Governing from a House of Cards
“As New York goes, so goes the nation”
By: Todd M. Schoenberger
In early February, New York City Mayor and current Democratic Presidential Candidate, Bill de Blasio, stood in front of a sea of cameras and delivered a dismal financial outlook for the Empire State. With both arms positioned as if Hizzoner were asking for a handout, or willing to give a hug, the Mayor delivered his preliminary executive budget and ordered agencies to trim spending to make up for a shortfall from personal income tax revenues.
In his speech, de Blasio projected New York City will receive $935 million less in income tax revenue for 2019 from the previous year. Although he gave several reasons for the shortfall, the most obvious seemed to link Wall Street and the dramatic drop in the markets at the conclusion of 2018. In the final seven weeks of the year, stocks managed to fall nearly twelve percent, resulting in annual losses for all major indices.
Fast forward to present day and it seems de Blasio’s forecast for a decrease in the tax rolls should be revised. Not only are the markets not cooperating, we are now receiving near-weekly announcements of layoffs from many of Wall Street’s most reputable firms, which will most certainly inflate the state’s tax revenue shortfall.
New York has always tied its fortunes and prosperity to Wall Street. As the New York Times put it, “the securities industry accounts for a disproportionate share of the city’s wages, and taxes paid by the highest-earning 1 percent of New York taxpayers typically generate more than 40 percent of personal income tax receipts in the state.”
On Monday, the industry was stunned to receive news that HSBC will be terminating 4,750 employees, which brings the 2019 total number of unemployed bankers to more than 23,000 globally. Deutsche Bank is responsible for the bulk of this figure when it recently announced 18,000 positions will disappear. However, hundreds more are being cut from bulge bracket firms from Citigroup to Goldman Sachs, to name a few.
The biggest concern for New Yorkers is two-fold: First, sliding markets and less institutional trading means the second half of the year is certain to result in further downsizing in the securities industry; Second, New York City has expanded its full-time workforce to its highest level in history, which makes this group vulnerable to layoffs due to decreases in operating budgets.
A reduction in tax revenue is certain to have a negative trickle-down effect as municipal layoffs will likely occur; as well as a hit to state services for social programs such as Heating and Cooling Assistance, and Foster Care Support.
New York state was able to weather the Great Recession of 2008 because of massive federal bailouts the big Wall Street firms received to maintain their solvency. And, only one year later, Wall Street’s profits were at record highs, thus helping to keep the state operating at a so-called normal level. This time, however, will be different.
It’s hard to imagine Wall Street firms going hat-in-hand to Washington again. The leaders of JP Morgan, Goldman Sachs and Morgan Stanley know the bailouts were a once-in-a-generation phenomenon and not to be repeated anytime soon.
So, it begs the question: If New York goes into recession, should the rest of the country be worried? The answer is an absolute yes, and the argument can be made the state is already in a recession.
Since 2010, New York City has experienced the highest rate of private job growth in the entire state, followed by Long Island and the lower Hudson Valley. However, Upstate New York has gained private-sector jobs at barely one-third the national rate, and less than one-third the downstate rate. Only three states have had lower private job creation rates than upstate New York.
Economists will educate, though, by saying a recession is determined by negative Gross Domestic Product (GDP) rates, not job growth. Considering this notion is factual, the Bureau of Economic Statistics offers evidence to support a rapid slowdown for the Empire State.
Since the national economy hit bottom in 2009, New York State’s Real (inflation-adjusted) GDP has grown by 12.7 percent, compared to a 16.8 percent average for all states. As a matter of fact, the state’s annual growth in Real GDP has trailed the national average in six of the past nine years.
Looking at the non-Manhattan areas of New York, though, 5 of 11 upstate metropolitan areas have experienced negative Real GDP growth rates since 2009, indicating their economies have contracted. The fastest growing upstate metro area (Albany-Schenectady-Troy) has expanded at only half the rate for all U.S. metros.
Governor Cuomo is governing on a house of cards because the final economic stronghold for the state is New York City, and if markets continue to slide (as many technicians are predicting) and additional layoffs ensue, the state will be facing a financial calamity not seen since the Great Depression.
And, as the Governor so aptly stated in 2018, as “New York goes, so goes the nation”.
Todd M. Schoenberger is a former Wall Street Hedge Fund Manager and the author of No Lie Lives Forever. He now resides in Upstate New York.