What Would New York Look Like With a Smaller Financial Sector?

After a disappointing year, the big banks are pulling back on their bonus pools.  A lot.  This is going to be hard on bankers whose salaries are usually a very small part of their overall compensation--and yes, yes, before you drag out the world's smallest violin, let me agree that they have no entitlement to anything more.  Nonetheless, people tend to build their life around their expected salaries, and in New York, this choice is particularly important.  You not only acquire a large mortgage that's often difficult to unload quickly (closings in New York take months at minimum, longer if it's a co-op), but also things like enormous school fees, higher food costs, and so forth.

Nor are the bankers the only ones who have built their lifestyle around a heavy flow of easy money.  Before the financial crisis, the industry payroll accounted for 20% of New York State's tax revenue.  It still accounts for about 13%, as well as a hefty chunk of the city's tax base.  Plus the Office of the State comptroller estimates that every job in the financial sector creates two additional jobs.

New Yorkers who do not work for banks spend a lot of time lamenting the existence of the bankers: buying up choice apartments for rates you can't afford, gentrifying your neighborhood retail into one teeming sea of Godiva Chocalatiers and L'Occitane en Provence body shops, bidding up the price of a private day school education to well north of college tuitions, and generally making things miserable for the rest of us.

But in a very real way, I think you can credit the financial industry for New York's revival.  Oh, one can point to all the vibrant creative arts and their near-cousins in advertising and publishing; one can sing paeans to the city's energy, its tremendous diversity, its nearly unmatched food culture.  But let those of us who lived there in the 1970s and the 1980s also recall that it was violent, crime ridden, and oh yes, depopulating.  (Between 1950 and 1980 the city lost more than 10% of its population). Its infrastructure was decaying, particularly the subway, and no one who had alternatives rode the subways after rush hour.  In the early 1970s, the city flirted with bankruptcy; after the 1977 blackout, it endured widespread looting that bordered on riots.

What turned this around was not the creative class, who were still flocking to rent-controlled apartments in the safer parts of town.  No, what made the difference was money.  Money bought peace among the city's various interest groups, repaired infrastructure that had been neglected for decades, and paid for more police.  It created jobs in construction and services and almost everything else you can imagine.  And where did that money come from?  Deregulation, and a 17-year bull market that inflated Wall Street salaries, and tax revenues right along with them.  Without the financial renaissance, these days New York might well look a lot more like Detroit or St. Louis.

So it's interesting to contemplate what it will look like, if the financial industry gets shrunk down to the size that many are hoping.  The last time that happened, in the 1930s-1960s, New York had a lot of other businesses: shipping, manufacturing, and for that matter, being the corporate headquarters for so many national businesses.  That's pretty much ended.  New York is now a specialist city: creative industries, finance, and tourism.

Could the creatives pay the bills if Wall Street stopped?  New York's bills are very hefty; about one in three people in the city (and one in five in the state) are on Medicaid, with the city paying half of that; the MTA has an operating budget of over $11 billion a year; and the city's annual pension bill runs about $7 billion.  New York's generous social services are what nearly bankrupted the city in the 1970s, until they finally found an industry that would just pay hefty taxes instead of moving south and west.

Raising that money from the creatives means, among other things, raising money from the less affluent--people who are less able to shrug off a tax increase as the cost of living in the Big Apple.  Creatives may also be a bit more mobile than folks who needed--until the last decade, anyway--proximity to a trading floor.

Post-Guiliani, New York has been a very good place to be rich, a very good place to be poor, and a very difficult place to be in between.  If the financial industry really did slim down to size, that might well reverse.  That might make it a more middle class city.  But it would be very difficult for a more middle class city to support New York City's cost structure.  Since it would be pretty hard to rip out the subways and bridges, and it's illegal to renege on your pension promises, I suspect that the welfare state would take most of the burden.  But not quietly.