When the Bankers Took Manhattan: Austerity’s New York Roots

The new book Fear City documents the slide of New York City from vibrant social democracy to neoliberal abyss.

Moe Tkacik

New Yorkers demonstrate against the subway fare hike on 42nd Street near Times Square on Sept. 2, 1975. (Vernon Shibla/New York Post Archives / (c) NYP Holdings, Inc. via Getty Images)

You might expect a book titled Fear City to be a bit more ter­ri­fy­ing than Kim Phillips-Fein’s just-released his­to­ry of New York’s famous mid-1970s cash crunch, omi­nous­ly sub­ti­tled New York’s Fis­cal Cri­sis and the Rise of Aus­ter­i­ty Pol­i­tics. It’s not for lack of vil­lains: Many of the book’s cen­tral char­ac­ters — Don Rums­feld, Alan Greenspan, Dick Cheney, Bill Simon — would go on to do much more sin­is­ter things. But in 1975, when the banks that had financed the bud­get deficit went on strike and brought the city to the brink of bank­rupt­cy, the neolib­er­al shock doc­trine” mafia was just cut­ting its fangs. 

Antagonism among the ruling classes toward the city’s “lifestyle” created a false “sense that New York City’s problems were entirely its own fault.”

Under the jun­ta” (as the Vil­lage Voice called it) appoint­ed to bal­ance the bud­get, New York saw lay­offs, cut­backs and hos­pi­tal shut­downs. The cost of a sub­way token soared from 35 to 50 cents ($2.23 in today’s terms). Class­rooms teemed with as many as 60 kids, twice the lim­it stip­u­lat­ed in the teach­ers’ con­tracts. Women who had been unem­ployed for more than four months were no longer eli­gi­ble to send their kids to the sprawl­ing net­work of free city day care cen­ters. (I’d like to say my heart bled read­ing that part, but I was pay­ing a babysit­ter $15 an hour for the lux­u­ry, so it felt more like an ulcer.) 

The scari­est thing about the book is the mem­o­ry of a time not long ago when what New York need­ed most was more rich peo­ple liv­ing (and pay­ing tax­es) in it. Ful­ly 49 per­cent of its pop­u­la­tion in the 1970s made less than the medi­an nation­al income — the city was, in oth­er words, a socioe­co­nom­ic mir­ror image of Amer­i­ca. But there were world-class parks and muse­ums and libraries, and abun­dant afford­able hous­ing, and tuition-free col­lege, and a vast net­work of pub­lic hos­pi­tals and clin­ics offer­ing every­thing from afford­able root canals to braces to eye­glass­es to dial­y­sis. Where fed­er­al Med­ic­aid and wel­fare fund­ing fell short, the city picked up the tab — and by the late 1960s, increas­ing­ly bor­rowed mon­ey to cov­er the difference. 

As exot­ic and excep­tion­al as all this may sound, the macro­eco­nom­ic clus­ter bomb that hit urban Amer­i­ca in the ear­ly 1970s was, Phillips-Fein argues, almost more unlike­ly: a near-instan­ta­neous tripling of oil prices amidst a back­drop of rapid dein­dus­tri­al­iza­tion and deur­ban­iza­tion and the return of hun­dreds of thou­sands of under-skilled and often opi­ate-addict­ed veterans. 

Dealt a less ruinous eco­nom­ic hand, New York might have — well, here’s where it’s impos­si­ble to know. Phillips-Fein argues, some­what half­heart­ed­ly, that antag­o­nism among the rul­ing class­es toward what the ubiq­ui­tous banker/​ pow­er bro­ker Felix Rohatyn called the city’s lifestyle” cre­at­ed a false sense that New York City’s prob­lems were entire­ly its own fault.” This obscured the real caus­es of the cri­sis: the dis­man­tling of the urban man­u­fac­tur­ing econ­o­my” and the fed­er­al sub­si­dies for home­own­er­ship and fed­er­al invest­ment in high­ways” that had caused a giant suck­ing sound out of cities nation­wide. Had Ford and his aus­ter­i­ty-smit­ten advi­sors not been so relent­less­ly hos­tile” to May­or Abra­ham Beame’s pleas for a loan, Phillips-Fein writes, New York might have had an eas­i­er time find­ing a way to rene­go­ti­ate its debts” in a ratio­nal and sys­tem­at­ic process that might even have redrawn city and sub­ur­ban bound­ary lines to make more resources avail­able for city governments.” 

