What seems to be left out of this summary is that when the crisis hit the economy had been slowing down because of Vietnam. Vietnam bankrupted us but the MIC was still getting funded through the 70s and 80s. Stagflation ensued and made things impossible to fix. The solution was to give money to “business” and let them go for it. Where they went was offshore. Trickle down liquidation. These austerity policies were enacted with reasonably good intentions. And 40 years later we have massive inequality. Back in the 70s and 80s the main way to stimulate the economy was good old real estate development. When that came to an end we found ourselves without a way to stimulate the economy and we haven’t figured out how to get out of the GFC yet. There is no lack of good ideas. There is just a lack of good politics. I don’t know what “real politics” even is. The prevailing ideology still believes it is controlling inflation. And that always seems to translate into austerity. Real politics is a vicious circle.

  10. Anonymous

    thank you for this post. I lived in NYC at the time and remember some of history, but did not have the perspective that time and distance give, and of course could not have imagined the Dems shifting to neoliberalism and austerity. I too feel nostalgic for the city then, warts and all, and yes, it is related to a perceived sense that labor was stronger in those days and society less unequal. Also more retail diversity then, small local businesses, not chains. A friend remembered the old toy factories downtown, flower district, wholesale areas. Into the 1980’s, homeless street people were still allowed into Grand Central bathrooms to clean themselves up; Giuliani and Bloomberg changed that. NYC does not feel friendly at all now on my rare visits.

  11. Ivy

    The NYC crisis got much publicity in Europe, where I was living at the time. One notion was that if the America that helped win WWII (insert pix of Joe and Willie here, with obligatory stubble, throw in some chocolate bars) was stumbling on the eve of its bicentennial, what did that mean for the rest of the western world? NYC was seen as a bellwether and cautionary tale for large European cities, if only in what not to do. There was also more mention of alternative economic models to the east, as the Soviet machine weaknesses were not fully publicized at that early date. The fatalism of some was offset slightly by a vague sense of the American can-do spirit, and that some rough solutions would be found, only without enough of the safety nets so familiar to locals on both sides of the pond.

  12. Adam1

    “Jimmy Carter was reluctant to send federal funds to New York after the blackout of 1976.” He may be a good elder statesman but he helped sow the seeds to where we are. Carter actually vetoed a bill to hike the debt ceiling in 1979. Oddly it was Congress that saved us then by over-riding his veto.

  13. Tim

    One think I will point which does seem like a small point is that during much of this times the Feds were willing to spend huge amounts on building the Washington DC Metro during this time period while NYC Subway continued to collapse. In fact if you read the book Great Society Subway the DC Metro right down to being called a “Metro” instead of subway like in Paris was designed very much to be a contra example to the NYC subway.

    I will also point out that Washington, DC home rule occurred during this very same time as the NYC crisis but on a much shorter leash from Congress than NYC ever had in the post war era from Albany. DC of course had it’s own financial issues in the 1990s but the DC financial control board has never been viewed in the same negative light as NYC.

  14. Michael Fiorillo

    A good post, and an era that people need a better understanding of.

    My quibble is that Phillips grossly understates the damage that mid-seventies austerity caused the public school system: over fifteen thousand teachers were laid off, music and art programs ended, and it took the schools twenty years to begin to recover.

    The chaos that followed was then opportunistically used by so-called education reformers to claim the public schools are “failing,” which received its first big push with the publication of “A Nation At Risk,” which was the opening salvo in the school privatization efforts that are now well advanced.

  15. Jess

    On the wall of my office I have a framed Time Magazine cover which depicts Mayor Beame as a hobo with a cup out. The caption reads, “Brother, can you spare $4 billion?”

  16. vegasmike9

    One reason New York didn’t become Detroit, the oligarchs like the Rockefellers had a lot of their own money invested in the City. If New York completely collapsed, their property would loose value. I also think there was a certain amount of civic pride. People in New York liked to compare themselves to London and Paris. Many people loved the idea of the living the culture capitol of America, even if they rarely went to museums or concerts. I and most of my friends and relatives are products of the New York public school system. In the 50s, the public schools were really overcrowded. My high school was on triple session. Sophomores went from 12-5 with no lunch break, juniors 9 to 3 with a lunch break; seniors 8 to 1, with no lunch break. One thing that many people who grew up outside New York find hard to believe, my alma mater like many New York high schools had no football team.

