Research

Inequality and Austerity: The Political Economy of Cities

November 24, 2020

In a forthcoming book about cities and inequality, SCEPA Senior Fellow Rick McGahey examines how economists think about cities, what they typically leave out, and what this tells us about the future for urban hubs such as New York City. 

McGahey argues that mainstream economics conceptualizes cities like competitive firms that eventually “converge” in equilibrium, balancing the need to keep taxes and regulations low to attract capital and labor, while securing enough revenues to provide needed basic services. But this view leaves out four historical urban trends based in the fact that cities are urban centers ringed by suburbs, which are separate jurisdictions that benefit from urban growth without fully bearing the costs:   

  • Economic structure, industry, and job restructuring
  • A long-standing anti-urban bias in federal policy
  • States and suburbs are often anti-city, and states control what cities can do
  • Structural racial and ethnic divisions

McGahey argues these trends contribute to an environment of austerity by creating a gap between cities’ financial resources and their social and economic needs, especially for minority groups. The political framework that cities must operate in, defined by hostility to their needs at the state and federal level combined with the effects of structural racism in metropolitan ecosystems, make it difficult for cities to move larger metrics on their own, especially as the pandemic has devastated urban economies. 

McGahey presented his research in an October 2020 presentation to the Institute for Social Transformation at the University of California, Santa Cruz. (View his slides here.) Below is a summary of his case study of New York City. 

 

The Political Economy of New York City 

Looking at New York, McGahey points to New York’s economic restructuring - including a sharp decline in manufacturing jobs (from 23% in 1966 to 7.4% in 1990 and 1.4% in 2020) and eventual transition to finance and banking as key sectors, as well as a fall in private sector unions -- as an important consideration. He argues that federal policy, suburbs, and states, which can control what cities can do, have long-standing anti-urban biases. This translates into a lack of assistance without sharp reductions in social spending, increased costs for residents, and tougher labor contracts. On the state level, an anti-city bias led to a takeover of city finances and removal of decision making authority from city elected officials. Lastly, McGahey argues that the effect of race and ethnicity -- the growth of mostly white suburbs in the postwar period, and large and continuing waves of non-white immigration -- has gone overlooked. 

In all, an examination of these four factors reveal a long-term legacy of the 1970s fiscal crisis: 1) structurally, the economy remains dependent on corporate offices and finance, 2) federal policy has been hostile to immigrants and state or city spending, 3) austerity policies rule and the state controls the city, and 4) a mix of race/ethnicity politics has led to fragmented workers without a common interest as workers. 

In tracing New York City’s political journey since the fiscal crisis, from Mayor Ed Koch’s politics of division and austerity budgets through the 80s, to Giuliani’s aggressive welfare reform, attacks on crime, and financial support for corporate entities in the late nineties, McGahey gives insight into New York’s identity and problems today. New York has seen great economic development since the 1970s, when the city was under water financially. But with the city’s economic ascension, who has benefitted? Between 1996 and 2006, housing prices in the city rose by 124%. As immigrants came to make up more of the city workforce - 40% by 2013 - suburban commuters hold many of the high-paying finance jobs.

Mayor Bloomberg’s administration responded to poverty on the “supply side,” by increasing and bettering income supplements, education and training, and taking mayoral control of the school board. But his administration did not focus on unionization or community benefit agreements, despite rising inequality. While the administration supported a state minimum wage increase, it opposed city living wage policies. Overall, there was very little citywide progressive economic advocacy. 

The question is: with the city consistently lacking progressive advances for the most vulnerable New Yorkers, why has there been no citywide movement against inequality and austerity? McGahey argues the city has been able to sell austerity measures as necessary for continuing financial health and access to credit markets and to prevent renewed state oversight and control. For nonwhite residents bearing the brunt of austerity measures, politics happens primarily at the local level, in neighborhoods and boroughs, which are relied upon for services. And unions were increasingly dominated by the public sector, detached from average taxpayers. Across the board, progressive issues focused on criminal justice, housing costs, and rent regulation, but not on the economy. McGahey argues that the financial crisis of the 1970s put an end to labor driven “social democracy” in New York. 

When Bill de Blasio became mayor in 2014, he came into office on a “tale of two cities” campaign story, which pledged to address inequality and “stop and frisk” policing. Under the de Blasio administration, development has been deadlocked, with two major corporate deals (Amazon and Industry City’s development) falling through due to criticism from progressives over gentrification and a lack of manufacturing jobs. Unfortunately, McGahey argues, there has been no consistent alternative vision for progressive development.

Enter the coronavirus pandemic, which has had catastrophic consequences for the New York City budget. With deep declines in revenue (3.7% in fiscal year 2021) and a growth in expenditures (5.5% increase estimated for fiscal year 2022), state budget cuts that will affect education and other city aid, and very limited federal assistance, the situation is dire. Health and public education funding both face major shortfalls and long-term needs. A situation like this one reveals why cities like New York need more economic independence, to best support their many workers and address poverty and other social needs. 

The New York economy today remains dependent on corporate offices and finance, austerity policies persist, and the state government retains true financial control.