Republican Plan: Squeeze the States

There is a widespread belief that the Trump Administration has no plan for coping with the Covid-19 pandemic.  That critique is far too charitable. The Administration, in concert with its enablers in the Senate, does indeed have a plan.

The plan is to plow through the pandemic, keep the economy running and the stock market up, and let the states and the American people deal with the rising body count however they can. In the time-tested tradition of petty swindlers, Trump and Mitch McConnell are orchestrating a fiscal hustle to force the hands of governors and mayors and pin the blame on them if things go terribly wrong.

Asked about a possible second wave of the pandemic during his May 21 visit to a Ford plant in Michigan, Trump responded: “People say that’s a very distinct possibility, it’s standard. We are going to put out the fires. We’re not going to close the country. We can put out the fires. Whether it is an ember or a flame, we are going to put it out. But we are not closing our country.”

How would he know? As we’ve all learned, it’s the governors and mayors who decide whether extreme restrictions on business and individual activity are necessary to protect public health. Trump takes no responsibility.

Although other developed countries have political jurisdictions equivalent to American states and cities, the United States is unique in how much responsibility for funding basic public services it places upon them. The majority of public spending on everyday needs like education, police, roads, parks, transit and healthcare is the responsibility of American states and cities. But when it’s necessary to respond to a widespread threat to public health, states and cities simply don’t have the budgetary resources or flexibility that the federal government has: they cannot run perpetual deficits, have no central banks of their own, and cannot print their own currency.

That’s why we have to keep an eye on Trump’s accomplice. McConnell is making sure that the states and cities are in no position to suppress their economies as they did in the spring. In stark contrast with his urgency for providing financial aid to business, McConnell is dragging his feet on fiscal aid to states and localities, lecturing on how the need for additional aid needs to be carefully thought through, even suggesting that states consider bankruptcy.

The spring shutdown of many state and city economies put their budgets in a deep hole. New York State recently adopted a FY2021 budget projecting general fund receipts $13.3 billion lower than anticipated February. The state expects its revenue losses to total $60.5 billion through 2024. California, a state widely lauded for its early and decisive measures to contain the pandemic, adopted a FY21 budget that anticipates a drop of $20 billion in tax revenue from the prior year and requires expenditure cuts of $13 billion. New York City adopted a FY21 budget that anticipated $7 billion lower tax revenues and $7 billion reduced spending from its preliminary plan proposed in January.

Democrats are pushing for a “phase four” of federal pandemic relief, the centerpiece of which would be aid to states and localities. But McConnell is in no hurry. Said Roy Blunt (R-Mo.), Chairman of the Senate Rules Committee, back in June: “Optimistically, we might move before the Fourth of July. I do think we will move on phase four before the August break.” There was no movement by McConnell by July 4. It just so happens that most states and cities operate on a July-to-June fiscal year, so if they were to avoid draconian budget cuts in their Fiscal 2021 budgets, they needed to know what kind of federal backstop they’d be receiving before the end of June. Senate Republicans surely knew that, and surely enjoyed the spectacle of big-state governors and big-city mayors taking heat for those cuts. So why rush a phase four to get them off the hook?

The House passed a $3 billion phase-four emergency relief bill on May 15, which included about $1 trillion in aid for state and local governments. Almost two months later, there has been little movement toward a Senate version. It’s been reported, however, that McConnell told Trump he wants to hold the total cost of phase-four relief to $1 trillion, which would almost guarantee that state and local aid is far below the amount needed.

Earlier in the spring there was talk of a “first wave” and “second wave” of the Covid pandemic, following the model of the 1918 flu. Increasingly, it’s becoming obvious that the Covid virus will not exhibit the seasonality of the flu and that the U.S. has never squelched the first wave. But however you prefer to characterize the pattern of contagion, it became obvious by late June that it was out of control in much of the country. States began to walk back their re-opening policies and even the ever cautious Dr. Anthony Fauci began to hint of another round of strict shutdowns.

Without additional federal aid, however, few states and cities will be in a fiscal position to order a second round of economic closures and social distancing, no matter how bad the pandemic gets. McConnell knows that and Trump knows that, which is why he’s so confident there will be no more shutdowns. Even if some additional federal aid is eventually delivered in a phase-four bill in August, McConnell will have already delivered his warning to governors and mayors. So that’s the plan, we’re all warriors in Trump’s reelection push and McConnell will do his best to keep the governors and mayors in line.

