Everybody knows that New York City's economy has boomed during the Giuliani administration, but just how spectacularly it has grown comes as a shock when you look at the details. Private-sector employment rocketed upward by more than 430,000 jobs over nearly eight years—the longest expansion ever. During the last couple of years, the city's job-growth rate has even zoomed past the nation's, adding 280,000 new jobs to the rolls just since 1998. Gotham's economy now employs 3.72 million people—more than ever before, except for a brief moment at the end of the 1960s. The percentage of New Yorkers who are employed is at an all-time high, as well.
What no one has quite grasped about this unprecedented expansion is that it presents New York with an historic opportunity to make an economic quantum leap. On the basis of economic realities that now exist as tender but vigorous young shoots, the city could readily create a dynamic new twenty-first-century economy with significantly more jobs—hundreds of thousands more jobs, offering opportunity at all levels—than the city has ever seen, not just in the central business districts but also throughout the five boroughs.
The current expansion has changed several key fundamentals. First, though Wall Street's strong performance loomed large in the boom, the city's economy has become more diverse than it was back in the 1980s, when Wall Street alone mattered. In particular, Gotham now boasts a new, cutting-edge high-tech industry with very strong growth prospects. Second, people from all over the nation and the world are eager to do business in New York, to work and live here, and to visit as tourists. Third, neighborhoods are reviving, offering huge potential for economic development. It is as if the vibrant, striving outer-borough communities of 50 years ago are starting to come back to life.
But to seize this glittering opportunity, the city needs to sweep away numerous impediments that for decades have ensured that every major expansion has collapsed into a steep recession that wiped out all previous gains and returned the city to Square One, so that no secular growth ever occurs. The fact that Gotham remains the nation's most heavily taxed, heavily regulated city, with a chronic shortage of office and residential space, could easily prevent the new economy from achieving lift-off. Whether New York will accomplish the bright future that's within its grasp will be up to the next mayor, now that the Giuliani administration is winding down. Voters and editorial boards need to be clear about what's at stake as the city chooses the man who will either take advantage of, or blow, this once-in-a-lifetime chance.
Basking in today's prosperity, it's easy to forget how bad things were when Giuliani took office in 1994. After the devastating 1989-92 recession wiped out 325,000 private-sector jobs—fully a tenth of New York's workforce—the city's optimism died. By 1993, a group of economists was predicting that New York could hope to regain only a paltry one-third of the jobs it had lost unless the government intervened with a massive jobs program. After all, experts reasoned, during the expansion of the 1980s, only Wall Street had thrived, while other key sectors of the metropolitan economy drooped. New York's vast entertainment industry, for example, shrank: half of Broadway's houses went dark; tens of thousands of movie and television jobs left town. Neighborhood retail development remained grounded when it should have soared. Why? The city's rising crime rates, which hit 35-year highs by the late 1980s, kept scared shoppers and theater-goers home.
So, when the market crashed on October 19, 1987, there wasn't much around to cushion the city's economy. And the financial sector fell hard. Investment firms, bloated after a decade of growth, axed 17 percent of the industry's total city employment over the next five years. Like tumbling dominoes, the huge business-services sector—personnel agencies, data-processing firms, public-relations companies, and other enterprises that relied heavily on Wall Street spending—contracted nearly 20 percent, costing the city 40,000 jobs. New office towers went begging for tenants. The construction industry lost a quarter of its employment.
New York's city and state governments, predictably, made things worse. In 1990, with Wall Street's decline causing shortfalls in tax collections, the Dinkins administration enacted the highest single-year tax hike in city history, adding $800 million in new taxes, surcharges, and fees on top of the enormous $15 billion a year the city was already levying. Albany piled on $1 billion in new state taxes in 1991. The increased cost of doing business in New York led many firms—already crippled by taxes and plagued by crime and squalor—to leave the city in search of more business-friendly locales. Others went bust; from 1989 to 1992 business failures in the city soared tenfold, to more than 4,000. In 1991 alone, the year most of the new taxes went into effect, New York lost an astonishing 192,000 jobs—20 percent of all the jobs lost across the entire country in the brief national recession that year. No American city has ever hemorrhaged so much employment in so short a time. For a dismal encore, Gotham lost another 93,000 jobs in 1992. Only one economic sector didn't feel pain during the recession—government employment, which grew slightly from 1987 through the end of the Dinkins years.
