On the fiscal crisis

It is not uncommon for governments at all levels (federal, state, and local) to borrow money to cover current account deficits and to use borrowed money for operating expenses rather than capital expenditure. Borrowing money can allow governments to meet their financial obligations and fund necessary services, but it can also lead to long-term debt and financial difficulties if not managed carefully.

At the federal level, the United States government has the ability to borrow money through the issuance of government bonds, which are essentially loans that are secured by the full faith and credit of the United States. The government can use the money from these bond sales to finance its operations, including paying for salaries, debt retirement, and other operating expenses. The government can also borrow money through other means, such as borrowing from the Federal Reserve or foreign governments.

However, it is important to note that borrowing money should be used as a short-term solution to cover temporary deficits, rather than as a long-term strategy for financing government operations. Borrowing money can lead to long-term debt and financial difficulties if not managed carefully. It is generally better for governments to use their own resources (such as tax revenue) to finance their operations whenever possible, rather than relying on borrowing.

New York City experienced financial difficulties from at least 1960 to 1980, as the city borrowed money to cover current account deficits and spent borrowed money on ordinary operating expenses such as salaries and debt retirement rather than on capital expenditure.

The financial crisis that hit New York City in the late 1970s was a wake-up call for city planners across North America. The ideals of popular civic democracy and social justice were overshadowed by the need for a balanced budget and financially stable city government. The crisis came during an international economic downturn caused by the OPEC oil embargo and the issue of stagflation, a regional economic decline caused by the migration of industrial capital to the sunbelt and a local population decline caused by the influx of impoverished blacks and Puerto Ricans into the city and the outflow of middle-class whites to the suburbs. In addition to these demographic and economic shifts, the political climate in the United States, and the federal government in particular, was becoming increasingly conservative and less willing to aid a city in financial trouble. Finally, New York City's finances were poorly managed and not transparent, making them vulnerable to serious mistakes in accounting and corruption among city officials.

New York City had been playing with financial fire for at least 15 years before the crisis occurred. From an accounting standpoint, the city's finances had been in crisis since at least 1960, when the city began borrowing to cover current account deficits. This was because money borrowed from banks and earned from bond issues was often earmarked for capital expenditure (such as road construction, new police cars, and similar expenses) but was spent on ordinary operating expenses such as salaries and debt retirement. In simple terms, the city was borrowing money to pay back creditors and cover yearly cost overruns that far exceeded yearly revenues. The city's finances grew more troubled as the 1960s progressed, and liberal political thought promoted costly policies such as generous welfare payments to the poor and collective bargaining agreements with city government workers such as teachers, clerks, and sanitation workers. This liberal policy helped maintain civil peace and prevent black rebellions that devastated many cities across the country, such as Newark and Detroit, which still suffer from blighted neighborhoods destroyed by black rioting.

In fact, New York City is one of the few large cities in the United States with a large black population that did not experience intense civil disturbances during the 1960s.

In terms of the impact on the black community, urban renewal has often had negative consequences. Many urban renewal projects in the United States have disproportionately affected black neighborhoods, leading to the displacement of black residents and the destruction of tight-knit communities. These projects have often been driven by the interests of the urban elite and have not taken the needs and perspectives of black communities into account. In some cases, urban renewal has contributed to the segregation and exclusion of black communities, as well as to the ongoing legacy of racial inequality in the United States.

Urban renewal is the process of improving and redeveloping older parts of a city, and it has a history dating back to the 19th century in cities like Paris and New York. It has often been driven by the urban elite and government action, and it has had both positive and negative effects on cities. In Paris, for example, urban renewal led to the creation of wider boulevards that improved public health, while in New York City, it led to the destruction of tight-knit neighborhoods and their replacement with high rises and expressways. For example, San Juan Hill was a neighborhood in New York City located on the Upper West Side of Manhattan. In the mid-20th century, the neighborhood underwent a process of urban renewal, which involved the clearance of existing buildings and the construction of new developments. The goal of this urban renewal project was to revitalize the area and create a new cultural center, known as Lincoln Center, which included institutions such as the Metropolitan Opera House, the New York State Theater, and the Juilliard School.

As part of this process, thousands of families and businesses were displaced, and the history and culture of the neighborhood was erased. The urban renewal project was driven by the City of New York and led by Robert Moses, chairman of the Committee on Slum Clearance. The project was funded in part through the Federal Housing Act of 1949, which provided funding for the clearance of slums and the construction of new housing and infrastructure.

The urban renewal project had significant costs and consequences for the community of San Juan Hill. Many residents were displaced, and the demolition of existing buildings and the construction of new ones led to an increase in real estate prices. As a result, the new housing units built as part of the project were out of reach for many of the original residents, who were mostly low-income and working-class.

The role of the state in urban renewal has varied over time, with some governments taking a more active role in planning and development, while others have taken a more laissez-faire approach. The concept of the "right to the city," which asserts that all members of society have a right to the city and its resources, has been used to challenge state-led urban renewal projects and advocate for more inclusive and equitable planning processes.

The municipal bond market is a key financing tool for urban renewal projects, as it allows governments to borrow money for the purpose of funding these projects. However, the potential negative consequences of urban renewal, such as the destruction of neighborhoods and the loss of valuable social goods, must be carefully considered before borrowing money through the municipal bond market. The decision to pursue urban renewal should not be made lightly, as it can have significant and long-lasting impacts on the community. It is important for governments to consider the potential consequences and weigh them against the potential benefits of the project before making a decision to borrow money through the municipal bond market.

Municipal bonds, also known as muni bonds, are debt securities issued by states, cities, and local government agencies to finance various public projects such as the construction of schools, hospitals, roads, and other infrastructure. One of the main benefits of investing in muni bonds is that the interest income is typically exempt from federal income tax, and in some cases, state and local taxes as well. This tax-free income can make muni bonds an attractive investment for people in high tax brackets who are looking for a way to reduce their overall tax burden. Additionally, muni bonds can offer investors a relatively stable and secure investment option, as they are typically backed by the issuing government agency's ability to levy taxes or fees in order to make interest and principal payments to bondholders.

In the case of New York City, the large bond issues required for Urban Renewal may have driven the appetite of the bond markets which enabled the City to issue bonds to cover ongoing expenses rather than strictly capital items. The use of municipal bonds to finance government expenses is a problematic and irresponsible practice that often results in long-term debt and financial difficulties for cities and states. Rather than relying on borrowing to cover deficits and fund necessary services, governments should prioritize using their own resources, such as tax revenue, to finance their operations. The temptation of tax benefits to investors may be appealing, but the consequences of excessive borrowing can be devastating, particularly for low-income communities and marginalized groups who bear the brunt of budget cuts and austerity measures when governments are unable to meet their financial obligations.

One wonders what lays ahead for other governments that are financing their operations using bonds.

And Here We Are...

Notes:

Caro, Robert A. The Power Broker: Robert Moses and the Fall of New York. Vintage Books, New York, 1975.

Moses, Robert. "Comment on a New Yorker profile and Biography." August 1974. http://www.bridgeandtunnelclub.com/detritus/moses/index.htm

Tabb, William K. The Long Default: New York City and the Urban Fiscal Crisis. New York: Monthly Review Press, 1982.