Beachfront Bargains

Having spent most of my life shuttling between the densest and fourth-densest counties in America, when I finished my tour in city government I thought it would be nice to try out a different lifestyle. So I moved to the East End of Long Island, down the road a piece from where Jackson Pollack did most of his pathbreaking work. My wife had already substantially made the move after her scary and exhausting battle with breast cancer.

Though I still love the city that gave me so much fun, friendship and opportunity, I also love my coastal, exurban environment. Until The Shutdown I continued to spend a lot of time in Manhattan and I can’t wait for this pandemic nightmare to end so I can once again stroll anonymously down Sixth Avenue and dive into a plate of ropa vieja, rice and beans. But as it turned out, my dispersal from the city presaged a Covid-induced flight from the city, and the summer season out here seemed to begin around April 1.

The long-term effects of the pandemic on urban-suburban-exurban residential patterns is a complicated question that I’d like to address carefully at some point, but in a nutshell I’m hopeful that they will generally be positive. In the meantime, the renewed interest in vacation-area real estate gave me a chance to opine, along with some other real estate experts, on one of my favorite topics in this WalletHub feature.

The World Changes Again

When I began this blog I had recently left the New York City Comptroller’s Office. During my ten years there I had built up a list of research ideas and policy thoughts that I either did not have the time to get to, or that were too politically sensitive to be pursued under the auspices of an elected official. My intention was to follow up some of those ideas and post them here, hoping that they would accumulate to a reasonably entertaining browsing stop for people interested in similar issues, and maybe even a useful research source for somebody investigating an issue of urban economics or policy.

Then Donald Trump was elected president and much of my research agenda was rendered obsolete. Not because Trump is a detestable individual who should be nowhere near the White House, but rather because he assembled the most extremist, conservative administration in modern American history, and he had Republican majorities in the House and Senate to implement his Fox TV-brand of reaction. Many of my research and writing plans presumed a backdrop of stable government, with policy possibilities fluctuating between center-right and center-left. I might have wanted to investigate particular aspects of environmental policy, for instance, but what relevance did they retain when a climate-change denying administration sought to dismantle environmental regulations rather than improve them? Or, how might thinking about alleviating homelessness have to change when the federal government was actively trying to impede the ability of municipalities to address such problems?

Gradually a list of new research items grew, more relevant to this era of spiteful conservative government and to the period of liberal push-back that will inevitably follow. Then, the novel coronavirus changed the world again. Suddenly, the importance of repealing the caps on state and local tax deductions paled in comparison to the massive fiscal challenges states and cities will face with their economies shut down. Concern about the cost of housing in big cities shifted to concern about whether people will still be willing to live in dense urban environments. Plans to expand urban transit transform into worries over whether the riders will ever return.

By the beginning of April we had seen enough of the virus to know it was a vicious bug and that the social distancing measures were absolutely necessary. In the immediate future there will be a whole lot of death and sorrow, and much human misery in the collateral economic and social damage. Emergency efforts to mitigate the damage will preoccupy the public agenda in coming months, and the recovery of semi-normal economic life will be the policy preoccuption of the next two years or so. It will probably take much longer than that to regain the ground we have lost, especially in terms of the economic interfaces that were flowering all over urban America– the vibrant street life, the proliferating cafes and restaurants, the brimming public transportation, the large employers that were returning from their suburban exiles.

It will probably take five years or more for people to resume their pre-pandemic lifestyles–for travel to recover to the levels of 2019, for people to eat out as much, for events with large crowds to become as common as they were before. It may take a decade or more for the economic damage to be fully repaired–for new restaurants to replace vacant storefronts, for office buildings to be refilled, for the thick ecology of small business contactors to be regenerated. But I’m betting that in the long run the pandemic of 2020 will turn out to be a ditch, not a turning point. There was continuity of the economic and social trends before and after WWII, there was continuity before and after the Great Recession, and I think there will be continuity once again. The big cities will come back, small towns will continue to languish, and we’ll face all the old problems we had before.

