The Legacy of the 1970s Fiscal Crisis | The Nation


The Legacy of the 1970s Fiscal Crisis

  • Share
  • Decrease text size Increase text size

Shoppers hustle down 42nd Street in 1975.
Shoppers hustle down 42nd Street in 1975. (Photo by Peter Keegan/Getty Images)
On a Tuesday in mid-May of 1975, Abraham Beame and Hugh Carey—New York City’s mayor and governor—arrived at the White House to meet with President Gerald Ford. The news they brought was not good: New York City was experiencing a severe cash shortage, and without help, the city would not be able to cover its bills much longer. Beame described a recent demonstration of CUNY students outside of Gracie Mansion; Carey warned that serious retrenchment might mean the collapse of civil peace. The president listened and then said that he needed twenty-four hours to think it over. (“24 hours. Must do what’s right. Bite bullet,” he wrote on a note- pad, probably before the meeting even happened.) The next day, Ford told Beame and Carey that there was nothing the federal government could prudently do to help. The city would have to solve its problems on its own.

About the Author

Kim Phillips-Fein
Kim Phillips-Fein teaches American history at the Gallatin School of Individualized Study at New York University. She...

Also by the Author

Thirty-eight years ago, New York City almost went bankrupt. Then as now, conservatives took a hardline stance.

Angus Burgin revisits Friedrich Hayek’s Mont Pelerin Society in The Great Persuasion.

Throughout the rest of the year, New York would flirt with default on its massive loans, scrambling to patch together one plan after another, each intended to save the city from declaring bankruptcy while cutting back on the social and municipal services it provided. Today, the city’s heralded renaissance is often contrasted with the bad old days of the 1970s, a dark, distant past through which the city had to pass to arrive at the rosy present. But in fact, the fiscal crisis of the ’70s—and the subsequent budget cutbacks that followed—reshaped the city in ways that continue to influence it even now.

Like most fiscal crises, New York’s was at once long anticipated and a complete shock. Many observers in the early ’70s had noticed that New York was entering a period of difficulty and falling tax receipts, as the city’s economy was rocked by the decline of manufacturing and the flight of the white middle class to the suburbs. New York did provide more services than most other American cities—more about these in a moment—although contrary to the railing of conservatives at the time, its public workers were not paid wages out of line with those of workers in other cities. During the Great Society years, the expenses of the city climbed, particularly those for Medicaid (for which it bore almost 25 percent of the cost, in accordance with state law) and welfare. At first, increases in federal and state aid helped fuel this expansion. But when the economy turned south in the early 1970s, New York turned to borrowing to make up the budget gaps. The tacit assumption of city leaders—rarely spelled out clearly—was that the borrowing was merely a temporary measure. Perhaps national healthcare would pass and the city would no longer have to foot a massive Medicaid bill. Once the economy recovered, the city would regain its fiscal footing.

But by 1975, as recession enveloped the American economy, the banks that marketed New York’s debt (and owned a great deal of it) became increasingly wary about the city, as did investors around the country. Some business leaders began to tell Mayor Beame that if he didn’t cut spending and balance the budget, “managers” should be put in place and made accountable for New York. In extreme times, wrote Jac Friedgut, a vice president at First National City Bank, “many things can be done even if they are technically not possible.” By the spring, the banks told the city that the bond market had closed.

As soon as its credit was cut off, it became apparent that New York did not have the money to pay its debts—or even to continue to cover payrolls without access to more borrowed funds. The state created the Municipal Assistance Corporation, which was empowered to issue special bonds backed by the sales tax to help the city pay its bills. When MAC proved no more able than the city to market its debt, the state created the Emergency Financial Control Board to oversee the city’s finances and make sure it was moving toward a balanced budget. Finally, with Washington’s help (it agreed in the end to provide the city with some loans), New York made an arrangement with the banks and its unions that kept it out of bankruptcy. The cost was serious budget cuts: over the next three years, the number of police officers and teachers each dropped by about 6,000 and the number of firefighters by about 2,500, transit fares were raised, and tuition was imposed for the first time at the City University of New York.

* * *

Social Democracy Lost

Today, the rituals of fiscal crisis—the blaming of public sector workers, the vilification of the poor who use government services suddenly deemed excessive luxuries—may seem familiar. One American city after another has been rocked by such difficulties in the years since 2008. In mid-March, Michigan Governor Rick Snyder announced the takeover of Detroit’s finances by a state-appointed manager. In the last few years, the cities of Stockton and San Bernardino in California have declared bankruptcy, as have Central Falls, Rhode Island, and Jefferson County, Alabama. To try to keep firehouses open, cities like Baltimore are contemplating selling ad space on fire trucks and rescue vehicles. The local fiscal crises are accompanied by the stoking of anxiety about the fiscal soundness of the federal government and by the debt crises wracking Europe.

Today’s local fiscal crises afflict primarily cities (especially smaller ones) that have been struggling for years. The takeover of Detroit is hardly a surprise—everyone knows the city is broken. New York in the ’70s, on the other hand, was the biggest city in the country, the home of Wall Street, the epicenter of capitalism. The idea that such an apparently powerful urban center could be in fiscal difficulty came as a shock, even to those in charge of governing the city. For people in New York as well as in Washington, DC, the city's problems soon became linked to broader questions about the direction of the country as a whole.

Although there were many local causes of the fiscal crisis—the specific economic problems of New York, the high proportion of the Medicaid and welfare costs borne by the city, and a general willingness within the city government to employ deficit financing strategies—it quickly became seen as a metaphor for the larger breakdown of liberalism in the ’70s. Throughout the postwar years, as historian Joshua Freeman has argued, New York City embodied a particular style of social-democratic politics: one that embraced a strong welfare state, a culture of labor power and solidarity, and a belief in the necessity of using the government (even city government) to help the disadvantaged. It can be hard today to imagine what it was like to live in a city that provided such a rich range of social services, ones that made possible a uniquely democratic urban culture. The city had nineteen public hospitals in 1975, extensive mass transit and public housing, public daycare and decent schools. The municipal university system—the only one of its kind in the country—provided higher education to all, free of charge. Rent stabilization made it possible for a middle class to inhabit the city. For many, the fiscal crisis showed that it was no longer possible for New York to finance these kinds of services. As Christopher Lasch wrote in his 1979 book The Culture of Narcissism, “Those who recently dreamed of world power now despair of governing the city of New York.”

  • Share
  • Decrease text size Increase text size