Given this bleak scene just a short while ago, what caused New York's dramatic, and wholly unexpected, economic turnaround in the Giuliani years? What are the ingredients for economic success that the city needs to preserve, nurture, and build upon?
Obviously, the nineties Wall Street boom played a leading role. In the 1990s, investment banks generated 45,000 new jobs in the city—about half of what they produced in the previous decade—and they indirectly were responsible for 90,000 additional positions. But the city has also created hundreds of thousands of jobs that have little to do with Wall Street, making the current expansion very different from earlier financial-sector-based recoveries. Here a key factor—perhaps the key factor—in sparking economic growth has been the city's success in bringing its crime problem under control.
Taking office in 1994, Mayor Giuliani was keenly aware that government's inability to ensure order and safety had imposed a heavy toll on New York's businesses. One 1989 study found that 83 percent of the city's small businesses had been victimized by serious crime over the previous three years. The shoe retailer U.S. Athletics closed its New York operations after its stores had been held up at gunpoint 15 times and broken into another two dozen times in 1991. The failure to police the city's streets had gotten so bad that restaurateurs on Manhattan's Restaurant Row—46th Street between Eighth and Ninth Avenues—had hired the Guardian Angels vigilante group to combat the rampant drug dealing and prostitution that scared away diners. Crime's biggest impact was on tourism. In a 1992 Zagat survey, crime-wary travelers placed New York dead last among major American cities as a preferred destination. Largely because of crime (though inflated taxes played a role too), occupancy at the city's hotels slipped to just 65 percent by the early 1990s.
The quality-of-life policing and other innovative law-enforcement strategies that Giuliani and top cop William Bratton famously instituted immediately forced crime down 15 percent in 1994 and another 18 percent in 1995. The huge reduction in crime—nearly 60 percent over eight years—has completely reshaped the city's economic fortunes.
Most visibly, national coverage of the city's amazing crime turnaround has brought the tourists roaring back—nearly 40 million of them this year, up 66 percent from 24 million in 1994. Now that New York is the safest big city in the nation, respondents to a 1999 Zagat survey rank it the nation's Number One preferred tourist destination. Times Square, just a few years ago the embodiment of urban disorder, is a perfect symbol for the tourism turnaround. With crime down 57 percent in the area, it now pulses with out-of-towners. Employment has shot up 25 percent, and the commercial vacancy rate has fallen from nearly 15 percent in 1994 to about 2 percent today, setting off a burst of construction activity that is creating thousands of jobs. The citywide flood of tourists has added 30,000 new jobs to New York's entertainment industry since 1994 and has boosted employment in the city's hotels by a third since the early 1990s. Last year, tourists spent $16.4 billion in the city, 40 percent more than they did in 1995.
Outside Manhattan's main business districts, the war on crime has had an equal or perhaps even greater impact—a facet of New York's economic boom that has gone relatively unnoticed. "The foundation of the city's economic revival has been the restoration of a sense of order in neighborhoods," says Kenneth Adams, president of the Brooklyn Chamber of Commerce. "When neighborhoods are safe, that encourages entrepreneurs to take risks they wouldn't otherwise take." From mid-1998 to mid-2000, the city's four outer boroughs contributed about 45 percent of all new job growth in the city.
Downtown Brooklyn is a prime case in point. Back in the late eighties, high crime rates had mugged the area's reputation. As the recession set in, major development had ground to a halt. Today, with crime in the neighborhood down 55 percent since 1994, downtown Brooklyn buzzes with economic life. New development, especially street-level retail, is going on everywhere you look. The borough's major builder, Forest City Ratner, has opened or has put under construction about 700,000 square feet of retail space in the area since 1998. National chains like Target have newly set up shop. In 1997, the Renaissance Plaza Marriott became the first new hotel to open in Brooklyn in decades.
Smaller revivals are also under way, little noticed but significant, not least because they provide a launching pad for further economic growth. Take Crow Hill, a tiny neighborhood attached to Crown Heights in Brooklyn. Drug dealers had hijacked the area's retail strip, Franklin Avenue, in the early nineties. Storefronts sat vacant and boarded up; local residents lacked basic amenities. But as crime fell in the middle of the decade, small retailers trickled back. A local development group began a retail beautification program, and the Transit Authority helped out by renovating the Franklin Avenue subway shuttle. Crow Hill's storefront vacancies have declined 50 percent over the last two years.