Presidents and the Economy

While early opinion polls show a number of possible Democratic candidates beating Donald Trump in the 2020 election, economic models of presidential elections are telling a different story. Some of the most reputable economic models show Trump winning reelection handily on the strength of strong economic fundamentals. Barring an unlikely recession, Trump will undoubtedly make his management of the economy the centerpiece of his reelection campaign.

Most voters seem to think that economic conditions are determined by presidential policies and attribute the strength or weakness of the economy to who’s in the White House. Indeed, questions about management of the economy are staples of political opinion polls. Economists, in contrast, see presidential policies as having relatively little effect on cyclical economic conditions, although they are more prone to believing that sound economic policies can have long-term effects that may manifest long after a president has left office.

Yet, it would be too sweeping to argue that presidents have no short-term economic influence. The effects of tax and budget policies can sometimes have short-term effects (as well as long-term effects that may be hidden from voters), and some regulatory policies may as well. But the biggest economic influence presidents can have usually comes at times of crisis, when the road forks and the consequences of wise or foolish decisions may be fateful. Franklin Roosevelt’s management of the 1930s economic crisis comes immediately to mind. Abraham Lincoln, too, should get more credit for his management of the economic stresses of the Civil War and for his tax and banking innovations. As I will argue, Barack Obama also belongs in that small club of great economic presidents for his handling of the financial crisis and the deep recession he inherited.

Some presidents deserve more criticism for their handling of the economy–Andrew Jackson, for instance–but that is a bit too remote from current concerns. This post will focus on how our past three presidents have affected economic performance, and on how the public ultimately perceived their stewardship.

George W. Bush

The younger Bush inherited from Bill Clinton a federal budget surplus and a minor recession, and he used the latter to justify eliminating the former. That is, he campaigned on and fully intended to give large tax cuts to the wealthy under the already-discredited Supply Side doctrine, but when it became evident that the economy was slipping into recession early in his presidency, he repositioned his tax cuts as counter-cyclical fiscal stimulus. That rationale was enough to give 12 Democratic senators cover to vote for the bill, which passed 58-33 in an evenly divided senate.

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Green Resolution

The “Green New Deal” resolution introduced last week by Representative Alexandria Ocasio-Cortez (D-NY) and Senator Edward Markey (D-MA) was a good idea. The Democrats needed to reestablish climate action as a governmental concern and inject it into the 2020 election. With her high visibility, appeal to young voters, and ability to get under the skin of conservatives, AOC could have been an ideal messenger. Like a football team throwing a bomb to its flashy rookie receiver on the first down of the first game, if executed successfully it could have rattled defenses throughout the season. Unfortunately, the pass was dropped and the Dems might now find themselves wishing they had called a more conventional play.

Sticking with the football analogy just a bit, Nancy Pelosi’s Democrats have been steadily grinding out the yardage but run the risk of being sucked into playing Trump’s game. Since possession of the House shifted to the Democrats, the political agenda and news has been entirely dominated by Trump’s boorish calls for his idiotic wall and his reckless government shutdown. Yes, Pelosi has outmaneuvered him at every step, but the Dems are not going to take back the Senate and White House in 2020 just by playing good defense. Meanwhile, their investigative committees have tread cautiously, partly for fear of interfering with the secretive Mueller investigation and partly for fear of appearing mere hecklers. With each passing week the presidential primary roster expands and, especially if Bernie Sanders enters the race, the risk grows that Medicare-for-All crowds out all other progressive issues. So the idea of AOC streaking down the sideline for a big gain on climate change made some sense.

One reason the play didn’t work as planned was that it wasn’t actually planned. Pelosi was forced to distance herself from it and did so in terms that were a little too dismissive for my taste. But who knows what really went on? Pelosi claimed that she hadn’t even seen the resolution before AOC’s press conference. If true, that’s a serious discourtesy. How is the Speaker supposed to support a resolution she hasn’t seen or apparently had any input into?