At the same time, Phillips-Fein acknowl­edges that as ear­ly as the 1920s the New York real-estate-devel­op­ment lob­by, in its quest to dri­ve indus­try away and recast the city as a gleam­ing habi­tat for the afflu­ent, had has­tened the pre­cise sit­u­a­tion — the exo­dus of mid­dle-class fac­to­ry work­ers to the sub­urbs and beyond — that she blames for defund­ing the city’s tax base. And as Nao­mi Klein’s account in The Shock Doc­trine of Hur­ri­cane Kat­ri­na makes clear, gen­uine nat­ur­al dis­as­ters are the bread and but­ter of the aus­te­ri­ans: Isn’t it more like­ly that stagfla­tion was sim­ply the nat­ur­al dis­as­ter” the rul­ing class had been wait­ing for? 

Cer­tain­ly May­or Beame, elect­ed in 1973 on a fis­cal respon­si­bil­i­ty plat­form, sus­pect­ed as much. His pre­de­ces­sor had float­ed bonds to finance a deficit in every year of his sec­ond term; Beame, comp­trol­ler for those four years, had warned a day of reck­on­ing” would arrive. But every month or so the banks had nev­er­the­less shown up with­out inci­dent to roll over the city’s debt — until Feb­ru­ary 1975, when a young banker” at Bankers Trust who had nev­er done a muni deal before” backed out of under­writ­ing a $260 mil­lion debt offering. 

The next week, no bankers showed up to bid on city bonds. What had changed? Beame had spent his first year in office scram­bling to cut costs and raise tax rev­enue, and the banks had thanked him with a cash boy­cott.” Their objec­tive was nei­ther spe­cif­ic nor quan­tifi­able, he told City Coun­cil: It was to force the city to move from pro­grammed recov­ery to shock ther­a­py.” Or, as Rohatyn put it, only overkill” — gra­tu­itous, sym­bol­ic cuts in ser­vices — was like­ly to sat­is­fy the face­less investors spurn­ing New York’s debt because its way of life is dis­liked nationwide.” 

Per­haps wise­ly, Phillips-Fein does not expend too much effort eval­u­at­ing the extent to which the cash crunch (or its after­math) was coor­di­nat­ed by the bankers and their allies. Con­spir­a­cy or no, New York was broke. But it’s remark­able to read her account of the blood­bath — in which the city’s elites slash the pub­lic pay­rolls indis­crim­i­nate­ly with­out con­tin­gency plans— along­side the let­ters Mil­ton Fried­man wrote to the new Chilean dic­ta­tor Augus­to Pinochet that self­same spring. Fried­man out­lined the tenets of what he termed the shock treat­ment” required to undo the dam­age wrought by decades of demo­c­ra­t­ic social­ism: an imme­di­ate 25 per­cent cut via across the board” lay­offs because any attempt to be selec­tive is like­ly to be defeat­ed.” New York shed 23.7 per­cent of its work­ers between 1975 and 1978, but Rohatyn con­sid­ered it a great vic­to­ry that cops and teach­ers and garbage col­lec­tors lost their jobs in equal pro­por­tions: Peo­ple … were will­ing to make real sac­ri­fices as long as they believed that those sac­ri­fices were rel­a­tive­ly fair­ly dis­trib­uted.” They were noth­ing of the sort, of course: with­in months of secur­ing its fed­er­al bailout, the city coughed up a tax break now val­ued at $360 mil­lion to a then-29-year-old devel­op­er named Don­ald Trump. 

And yet, as Phillips-Fein remarks in her epi­logue, One can imag­ine much worse out­comes.” It hard­ly requires an imag­i­na­tion, in 2017: pub­lic sec­tor unions could have been essen­tial­ly out­lawed, as in Wis­con­sin; employ­ees could have had their salaries sum­mar­i­ly slashed to $7.25 an hour (Scran­ton, Pa.); cit­i­zens could have had their water bills jacked up to near­ly $900 a year — for the lux­u­ry of drink­ing poi­soned water (Flint, Mich.); death squads might have abscond­ed with any­one who protest­ed the cuts (Friedman/Pinochet’s Chile). Mere­ly con­tem­plat­ing a mod­ern Amer­i­can city with acces­si­ble health­care, afford­able hous­ing, decent schools and a func­tion­ing tran­sit sys­tem — now that requires imag­i­na­tion. If not for Fear City, I might have writ­ten it off as a pipe dream. 

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