The legions of immigrants who have poured into the city, now that the Big Apple is no longer shunned as the murder capital of the world, have revitalized many once-run-down outer-borough neighborhoods and have swelled the city's population for the first time in decades, boosting it by nearly 10 percent to more than 8 million. Russian-born New Yorkers have tripled over the past ten years to 229,000, and immigrants from Bangladesh, India, and Pakistan have more than doubled to 146,000. About 40 percent of the city's population is now foreign-born, up from 28 percent at the beginning of the nineties.
Queens has benefited most from the energy of these ambitious new New Yorkers. An influx of Bengalis, to take one example, has revitalized formerly crime-ridden parts of Long Island City and Astoria. Restaurant owner Shanin Chowdhury, a board member of the 30th Avenue Merchants Association, estimates that Bengalis now own roughly 150 businesses in the area, which has seen its crime rate cut in half since 1994. "When I opened my restaurant eight years ago, crime was our biggest problem," Chowdhury says. "I had a number of my employees mugged, and every Bengali-owned store I knew had been robbed. Now the difference is night and day." The area's biggest problem these days, he adds, is too much prosperity. The retail strip along 30th Avenue has virtually no vacancies, and rents have been edging upward by 5 percent to 10 percent a year, as new ethnic stores—Indian restaurants, Pakistani grocery stores and clothing shops—open their doors and flourish side-by-side with the area's older Greek and Italian food shops, drawing in crowds that make the street bustle with life and color.
Such changes have given many outer-borough neighborhoods a wonderful new vibrancy. On Steinway Street in Astoria, national chains like Benetton, the Gap, and Victoria's Secret sit side-by-side with Greek bakeries and Egyptian restaurants. Nearby on Northern Boulevard, big retailers like Old Navy have opened and teem with shoppers. In Brooklyn, national chains new to the borough, including Home Depot and Target, are anchoring Gateway Center, a huge project set to open soon along the Belt Parkway: it will create 1,500 new jobs. Retail employment throughout the outer boroughs has grown by 15,000 positions since 1995. And perhaps the best news of all: many of these neighborhoods have only started to revive in the last several years, so they have much more room for growth as national retailers discover underserved shopping districts.
Even as formerly blighted neighborhoods have come alive again, New York's main business districts have experienced their own rebirths, led by a striking boom in technology jobs that sprang from the city's indigenous strength as a center of culture and commerce. As the number of home computer users started to grow in the early nineties, New York began to attract software firms looking to tap into the city's arts and entertainment industries to provide content for CD-ROMs. By 1995, companies working on such new media already employed an impressive 27,000 people in Gotham. After CD-ROMs gave way to online technologies, New York became home to early Internet ventures, some drawing on the city's traditional strength as a center of business services. The result has been an even bigger job bonanza for the city, with 58,000 New Media jobs by 1997 and nearly 140,000 by the end of 1999.
In addition, Wall Street's spending on technology—to the tune of about $15 billion a year by the mid-1990s—turned what had been a small industry of specialized local software firms serving the financial sector into an employment powerhouse. This niche industry started the 1990s with fewer than 2,000 firms and 15,000 workers in the city. By the end of last year, it boasted 4,500 firms and 50,000 workers. Technology jobs within the city's big companies have doubled since 1995. Though Wall Street's tech spending is likely to slow as profits slip, lots of the outlays are mandated by external factors like changes in the U.S. tax code, which require firms to improve their computer technology, so at least a solid core of the spending won't evaporate.
These developments have given New York the welcome—and deserved—reputation of being a big-time New Economy mecca. "When I used to tell people back in the 1980s that we were based in New York, they would ask me why," says Gerald Cohen, chief executive of Information Builders, the city's largest software company. "They didn't recognize New York as a place for tech companies." Now, maintains Cohen, "you have to be in New York to be in this business." The city's new reputation as a high-tech center has led West Coast giants like Sun Microsystems, Microsoft, and Cisco Systems to set up significant operations in the city. The current shakeout among Silicon Alley Internet firms is unlikely to change this new reality. "New York now has so many experienced technology workers that, as new technologies emerge, people will form new companies here," Cohen predicts.
