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.

A Good Tax

Gina Bellafante, who is usually an acute and sensitive observer of New York’s community life, wrote a somewhat misdirected column about the city’s retailing environment for Sunday’s Times.

The column portrays sympathetically several long-time Manhattan retailers who have been forced to close shop, or might soon, because of the high cost of rental space.  And they are sympathetic! However, the column identifies the City’s Commercial Rent Tax (CRT) as a contributor to the rent inflation retailers have faced and hence to the corporate homogenization of the city’s streetscape. There are several problems with this premise, not the least of which is that the CRT probably doesn’t contribute much, if at all, to the high rents for retail space.

The CRT, initially imposed in 1963 and modified a number of times since, effectively imposes a tax of 3.9% on commercial rent payments that exceed $300,000 annually.  The tax applies only in Manhattan below 96th Street and phases in beginning at the $250,000 benchmark.  The tax raised $816 million in the City’s 2017 fiscal year which, somewhat astonishingly, represented only about 1.5% of its tax revenue.

A savvy newcomer might ask why levy this tax at all, doesn’t it do more or less what a conventional property tax on commercial buildings does? The answer is yes, it does, but its origins and continued usefulness lies in New York State’s constitutional limit on how much property tax revenue municipalities in the state can raise.  In New York City’s case, that limit is 2.5% of the 5-year average of the full value of real property within it (with some complicated adjustments). The City has periodically bumped against that cap, so having a revenue source that is similar to a property tax, but which is not subject to the cap, is fiscally useful.

Continue reading “A Good Tax”

Luxury Housing and the Rest of Us

Does the construction of ultra-luxury apartments raise the cost of housing for everyone else? Simple logic would suggest it doesn’t, insofar as an increase in housing supply should operate to satisfy some housing demand, even if it’s for a thin upper-crust of buyers, thereby relieving price pressure on the rest of the housing stock.

But before jumping to that simple conclusion, less expensive housing that might be demolished to make way for the ultra-luxury building needs to be considered. In the case of 15 Central Park West, one of New York’s most expensive addresses, the 365-room Mayflower Hotel was demolished and replaced by only 202 ultra-luxury units, thereby eliminating affordable housing and reducing overall housing supply. In other cases, however, sites were previously occupied by commercial uses, so there was no offsetting loss of existing housing. Moreover, in New York at least, luxury developers’ purchases of air rights from adjoining properties can lead to the preservation or improvement of existing housing. Overall, it seems that ultra-luxury housing development generally expands the housing supply.

But how does the emergence of an ultra-luxury housing market affect the price of land, and hence the type of housing that can be built in desirable parts of the city?  In theory it doesn’t, because the market values land according to the most profitable use it can be put to, and precisely orders sites according to the marketability of the housing that can be built on each. Each site would be developed accordingly. That is a very static view of the land market, however. In the real world, it can be rational for a land owner to keep her property underutilized if she thinks that at some point it will become a viable site for ultra-luxury housing.

Suppose, for example, that the residual value of land for ultra-luxury housing development is three times as much as for normal, upper-middle income housing. Also imagine that there are ten vacant sites available for development, but that the ultra-luxury market can absorb only one of those sites per year. In a static world, the most desirable of those sites will be purchased to develop ultra-luxury housing and the other nine will be sold to developers of more modest housing. In the real world, however, it may pay for the other nine owners to absorb the carrying costs of their underutilized properties until their turn to sell to an ultra-luxury developer arrives.

Something like this may be playing out in Manhattan now. According to a recent New York Times article: The major impediment to more  of these projects (apartments modestly priced at $1 million to $3 million) coming to market is the price of land, which has not fallen along with the demand for ultraluxurious properties.

So it seems land owners would rather just hold onto their developable sites, hoping that eventually the ultra-luxury market will revive and their turn to sell to that market will come. In the meantime, development of professional-class housing is impeded.