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Fear City’s Revenge

I was reading Kim Phillips-Fein’s Fear City at the time news broke of Amazon’s choice of Long Island City as one of its two HQII locations. The Amazon announcement was greeted with a weary acquiescence to the city’s inevitable dominance, as though the Yankees had just signed Bryce Harper. What a contrast to the mood of grim, inexorable decline that permeates Fear City. It reminded me that each chapter of Gotham’s story sets the stage for the next, and that the great city’s essence can be suppressed but not extinguished. 

Phillips-Fein’s book is a highly readable narrative of New York City’s brush with bankruptcy in the 1970s. For those who are not municipal budget wonks, the book maintains a good balance between financial detail and narrative flow. I set down to read it as a professional chore but found myself re-immersed in a period I lived through but, in the heedlessness of youth, failed to appreciate as a time of such outlandish grotesquerie. I could almost hear the punk music pounding and smell the tenements burning.

In Phillips-Fein’s telling the fiscal crisis was not just a trauma for the city, but a pivotal triumph for the emerging neoliberal creed of public-sector austerity over an exhausted New Deal progressivism. With banks refusing to lend to the city, and Wall Street refusing to issue more bonds, and the White House refusing to provide federal aid (thanks in no small part to President Ford’s Chief of Staff, Donald Rumsfeld), the city was forced to make draconian cutbacks in public services. Fire houses and day care centers closed, public infrastructure decayed, and perhaps most symbolically, CUNY ended its policy of free tuition. It was the end of expansive, activist urban government.

If Phillips-Fein had continued her story, though, it would be apparent that the neoliberal triumph was not so final. City government did make many important fiscal reforms as the result of the crisis and today it is run with a great deal of financial discipline and transparency. But its ethos of activist municipal government was not eradicated. In the early 1980s the state and city undertook a major reinvestment in its subways under the leadership of Richard Ravitch, and in the late ’80’s Ed Koch launched his massive housing program, which was instrumental in revitalizing large parts of the city. Mayors Dinkins, Giuliani and Bloomberg continued the housing program and made large strides in reclaiming the city’s waterfront and other abandoned industrial areas. Mayor di Blasio launched a universal preschool program. CUNY did not restore free tuition but it survives as a unique urban institution and in many respects is thriving. Urban liberalism in New York City retreated but did not surrender and had reasserted itself within a decade of the crisis.

There is also another sense, I think, in which Fear City’s short-period narrative obscures the meaning of the fiscal crisis. By giving so much attention to the neoliberal critique of the City’s financial practices and its expansive mission, Phillips-Fein inadvertently conveys that they were the underlying causes of the crisis. They were not. The crisis occurred in the midst of a severe national recession, which Phillips-Fein barely mentions, and a long-term restructuring of the nation’s economic geography. The city’s manufacturing base had been hollowed out by firms moving to the suburbs, and more portentously, to the sunbelt.

We now know that industrial capital’s search for the ideal business climate did not end with the sunbelt. The garment makers, the metal shops, and the electrical assemblers that first moved to South Carolina, Georgia and Texas in search of cheaper and more docile labor, lower taxes, and lax environmental standards later found even more favorable locations in Bangladesh, Mexico, and China. Those manufacturing firms have moved on and so has the city, and only the most stubborn industrial revivalists would still argue that manufacturing mens’ and boys’ outerwear is key to New York City’s economic future.

What appeared to many in 1975 as the city’s death throes now appears more like a molting, with the city shedding activities that would not be essential to its regeneration to make way for those that would. The first energy crisis and resulting recession caught the city during that extremely vulnerable time, a vulnerability compounded by some admittedly sloppy budgetary practices resulting in the humiliating fiscal crisis. But the fiscal crisis wasn’t the result of a fundamentally misguided vision of the role of government in a modern metropolis. In fact, it was that expansive vision of urban government that created the cultural, intellectual and physical conditions for revitalization.

Austin Debates Density

One of the most interesting urban planning debates going on in the country right now is happening in Austin, Texas. In 2012, the Austin City Council adopted the Imagine Austin Comprehensive Plan, a three-year effort that established priorities for the city’s growth and development for the next 30 years. Among the priority actions the plan identified were to invest in a compact and connected Austin, to grow and invest in the creative economy, and to develop and maintain household affordability. The next step in implementing the plan is to revise and modernize its zoning regulations. The city is now in the midst of that process, which it has dubbed CodeNEXT.

