How Bankers & Technocrats Used The 1975 Fiscal Crisis To Permanently Reshape NYC

The West Side Highway in the mid '70s.

Another week, another study confirming what everyone already knows: New York City is a playground for the rich, and a hellscape for the poor. It's a stubborn fact, so self-evident that it seems almost beyond the scope of basic questioning: Where did this inequality come from, who stands to benefit from maintaining it, and what, if anything, can be done to change this citywide predicament?

A new book from historian Kim Phillips-Fein argues that the key to understanding our increasingly stratified metropolis can be found in the backroom dealings of 1975, as the city was on the brink of bankruptcy. In Fear City: New York's Fiscal Crisis And The Rise Of Austerity Politics, Phillips-Fein offers a vivid—and often exasperating—account of how New York's investment bankers and political opportunists used the crisis to shape the city in their own image, gutting necessary social services along the way, and permanently shrinking the fortunes of the working class.

We spoke with Phillips-Fein about the resurgence of austerity politics, the challenges of expanding the city's political imagination, and the Donald Trump-initiated real estate deal that forever altered New York's relationship to private development.

via Wikipedia

What I was struck by working on the period was the really intense political struggle that is taking place over the future of the city, which I think both shapes the way that people understand the disinvestment and abandonment and also serves as a backdrop for the cultural resurgence. I think there was a really strong sense in New York in this moment of old ways of thinking about the city, old expectations and the order of how things had operated, that that was under attack and collapsing, and something new was going to come into existence.

There's a sharp struggle amid different groups in the city about what that would be. And that kind of comes to a head in the fiscal crisis, but it's happening even before. When people think of the rubble-strewn lots of the South Bronx, they don't think about the takeover of Lincoln Hospital by the Young Lords. They don't think about the protest at Welfare Offices. They don't think about the protests at City College that expanded access to CUNY for non-white New Yorkers. And then they also don't think about the response among elite groups in the city who were, I think, frightened and upset about the demands that were being made on the city government.

How would you describe the people who were in charge of laying this foundational change in the city?

Well, there's a kind of generational conflict that takes places during the fiscal crisis, and a lot of the people who are empowered during the crisis are much younger. They are kind of a generation of professional and well-educated people, many of whom come from the city's financial and business circles. Felix Rohatyn [the Lazard investment banker who helped broker deals to keep the city out of bankruptcy] is probably the most famous of this group, but it's really a whole contingent of people.

One of the dynamics of the fiscal crisis is that the city's elected government lost a lot of power that was kind of placed in these small agencies, which were staffed with people who were appointed by the governor and included representatives of the private sector. And more deeply, there's a growing sense in the city that the city government should be oriented toward finding ways to subsidize and support economic development as much as it can. And that it should improve basic urban services and turn it toward the private sector.

This position comes to be associated with people around the Manhattan Institute, and people who you might describe as members of the rising conservative movement, but I think it's also held widely among liberals who kind of feel like their backs are against the wall and the only way to save the public sector is by expanding the aid that is offered to private development, and that's what they need to do to expand revenue overall.

There's a quote from Felix Rohatyn in the book warning that the city would need to undergo "the most brutal kind of financial and fiscal exercise any community in the country will ever have to face." Is it fair to say that the people who are championing these policies are not the ones who will be impacted by them.

Definitely. Another remarkable aspect of the crisis is that during the cutbacks, you find a lot of people talking about and relishing how deep they are and how extensive they're going to be, but not trying to grapple seriously with the impact that they'll have on the people who would be most affected by them.

You also note in the book that “the crisis provided a way to change the politics of the city in profound ways without ever talking about race or class explicitly,” and that the effect was “a group of almost universally white elites remak[ing] life in a city that was becoming increasingly black and brown.” How intentional was this?

I don't think the decision-makers set out to hurt New York's poor or minorities communities, but I also think there was a certain level of implicit blame on those communities. There's a sense that their demands were fueling the city's fiscal problems, and also a willingness to disregard the reaction of poor and nonwhite New Yorkers. And yet, what is so powerful and difficult about the fiscal crisis is that it provides a way of talking about the public sector and public services that is totally divorced from a sense of who needs services, who has a right to them, and whose voices matter. It kind of removes all of those political demands and turns it into a language of technocratic, neutral questions about responsibility and the inevitability of the need for retrenchment in the condition of scarce resources.

What are some examples of crisis-era policies that we're living with today?

