The American Interest
Analysis by Walter Russell Mead & Staff
Playground of the Rich Collapsing

The ever-insightful urbanist Joel Kotkin has a must-read piece out on the limitations of the Blue Social Model in New York City. The Big Apple has been touted as the archetypal new Blue city and has experienced a revival of sorts as a “luxury city.” But the luxury city model is rapidly approaching its demise, says Kotkin:

For a decade, the Bloomberg paradigm has held the city together: Wall Street riches fund an expanding bureaucracy that promotes social liberalism and nanny-state green politics. Indeed, Wall Street’s fortune — guaranteed by federal bailouts and monetary policy under both Presidents George W. Bush and Barack Obama — has been the key to the mayor’s largely self-funded political success. Under Bloomberg, Wall Street’s profits allowed city expenditures to grow 40% faster than the rate of inflation. Bloomberg was also able to buy political peace by bestowing raises two to three times the rate of inflation on the city’s unionized workers.

Now this calculus is falling apart. Layoffs are mounting on Wall Street, while bonuses — the red meat that fuels everything from high-end condos to expensive boutiques and restaurants — are expected to drop 30% from last year.

The past decade’s NYC revival was almost wholly based on an unsustainable reliance on the financial sector. Growth in the government-Wall Street partnership fueled a luxury boom in  trendy Manhattan – and masked a hollowing out of the city’s core — middle class families have fled the boroughs in droves. High rents, high taxes, lousy schools, and restrictive regulations have driven the middle class away.

Ultimately, the basic truth is this: Bloomberg’s luxury city has failed most of its citizens. Despite its self-celebrated “progressive” image, New York has the most unequal distribution of income in the nation. The bulk of the job growth has not been on Wall Street, where employment has declined over the decade, but in hospitality and restaurants, which pay salaries 60% below the city average. In fact, restaurants are now the largest single private employers in Manhattan, with more people serving tables than trading equities.  As the New York Post quipped: “If you can make it here, you can make it anywhere — as a waiter.” […]

Ultimately, suggests Jonathan Bowles, president of the Center for an Urban Future, the future of New York’s middle class depends on reducing dependence on Wall Street.  The city needs to focus on industries and niches outside finance, including education, health, design, high-tech services, media and smaller businesses, many of them owned by immigrants.

If the financial sector’s growth continues to slow as it loses its cozy relationship with big government – as it looks like it might – the revival of the city will be over. Look for low cost suburbs and less hip cities to be on the cutting edge of innovation as they drive the 21st century economy.

Glamorous Queens, of course, will weather the storm.

Published on September 23, 2011 1:51 pm
  • WigWag

    This is from ABC Radio News one week ago today (September 16, 2011 at 4:27 pm)

    “(NEW YORK) — Mayor Bloomberg warned Friday that there would be riots in the streets if Washington doesn’t find a way to start generating more jobs.

    He pointed to demonstrations in both Cairo and Madrid as examples of dissatisfied citizens taking to the streets to show their unhappiness.

    In Cairo, angry Egyptians demonstrated their frustrations by toppling leader Hosni Mubarak and, more recently, attacking the Israeli Embassy. In Madrid, recent protests were sparked by the government’s decision to spend millions on Pope Benedict’s visit rather than dealing with their widespread unemployment problems.

    Bloomberg’s prediction comes as President Obama has been pressuring Republicans to pass his proposed job creation plan.”

    While I am no fan of Bloomberg’s I don’t think that there is any doubt that he is right about this.

    Regardless of what anyone thinks about the viability of the “blue state model” and whether it needs to be reformed or jettisoned, the one feature of that model that is a prerequisite for the success of capitalism in the 21st century is a system to redistribute income from the more successful to the less successful.

    Capitalism has always fostered increasing concentrations of wealth; in its modern incarnation this is more true than ever. Social stability cannot be maintained when a small sliver of society becomes increasingly wealthy while the largest segment of society becomes downwardly mobile. Without social stability, productivity declines and economic growth becomes impossible. The net result is that everyone in society, the wealthy and the poor alike suffer economically.

    In an increasingly interconnected and wired world, both peaceful and violent social protest is facilitated by the ubiquity of cell phones, twitter, Facebook, you tube and the like. Examples are not only to be found in backwards places like the recent revolt in Cairo but also in cosmopolitan venues as demonstrated by the recent riots in London and the more peaceful protests in Madison, Wisconsin.

    Whatever the blue state model ultimately morphs into, unless vibrant mechanisms are found to facilitate redistribution of income from the wealthy to the less wealthy, the capitalist economic model will experience severe strain and American prosperity will dissipate even more rapidly.