The new technology industries have transformed lower Manhattan. By the mid-1990s, many venerable Wall Street firms had migrated to midtown, occupying empty towers built during the tail end of the eighties boom, or filling office space vacated by Fortune 500 firms that left the city during the recession. With one-quarter of the office space in the financial district empty, tech firms, encouraged by tax breaks and falling rents, began moving in. Bankrupt Drexel Burnham's former headquarters at 55 Broad Street soon housed nothing but technology companies. Vacancy rates downtown have shrunk to less than 5 percent, the lowest level since the mid-1980s.
Taken together, all these encouraging trends mean that in a coming national recession, Gotham stands a good chance of getting off lightly and, when growth resumes, of propelling its newly diversified economy into uncharted, higher-employment territory. But here's where wise policymaking will be a make-or-break matter.
The first priority—after making sure with almost religious dedication that crime stays down, no matter what—will be to cut taxes. When Rudy Giuliani first became mayor in 1994, he understood that excessive taxation had played a key role in driving businesses out of town, reducing the number of New York's Fortune 500 corporate headquarters from 140 in the mid-1950s to 33 today, squelching small-business formation, and causing the city to have 1 million fewer jobs than it would have had if its tax burden were no heavier than the average northeastern city's, as City Journal has shown (Autumn 1997). Accordingly, he declared that the economy could bear no new taxes, even though the city was facing a $2.3 billion budget deficit. Instead, he proposed to shrink government spending for the first time in 16 years, to reduce the city's workforce, and to whittle down two irritating taxes: the hotel levy—at the time, the highest hotel tax in the world—and the commercial-occupancy tax. Even though these tax cuts amounted to just $35 million in their first year, they succeeded, as intended, in inspiring confidence in the business community.
But though Giuliani set New York on a new course with his early tax reductions, he didn't follow it very far, and the city still labors under the most oppressive tax burden of any major U.S. metropolis. Even Giuliani's more recent tax cuts, once fully implemented, will only ease the city's burden by about 65 cents per $100 of taxable income, leaving New York far more taxed than other cities. According to the New York City Independent Budget Office, in 1997, the last year for which complete data are available, New York collected $7.99 for every $100 of taxable personal and business income combined. Compare that with Los Angeles's $4.21 per $100 and an average of $4.46 per $100 in the ten largest cities. Only Philadelphia, the sole other major U.S. city with both a personal income tax and a sales tax, comes close to Gotham, collecting $6.82 for every $100 of taxable income—and Philadelphia lost employment for ten consecutive years, from 1987 through 1997.
These stark differences don't worry some Big Apple mayoral candidates, who are already arguing not whether to raise taxes, but how. If high taxes really hurt the city, they demand, why would Gotham's economy have rebounded so strongly in the last few years? The answer to that question is simple. The current revival began after a steep recession had driven the city's other costs way down, temporarily making it more competitive with other cities, despite its steep taxes. Now, all costs have risen sharply as the boom has increased demand, and the high tax rates make the city unaffordable for some businesses. In 1994, to take the most dramatic and important example, midtown office space was renting for $40 a square foot, a bargain, despite the 15 percent real-estate tax contained in that number. Today, that same space costs twice as much—a huge amount—and the $12 of real-estate tax that is contained in that price is the final straw that drives some companies out of town. It's in this way that New York's high taxes keep the city stuck in the boom-and-bust cycle whose result is that, despite the latest gains, New York still has fewer jobs today than it did in 1969, while the U.S. workforce has nearly doubled since then.
A new mayor would have no trouble finding legions of anti-competitive taxes worth cutting or eliminating entirely. Topping the list would be the city's personal income tax—the Number One drag on Gotham's economy, since it affects every wealth-creating household in the city. Major cities like Los Angeles, Houston, and Chicago don't have income taxes, and New York's are by far the highest of those cities that do—$1.68 out of every $100 its citizens earn, adding up to an average of $1,364 per taxpayer. The next mayor's top economic priority should be, first, to finish eliminating the two surcharges that the Dinkins administration slapped on the personal income tax and then to go after the heart of the personal income tax itself.
