The Magazine

The Meltdown State

New York's pathetic economy.

Mar 15, 2004, Vol. 9, No. 26 • By WILLIAM TUCKER
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New York

THE DEMOCRATIC CIRCUS came to New York for Super Tuesday. John Edwards preached about the "two Americas." John Kerry's fans in Buffalo put up a huge sign: "America Works Best When We Say Union Yes. Edwards was closer to the mark: If there is one state going in a different direction than the rest of America, it is New York. But New York's meltdown is the result of exactly the kind of policies Democrats are promising for everyone else.

As usual, New York is dragging itself out of the recession far behind the rest of the country. During the 1990-91 downturn, New York state lost one of every five jobs that disappeared nationwide. While the rest of the country was growing by the beginning of 1992, New York didn't see job growth until 1994.

This time is no different. While the national economy grew at a blistering 7.2 percent in the third quarter of 2003, New York grew 0.3 percent--and politicians were celebrating! Wall Street has revived, but at current rates it will be 2006 before New York City recovers its job loss from the last three years. That's not surprising. Like the Jets and Giants, Wall Street basically uses New York as a business address. Since 1990, 95 percent of the job growth in financial services has been outside New York City.

Still, that's not the real New York story. The unprecedented devastation is found outside the five boroughs--on Long Island and in the "Northern Tier" of industrial cities that once formed the backbone of the state's manufacturing economy. As Fredric U. Dicker, state editor of the New York Post, recently put it, "Albany politicians are fiddling while New York burns." Here's the scorecard:

* Buffalo is so financially weak that Mayor Anthony Masiello has thrown in the towel and asked that the city be absorbed into surrounding Erie County. County officials are wary, however, fearing that consolidation may bankrupt the county.

* Rochester's largest industry, Kodak, has just announced it will cut another 5,000 jobs. Kodak's Rochester employment, which stood at 60,000 in 1981, will now be 15,000. Xerox, the city's other major manufacturer, has cut employment from 16,000 to 8,000 since the late 1970s.

* Syracuse's largest employer, Carrier Corp., announced in October it will close its two manufacturing plants in 2004, moving 1,200 jobs to Georgia and the Far East. Pyramid Companies' efforts to expand a shopping mall in the city also fell apart in the last year.

* Schenectady, once the world headquarters of General Electric, is at the point of financial collapse. The city has borrowed $12 million in short-term notes and illegally transferred $5 million from capital funds to meet operating expenses. State comptroller Alan Hevesi says the city will run out of cash in May.

* Westchester County just lost its AAA bond rating despite an 18 percent increase in property taxes. Nassau and Suffolk counties are in similar predicaments. A recent survey found that Long Island's population of 18-to-34-year-olds dropped 20 percent over the last decade, with 5 percent of the 24-to-35 group leaving in 2001 alone.

* Albany is the one bright spot, with the NanoTech Center at SUNY Albany having just persuaded IBM to build the world's most advanced microchip factory in nearby Fishkill. Sematech, the international semiconductor consortium, has also located its second facility in Albany. (Austin has the first.) These faint signs of life are probably because Albany is the home of one of America's biggest spending machines, the New York state legislature.

Geography and climate obviously play a part in this historical decline. The Northern Tier, originally built along the Erie Canal, has become the Snow Belt, with 20-degree temperatures and four-foot drifts through much of the winter. With opportunity flourishing in the Sunbelt, many people simply won't live under these conditions anymore. Yet other cold climates--Minnesota, Wisconsin, Chicago, Toronto--have experienced slow growth while avoiding utter financial ruin.

New York's disaster can be summed up in one word--Medicaid. While Medicaid is the principal social-services burden in every other state, in New York it is swallowing the entire economy.

The fateful decision was made in 1966, when Congress promised to split the costs of the health care program with the states (50-50 in "wealthy" states like New York, 80-20 in poor states like Mississippi). While most states approached Medicaid gingerly as a potential burden, New York politicians gleefully embraced it as an opportunity to "leverage" federal dollars. Local counties (including New York City's five counties) were mandated to match the state government's spending--even though decision-making largely remained in Albany.

As a result, New York will spend $42 billion on Medicaid this year, more than California ($25 billion) and Texas ($15 billion) combined, even though together those states have three times New York's population. New York City alone will spend $4.5 billion on Medicaid--more than the entire municipal budget of every city in the country except Los Angeles and Chicago. Even then, politicians are wildly expanding the program. After September 11, Governor George Pataki created Family Health Plus to extend Medicaid to working families. Not to be outdone, Mayor Michael Bloomberg has been running his own recruitment effort--the logic being that more enrollees will help pay the bills in New York City's $1 billion municipal hospital system. In two short years, New York City's Medicaid rolls have leaped 50 percent, from 1.6 million to 2.4 million--one out of every three residents. The city only receives 3.4 million tax filings. Within a decade, the number of Medicaid beneficiaries could easily exceed the number of taxpayers.

Outside New York City the situation is even worse. "Every penny of the Erie County property tax goes to Medicaid," says county executive Joel Giambra. In Broome County, only a 37 percent tax increase over the last two years prevented Medicaid bills from going above 100 percent of real property tax receipts. Yet the state continues to force new mandates on local governments. "When the state can bring in new constituents at 25 cents on the dollar, there's no incentive to curtail the program," complains Bob Gregory, executive director of the New York State Association of Counties.

Much of the problem grows out of Albany's petrified political culture. Although state legislators are the longest-tenured lawmakers in the country, they play almost no role in budget-making. By long-standing tradition, the entire negotiation is carried out between: (1) the governor, (2) the speaker of the assembly (Democrat Sheldon Silver), and (3) the majority leader of the senate (upstate Republican Joe Bruno). Once the leaders have struck a bargain, party members fall in line. In these close quarters, the state's powerful municipal and service-workers' unions wield enormous strength.

The system is finally being challenged. Nassau County Executive Thomas Suozzi, a liberal Democrat, is leading an effort to unseat legislators no matter what their party affiliation. "It cannot be that all municipal officials, regardless of party or geography, are high-taxing, reckless spenders who have no regard for taxpayers on fixed incomes and are intent on preventing new businesses from locating in our communities," says Suozzi. "There must be something we share in common. It is New York state government."

Still, there is little chance of Suozzi's effort generating much heat. Ballot initiatives--the premier instrument of tax revolts in other states--are not permitted in New York. The state constitution does require voter approval of bond issues, but Governor Nelson Rockefeller learned to circumvent this long ago through quasi-private authorities. New York state now has more long-term debt ($40 billion) than any other state, and New York City has more debt than New York state.

Still, the forces of dissolution are not resting. Only two weeks ago, Local 1199 of the Services Employees International Union (hospital workers)--in conjunction with the immensely powerful Greater New York Hospitals Association--proposed Heal New York, essentially a blood transfusion to the hospitals from the small-business sector. Eager to have their bills paid, Local 1199 and the Hospitals Association want the state to require every business with more than 25 employees to provide health insurance--or pay a $3,000-per-head tax to cover yet another expansion of Medicaid.

If the mandate passes, New York--already at the bottom in most job-generation indexes--will probably fall off the edge of the continent. At best it will develop an underground economy more reminiscent of Italy than America. Yet Local 1199 president Dennis Rivera, the most powerful political actor in the state, is likely to get his way. Social services employment already exceeds Wall Street employment, and almost half the metropolitan area's 25 largest employers are hospitals. When Big Health talks, Albany listens.

To quote John Kerry's supporters, when you say union yes, you get an economy that looks like New York's. So yes, John Edwards, lets have one America. But not one that looks like this state.

William Tucker is a New York writer and fellow with the Discovery Institute.