    1. neo-realist

      Sophomores went from 12-5 with no lunch break, juniors 9 to 3 with a lunch break; seniors 8 to 1, with no lunch break.

      the mid to late 70’s too, from my experience, but juniors also did 12-5/no lunch break in my high school.

  17. Chauncey Gardiner

    Surprised the role of Felix Rohatyn in resolving the NYC fiscal crisis was not discussed. Perhaps that is in the book. Interesting guy with interesting connections whose name was up in lights at the time, and who was given much of the credit for resolving the crisis. IMO he was instrumental in gaining credibility in the public’s eyes that Wall Street had the skills to fix financially distressed governments:

    Given the time proximity of NYC’s fiscal crisis to the war in Vietnam; Nixon’s decision to take the dollar off the gold standard; the collapse of the Bretton Woods system; the Powell Memorandum; the economic shock, stock market crash, and effect on the national psyche of the Arab oil embargo (1973-74); and the emergence of stagflation at that time; there are likely some unturned pages in this neoliberal bedtime story relating to both the national political landscape and the embrace of austerity policies at the federal level by both parties.

    In a currently related vein, the austerity policies being undertaken in Puerto Rico’s BK appear to be consistent with the template.

  18. Jay Sullivan

    This tallies with my memory of living through that era of 1960-70 and what cursory research I have done by looking at the charts: 1975 was about as good as it ever got for working people in the USA. Also the more I learn about Jimmy Carter, the less I like him.

  19. Sound of the Suburbs

    “Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild

    What does he mean?

    In this era, where we have technocrats running economies to ensure things are running well, what are they not looking at?

    This is the US money supply leading up to 2008:

    Everything is reflected in the money supply.

    The money supply is flat in the recession of the early 1990s.

    Then it really starts to take off as the boom gets going which rapidly morphs into the US housing boom, courtesy of Alan Greenspan’s loose monetary policy.

    When M3 gets closer to the vertical, the black swan is coming and you have an out of control credit bubble on your hands (money = debt).

    Well they may be looking at the money supply, but they don’t seem to know how to interpret the information that the money supply is telling them.

    2008 – “How did that happen?”

    The IMF predicted Greek GDP would have recovered by 2015.
    By 2015 it was down 27% and still falling.

    Obviously no one was looking at the money supply again, which would have been contracting in Greece and causing debt deflation.

    We can see there are problems in both the FED and ECB, who do not seem to be aware of something that was known hundreds of years ago.

    The ubiquitous, neoliberal housing boom is a very good way of increasing the money supply by creating new debt, which makes the general economy appear to be doing very well.

    As the housing boom turns to bust you get the opposite effect of debt deflation as the money supply contracts, which makes the general economy suffer, e.g. Japan 1989, US 2008, Ireland 2010 and Spain 2012.

    As banks produce 97% of the UK money supply and have such a drastic effect on the overall economy it is very important they are run well and Central Banks know how to interpret the data in front of them.

    The UK economy in the neoliberal era:

    Its success has been based on using housing booms to increase new debt and the money supply by borrowing money from the future.

    The neoliberal wealth illusion has been playing out globally.

    How do you create real wealth?

    You use bank credit for productive investment in business and industry, not for speculation or asset price inflation. The Asian Tigers used this technique in their most stellar growth phases.

    Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild had realised the economies dependence on the money supply and this can make the people that are supposed to be running the economy look good or bad. To generate the positive effect you increase the money supply, to generate the negative effect you decrease the money supply.

    To produce something that will last in the long term that newly created money needs to go into business and industry.

    The somewhat arbitrary sentiments of bankers have a huge effect on the overall economy, when they are positive they are issuing lots of new credit, when they feel pessimistic they cut that supply of credit.
    If the economy becomes saturated with credit you see stagnation, it just can’t take any more of that money creating debt.

    Just like the global economy now.

  20. Paul Hirshman

    Every year we waste hundreds of billions–hundreds of billions–on military overspending and unnecessary corporate “incentives.” My guess is that if the US military were scrutinized the way public schools are, we’d find the money to end “austerity” immediately.

    Austerity is the boogieman that hides military waste. Hence the importance of our public religion of mindless nationalism and “exceptionalism”: these emotions enable the austerity boogieman to function.

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