There are particular things, like the tuition at CUNY—nobody has really talked about making CUNY free since then, Cuomo's stuff aside. The idea of a tuition-free city university hasn't come back. It's hard to imagine this but all the PTA fundraising that pays for the art and music parts of education, that whole system was not in play in the same way in the pre-fiscal crisis. It developed afterward. There's the shrinking of the public hospitals systems, which some public health scholars have argued slowed the response to AIDS and also made it difficult to respond to Tuberculosis in the 80s. Homelessness—again it's not directly caused by the fiscal crisis—but when Koch took office I think there were maybe 1,000 people or so in shelters. [Editor's note: Current estimates put that number at 60,000 on any given night.] People don't remember that, that this is a recent problem.

So you can point to these particular ways in which the regime that existed before the crisis is different than what it is now. But the biggest shift really is in terms of what people think is possible for city government, or government more broadly, to accomplish. And there's a sense today that everything depends on finding ways to work with the very wealthy, or direct development, and there might be spin-off benefits for the middle class or poor people, but that's not what's driving things. And that's what all social policy at the city level needs to be geared toward.

You mention that there were some people, such as Donald Trump, who really benefited from this changing political imagination. Can you elaborate on the claim that the “fiscal crisis of 1975 made possible the rise of Donald Trump”?

Well, in a literal sense I think that it's true in that Trump's first big deal in Manhattan was the Commodore Hotel. So the Commodore Hotel was located near Grand Central Terminal and it had been owned by the Penn Central Railroad, which went bankrupt in 1970. The hotel, which had been around since 1919 or so, had become decrepit and was going to be closed down. It kind of created this specter of the collapse, on that corner there, near the library, near Grand Central Station. It just created this image of the whole area falling into disrepair. So what Trump wanted to do was to work with the Hyatt Regency and to basically buy the hotel, sell it back, and then lease it. Thus delaying paying property taxes on it and effectively getting a subsidy that since that time has been worth more than $350 million.

This story has been told at different points, and it's often told in terms of Trump's own willingness to strike a hard bargain, or his dependency on the public sector and on public subsidies, all of which is true. But the other thing that is kind of striking about it is that the city, it's not as though the city complained about this or was even sheepish about it. The city government actually trumpets this arrangement—the Economic Development Administrator describes it as signaling to the business community that there has been a change. It's meant to usher in a whole new way of doing business by offering deals and breaks and subsidies to companies who will develop here.

There's a much broader expansion of different kinds of property tax incentives for new developers or tax breaks for converting industrial properties to residential. Or upgrading properties, like the single room occupancy hotel. So it's part of a whole wave of using property tax breaks to stimulate development, and Trump is able to use that to catapult himself onto the Manhattan real estate scene, and onward and upward from there.

I think the crisis also shaped a lot of Trump's ideas about cities and about the role that business people should play in political life in general. The idea that what you really need is tough executives to come in and clean things up, that sense was widely embraced during the fiscal crisis. And in some ways the willingness of business people to ignore democratic protest was exactly why they were thought to be the right leaders for the city. So I think you can see some of those ideas playing out for Trump today, too. But even just his own business career really hinged on coming in and getting favorable terms from the city as part of a broader program of economic development.

There has been a lot of talk of what would happen if New York was to lose federal funding. Do you think we could see a similar reaction from the city to what happened in the 1970s?

I think the situation would be really different with losing that money. For one thing, New York gets a lot less money from the federal government than it did in the mid-1970s. At this point the federal funds make up 8 to 10 percent of the budget, whereas in the '70s it was more like 17 to 20 percent. In the mid-'70s, New York was funding really only about half or slightly more than half of its own budget. The rest is federal or state government. New York is actually a lot less reliant on the federal government than it was then, and that's partially the product of a shift in federal policy and the move away from the Great Society/War on Poverty years. Also, the city's budget office is infinitely better organized than it was in the '70s. Part of what happened in the fiscal crisis is that people at really high levels did not understand how much trouble the city was in. That is not going to happen again in the same way.

But, I do think the loss of the federal funds would be a serious problem for New York. I think that a lot of that money, the programs that it's funding are ones that affect poor people most directly—although a lot of it is going to security too. But there’s public housing money, the money for Temporary Assistance for Needy Family, that would be threatened. So yeah it could be similar, and it doesn't appear that the de Blasio administration exactly has a solution to this problem. They've said they're going to tap into reserve, but how they would really respond if that happened, it's just not clear.

The real challenge to it, politically, is a kind of commitment to finding alternative ways to fund those services rather than simply to cut them out altogether. While also challenging the punitive decision to strip federal funds in that way. I'm not sure another fiscal crisis would emerge in the same way, but we could see a social crisis that was similar to what we saw in the 1970s.