Austin, of course, is one of the fastest growing cities in the U.S.  From 2000 to 2017 the city’s population increased from 657,000 to 950,000, an annual rate of growth of 2.2%. It’s also gained a reputation as a fun place to live and has become a migration magnet for millennials; a Brookings Institution study found that Austin has the second-highest proportion of millennials in its population (27.2%) of the top 100 metro areas. With about 48% of its adult population holding a bachelor’s degree or higher, it also ranks among the nation’s most educated cities, comparable to Boston and Minneapolis.

Not surprisingly, Austin’s economic prosperity has entailed some costs. In particular, during this century it has had one of the fastest rates of housing price increase in the country. According to the Freddie Mac House Price Index, home prices in Austin have increased at about a 5.0% average annual rate since 2000, which is on a par with the Fresno, Salt Lake City and Washington D.C. metro areas. Since much of the city and the surrounding areas are zoned for single-family homes, growth has mostly taken the form of low-density sprawl. The developed land area of the metro area increased from just 53 square miles in 1970 to 372 square miles in 2016.

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Transparency in Trumpland

A little juxaposition of news items reveals how the Trump administration views transparency in government.

First comes Scott Pruitt’s announcement that EPA will seek to implement a regulation that will require all EPA rulemaking to be based only on scientific evidence for which the underlying data is publicly available. That will prevent the EPA from formulating regulations based on medical data that is confidential.

According to Pruitt, “The science that we use is going to be transparent, it’s going to be reproducible.” Junk science purveyor and member of Trump’s transition team Stephen J. Milloy added, “This will really open up EPA science to public scrutiny.”

Meanwhile, over at the American Bankers Association conference, Mick Mulvaney, interim director of the Consumer Financial Protection Bureau, announced that the CFPB would cut public access to the bureau’s database of consumer complaints.  Mulvaney explained: “I don’t see anything in here that says I have to run a Yelp for financial services sponsored by the federal government.”

Evidently, transparency is good when it hinders regulations to protect the public health, but bad when it helps to protect consumers.

Making Deficits Great Again

After 2010, when Republicans gained control of the House of Representatives and later the Senate, the U.S. essentially pursued a policy of fiscal austerity.  President Obama sought to roll back the Bush-era tax cuts for wealthy households and was partially successful during the “fiscal cliff” standoff at the end of 2012. Meanwhile, the Republican Congress steadfastly refused to allow Obama to stimulate the economy with federal spending.  As a result, total federal budget outlays (including Social Security) grew at only a 1.9% annual rate from 2010 to 2016, far slower than the 6.5% annual rate of increase during the Bush years.

That American-style austerity was an under-appreciated contributor to the slow recovery from the Great Recession. However, the budget deficits of the U.S. government fell in both absolute dollars and as a percentage of GDP during most of Obama’s tenure, in 2014 and 2015 even reaching a level that produced stability in the ratio of overall debt to GDP. There was some slippage in the deficit at the end of Obama’s tenure, primarily because of a lapse in the economic growth rate in 2016. Responsible fiscal management would have suggested an attempt by Obama’s successor to get the deficit back to parity with the rate of economic growth, which would have required shaving it by about one-third, or by $250 billion.

Of course, after the Republicans held on to both houses of Congress in 2016 and unexpectedly found themselves with a Republican President to work with, there was no reasonable prospect that stabilization of the debt-to-GDP ratio would be made a policy priority. It is undeniable that cutting taxes, regardless of the fiscal implications, is the core policy goal of the modern Republican Party. Two intertwined factors are behind that inversion of Republican political philosophy. First is the widespread acceptance among conservatives of the “starve the beast” strategy for reducing the size of government.  The second was the creation of a much more cohesive, purposeful and sophisticated political apparatus by conservative mega-donors to the Republican Party, who out of ideological conviction and personal self-interest orchestrate anti-tax pressure and insist that their  elected dependents deliver. The two previous times Republicans took over the White House (Reagan and George W. Bush) they immediately enacted huge tax cuts and the deficits swelled. There was never any chance that, in the unlikely event Trump was actually elected, this time would be any different.