    Professor Mead may side with the critics of Bloomberg who think his approach to governing New York City is not viable for the long term, but unless Mead confronts Bloomberg’s speculation about what is likely to happen in the absence of job growth, he is merely whistling in the dark.

    As for Professor Mead’s assurance that “glamorous Queens…will weather the storm” as a part-time resident of the Borough, I am very happy to hear it.

  • dearieme

    Will the same blight hit London? There is a countervailing force in the property market – foreigners who don’t trust their own governments not to pillage them – Russkis, Chinese, (Greeks?, Italians?)….

  • Luke Lea

    On the countless dozens of times I’ve visited Manhattan over the past fifty years, what strikes me most forcefully is the aging pile of the masonry.

  • Richard F Miller

    “…vibrant mechanisms…to facilitate redistribution of income…”

    WigWag:

    There is only one “vibrant mechanism” and it doesn’t redistribute anything. It’s called “economic growth” and it was this–not excessive borrowing, not social engineering and not redistributionist scams–that fueled American prosperity and increasing standards of living.

    Whatever replaces the Blue Model, to succeed, it’s going have to liberate individual initiative and reduce barriers to growing enterprise. To statists and those for whom the absence of centralized control is unthinkable the resulting creative chaos will not be sweet.

    But it will be necessary to restore and maintain national competitiveness. The trend? If it’s big, overpaid, overstaffed, and has a headquarters mentality, kiss it goodbye.

  • Luke Lea

    @WigWag

    Regarding economic inequality, I found it interesting that in a society like Israel, which is committed to egalitarian principals, 12 or 13 wealthy families dominate the national economy, at least according to the newspaper Haretz.

    It shows Pareto was right. A power law governs the distribution of wealth and income in any and all societies, no matter what. It is governed by laws of probability (including relative ability and the distribution of talent, which, being based on genes, are also matters of probability). Typically we find 20% of the population gets 80% of income and controls 20% of the wealth. The top one tenth of one percent — the truly wealthy — control the lions share of that. These are empirical facts.

    That said, a power law needn’t govern the distribution of consumption (= income minus savings minus taxes plus government assistance). The latter is emphatically a matter of public policy.

    So I agree with your conclusion: “vibrant mechanisms must be found to facilitate the redistribution of income.” It is evident that a steeply graduated income tax is not the answer — the right wing are right when they claim such a tax penalizes business ambition and inhibits the entrepreneural spirit.

    You may not agree but for the purposes of argument allow me this premise. What does that leave? Conservatives — no, scratch the word conservative (I am one!) — reactionary right-wingers advocate a flat tax, or a national sales tax, or a continuation of our current 15% tax on capital gains, interest, and dividends. They also want to eliminate the estate tax (death tax). In a word they want to maintain Pareto inequality with no redistribution of th fruits of our economy whatsoever.

    Without going into details I would call your attention to the concept of a graduated expenditure tax (sometimes referred to as a graduated consumption tax) as outlined by the American economist Irving Fisher in the darkest days of WWII. You can find it online. Another good source is Cambridge economist Nicholas Kaldor’s little book, “The Expenditure Tax,” which traces the history of the concept in English political economy over the past 300 years.

    Of course rich people don’t like it. That’s why they killed the USA Tax sponsored by senators Domenici and Nunn back in the 1990′s. That piece of legislation embodied the basic concept of a graduated expenditure tax but died in committee, in part because not a single representative of the current generation of economists in American universities stood up to defend it, which says more about them than the merits of the bill.

    So what is a graduated expenditure tax? Well, it is just like a graduated income tax but with savings tax exempt. Citizens are taxed not on the basis of what they earn but on the basis of what they spend on themselves and their families — for what they take out of the common pot, not what they put in. The way it works basically is that all bank and brokerage accounts have to be registered (no more overseas tax havens!) and are thenceforth treated just like current IRA accounts would be treated if there were no limits on annual contributions and no penalties for early withdrawals.

    Milton Friedman supported the basic concept, as did John Maynord Keynes. There have always been practical obstacles to implementation, unsolvable until recently; but that was before the rise of the modern international banking system based on computers and the internet.

    You have considerable rhetorical skills. You ought to study up on this.

  • Mark R. Yzaguirre

    “Look for low cost suburbs and less hip cities to be on the cutting edge of innovation as they drive the 21st century economy.”

    This is true. Cases in point: the larger cities in Texas – Houston, Dallas, Austin and San Antonio. You can go to experimental theater shows and buy organic food in those cities, while still being able to purchase a house of your own. That isn’t something to be underestimated.

  • IgotBupkis, President, United Anarchist Society

    Folks, this is the liberal version of the future with the masks pulled off — no middle class, just the hoi polloi elite class and the rabble, aka “You”, serving them as is your rightful purpose.