Next, a new administration should tackle the city's absurdly high business taxes. Gotham's government takes $1.31 in business taxes for every $100 of taxable income New York produces, compared with just 19 cents per $100 in the next nine biggest cities combined. The city collects $3.3 billion in business taxes a year, and the next-largest city, Los Angeles, collects less than $300 million. Another target: the commercial-occupancy tax, the only tax on rent in the country. Early in his tenure, Mayor Giuliani began phasing it out, but he has delayed the process so many times that midsize and big companies in Manhattan's main business districts are still paying it. The final phase-out won't happen until 2004, well after Giuliani leaves office, so it will be up to the next mayor to finish the job. Eliminating this tax would cost the city $400 million or so in revenue, but it would help contain the swiftly rising and business-dampening cost of Manhattan office rents. Reductions in the city's three separate corporate income taxes would make the city more business-friendly, too, as would a cut in the city's inflated utility tax and tax credits for partners in subchapter S corporations, whose profits (in New York but not the rest of the nation) are now subject to double taxation.
How can the city pay for this kind of aggressive tax slashing? First, tax cuts will boost economic activity and so will partially (and perhaps even wholly) pay for themselves. But it will also be crucial to rein in city spending. Mayor Giuliani started out with a bang in this department when, in 1995, he demanded $700 million in productivity gains from city workers and proposed a $1.1 billion spending cut, the largest single-year reduction since La Guardia was mayor. But then his enthusiasm for further cuts waned—particularly as he sought union support for his reelection.
To curb city spending further, the next mayor should first push for a state takeover of Medicaid payments. In all states other than New York and Arizona, the feds pay half the Medicaid bill and the state pays the other half. In New York, though, municipalities pay 50 percent of the non-federal share, which causes Gotham to hemorrhage $3 billion a year. This arrangement entices state legislators to keep loading on expensive new Medicaid services, since they've only got to pick up a quarter of the cost. One of the Pataki administration's biggest failures has been its reluctance to use the recent huge state budget surpluses to revive a takeover plan that died a decade ago. The city might resurrect the Medicaid debate by proposing at the very least to freeze the city's contributions at current levels and then have the state pay for all new expenditures, a proposal first voiced in 1994. Had it taken effect then, Gotham would now be saving $600 million a year.
Paying for the tax cuts will require boosting the productivity of city workers too. Upcoming union contracts are an obvious place to start. Bargaining probably will go on until after Mayor Giuliani leaves office, so it will fall to the next mayor to push union bosses to accept efficient labor practices standard in the private sector but anathema to city unions. The Citizens Budget Commission estimates that the city could save $1.4 billion by such everyday practices as giving bigger raises to the categories of workers hardest to hire, instead giving the same percentage hike to all unions. When New York negotiates a contract with the sanitation workers' union, for example, it should recall that the department is deluged with 75 qualified applicants for every job, and jobs at the fire and correction departments also are already cushy enough to draw flocks of applicants. The city can end some burdensome union work rules by offering to share any productivity gains with workers as bonuses. In addition, city hall should keep pushing hard for merit pay, rather than rewarding productive and unproductive employees alike. It should also work to cut staffing and overtime to reasonable levels throughout city agencies, and it should eliminate or merge scores of useless agencies, such as the Consumer Affairs department or the Public Advocate's office, both of which replicate tasks done by other city or state bodies.
To foster real and lasting job growth, the next mayor will need to figure out where to house future new companies and their workers. The current boom has added precious little office space to the city—only about 2 percent more in midtown over the past six years. There is little affordable space to nurture new industries like biotech, and even companies willing to pay Manhattan prices can't find space. Where will developers put up the needed new buildings, and how will the city provide those buildings with the transportation links they need in order to function?
The biggest development opportunity clearly lies in Manhattan, from 28th Street to 42nd Street, west of Ninth Avenue. This could become the third major business district in a city that for so many years has had only two. Currently a hodgepodge of warehouses, auto-repair shops, and other small businesses, the area, even under current zoning rules, could accommodate 32.5 million additional square feet of development; rezoning could boost that number to 65 million feet, a mix of office towers, hotels, and stores. The city should commit to a rezoning plan that allows for at least 15 million square feet of new office space in the neighborhood—the equivalent of 15 big office towers that could house 60,000 new jobs. Anything less will not produce the critical mass the Far West Side needs to emerge as a world-class business center.