So the tax reductions Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan engineered in December were entirely out of the Republican playbook and should have been fully priced in to any economist’s or investor’s forecasts.  If there was anything surprising about the tax changes, it was the gratuitous and vindictive targeting of voters in high-cost, coastal Democratic strongholds (by imposing new limits on the mortgage tax deduction and the state and local tax deduction), an unprecedented use of the federal tax code to punish political opponents.

The McConnell-Ryan tax cuts will raise the cumulative federal deficit by $1.268 trillion over 10 years, according to Tax Policy Center estimates.  That represents a 14.8% increase over the CBO’s June 2017 baseline estimates. 

Then in early February things took an unexpected turn. Instead of pressing for more spending stringency, a smiley McConnell suddenly agreed to a two-year budget deal with Democratic Senate leader Chuck Schumer that called for large increases in both defense and non-defense discretionary spending. The deal, subsequently approved by Congress and signed by the President, is expected to add another $419 billion to the cumulative deficits through 2027.

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Time for an SUV Tax

There is no question that New York City is not viable as we know it without its mass transit system, so the snowballing problems of the Metropolitan Transportation Authority should be of concern to everyone who lives or works in the city, whether or not they are regular users of the system.

Increased funding for NYC Transit (the subsidiary of the MTA that operates the subways and buses within NYC) may not be a sufficient step for improving the system but it is certainly a necessary one. Finding additional funding in an already heavily taxed city will not be easy, however, and already the Governor and Mayor are at war over whose responsibility it is. In addition to each arguing that the other already has money in their budget that can be used to help, Mayor de Blasio has proposed an income tax surcharge on tax filers earning in excess of $500,000, while Governor Cuomo is considering some version of the congestion pricing system originally proposed by Mayor Bloomberg.

When Bloomberg made his push for congestion pricing in 2007, I was working as the Chief Economist for New York City Comptroller William C. Thompson.  The Comptroller is an independently elected citywide official who frequently serves as the chief antagonist of the Mayor, and at that time Bloomberg was maneuvering to have the city’s term limits waived so he could run for a third term. Thompson, who was planning to run for Mayor in 2009 all along and now faced the prospect of opposing Bloomberg, was casting about for an alternative to Bloomberg’s proposal. As it happened, I already had drawn up an alternative as a think piece and Thompson was intrigued.  He eventually adopted it as the position of the Comptroller and as a plank in his 2009 and 2013 Mayoral campaigns.

Before describing my proposal I should note that residents of New York’s “outer boroughs” have a deep-seated suspicion of schemes to restrict access to Midtown Manhattan, whether they be in the form of tolls on the East River bridges or the more high-tech congestion pricing plan Bloomberg sought. I share their suspicion. There is, of course, a distributional effect, as a congestion pricing regime would disproportionately charge residents of the outer boroughs in order to improve a subway system that disproportionately serves Manhattan residents. But I think outer borough residents have a more visceral objection as well. Many of them work in Manhattan, study in Manhattan, play in Manhattan, and have family roots in Manhattan. They see Manhattan as the city’s commons, not as a separate borough to which its increasingly wealthy residents should have privileged access. It’s that possessiveness that all New York residents feel toward Manhattan that underlies their hostility to bridge tolls and congestion pricing. It was ultimately outer borough opposition that sunk Bloomberg’s congestion pricing proposal, and that Thompson was seeking to appease.

The proposal I devised for Thompson would impose a registration tax on motor vehicles registered in the five boroughs according to the curb weight of the vehicle. Thompson modified the proposal only by expanding it to all 12 counties of New York’s metropolitan commuter transportation district. Passenger vehicle registration fees in New York State average only about $20 per year and neither the State nor City imposes a personal property tax on vehicles as many states do. As proposed, a vehicle weighing up to 2,300 pounds (think Toyota Yaris) would pay an annual registration fee of $100, and the fee would increase by $.09 per pound above that weight, bringing the annual registration fee for, say, a Lincoln Navigator SUV to about $430.  The registration tax could generate about $350 million annually just from the 2 million automobiles and trucks registered in the city.  The revenue generated could be adjusted, of course, by adjusting the weight formula.  More precise estimates of the revenue could be made beforehand using data on the makes and models of vehicles registered, which we did not have access to at the time.

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