That means that the next administration will have to fend off proposals to devote most of this land to non-business uses like parks or subsidized housing, or that envision using it for a publicly subsidized Olympic stadium, which studies show would be of questionable economic benefit, to say the least. The neighborhood also desperately needs access to mass transit. City Planning Commissioner Joseph Rose estimates that government must spend up to $2 billion to extend the Number 7 subway train from 42nd Street down into this district and to extend the Long Island Railroad to the Far West Side. Unlike stadiums and convention centers, these are the kinds of public investments that ultimately pay off in significant new tax-generating economic activity.
The next mayor needs the imagination to conjure up new office space beyond Manhattan, too—especially at prices that can keep New York competitive with rents in New Jersey and Connecticut. Downtown Brooklyn, for instance, a perfect spot for tenants looking to move out of nearby Wall Street, could become a new mini-city, bustling with wealth-creating activity—except that the area is fast running out of developable office sites. The city could begin by rezoning to allow bigger office buildings to be built there, producing up to 15 million square feet of additional developable space. It could move government agencies out of their desirable sites in the neighborhood to make room for office development. Government employees will squawk, of course, as will residents of surrounding neighborhoods, so the next mayor will have to be ready to fight. A positive sign: front-running mayoral hopeful Mark Green has endorsed, with some modifications, a planning-department initiative to rezone the area for more office space.
Meanwhile, as the city has failed to act, major companies have started to plan big new offices on the New Jersey side of the Hudson. Goldman Sachs is building 1.3 million square feet of space on the Jersey riverfront to house 2,200 workers. Chase announced last summer that it is moving 1,900 jobs to Jersey City. Merrill Lynch, which already has about 2,000 workers on the Jersey waterfront, has purchased a site near Goldman's for a big facility. For many relocating companies, lack of New York space at any price is as significant a problem as rising costs.
A new mayor will also have to overcome Gotham's infamous housing shortage and find places for workers to live. The city's rent-control laws, zoning regulations, permit requirements, and taxes make it more difficult and expensive, and often less profitable, to build apartments here than in any other city in the country, so it's no surprise that few are going up. Even in New York's outer boroughs, it costs a lot more to build an apartment building than in any other major American city. Short of eliminating the city's rent-control regime, which in the name of preserving affordable housing actually prevents its construction, the city could rezone to allow residential building along its desolate (but potentially desirable) waterfront and in zones kept fallow in the vain hope that manufacturing will someday return to them. Reforming the byzantine and corrupt permitting process, revising the building code, cutting taxes on building materials and services, and getting the city's building unions to negotiate competitive wage rates for residential construction would also foster new building.
A new administration should continue Giuliani's fight to allow big-box stores to expand their New York operations. The zoning code prohibits big retailers from entering certain sections of the city. But a zoning loophole that allowed the giant retailer Home Depot to open four stores in Queens proves what a boon these stores could be. The chain's first Queens store is now its highest-grossing outlet. True, employment at the borough's small hardware stores has shrunk by some 100 jobs, but the four Home Depots have added around 1,200 jobs, for a net gain of 1,100 positions. This pattern would multiply throughout New York if the city lifted its big-box restrictions and New York regained retail jobs lost to the suburbs. For instance, although total personal income in Queens is higher than in neighboring Nassau County, it is Nassau that has become the shopping mecca, with about 40,000 more retail jobs than Queens. The city ought to try to regain its preeminence in retailing by letting the big boxes in.
Most New Yorkers love the vibrancy that the Giuliani boom has brought: the opportunity, the prosperity, the neighborhood renewal, the influx of ambitious young people, the sense of possibility, the excitement of being in a glamorous location where the action is. But no mayor in living memory has explicitly, convincingly made the case for an expanding, opportunity city. No mayor has tirelessly, enthusiastically explained how such measures as tax cuts and zoning changes can transform the city immeasurably for the better. It's a serious political failing; and if the next mayor lacks the understanding or the political will to forge—and sell—a bold economic policy, he'll squander an opportunity that the city hasn't seen for half a century.
