Howard Chernick: New York City's Economy Remains Resilient
The September 11, 2001 attack on New York City caused enormous losses, in life, health, property, and income. In Resilient City, our 2005 assessment of the costs of 9/11, we estimated that the total costs of the attack ranged between 2 and 4 percent of total output in New York City. Despite the magnitude of these losses, and the social and economic and fiscal disruptions that ensued, our study found NYC’s economy to be surprisingly resilient. After eight to ten months, the city’s employment picture had reverted to pre-9/11 trends. Housing prices grew at rates faster than the national rate, and commercial office vacancies were among the lowest in all big cities in the United States.
Our study did suggest longer-term risks to NYC’s economy from 9/11, especially if markets acted to impose a 'terror tax' on business activity in the city. Such a tax would take the form of firms requiring a price premium for locating here, to offset potentially higher costs of insurance, higher wage costs to compensate employees for the extra danger of living in NY, and higher taxes to pay for security. A sufficiently high terror tax could over time erode the economic competitiveness of the city.
Fears of longer-run economic decline from 9/11 have by and large not been realized. Instead, the city’s economy performed quite robustly up until 2008. While economic activity fell with the Great Recession, the decline in employment was less than the nation, and the recovery, though still tentative, has been more rapid.
REAL ESTATE STAYS STRONG
In much of the past decade, housing markets in NYC have been stronger than the nation. Prices for owner-occupied housing rose more rapidly during the housing boom, and fell less precipitously than in most other cities. The increase in the price of housing and commercial real estate helped the city to weather the budgetary stress induced by the 9/11 attack. Real estate transfer taxes, which had been averaging about $500 million per year in the late 1990s and early 2000s, shot up to $3 billion or more from 2004 to 2008. These unanticipated tax windfalls were crucial in allowing the city to enjoy budget surpluses in most of these years. They are also strong evidence that demand for NYC locations, both for residences and firms, remained strong.
By some counts NYC’s competitive position has even increased relative to the greater metropolitan area. A repeat-sales index of housing prices in NYC and in the New York metropolitan region, calculated by researchers in the Office of Management and Budget of NYC, showed greater rates of increase in housing prices in the city than in the suburbs during the housing boom, and less of a decline, in the housing bust that began in 2008.
Beginning in 2009, many U.S. cities have been suffering extraordinary fiscal stress. In a recent paper we predicted that between 2008 and 2013, the typical large U.S. city would suffer revenue and spending declines of about 7 percent in real terms. Since city budgets typically grow at about 3 percent per year, this represents a steep cut in public services. The main reasons for this projected decline have been the falling value of real estate, which cuts into property tax revenues, and declines in state aid. By comparison with other cities, NYC’s revenues were projected to fall by substantially less, and more recent data actually suggest a rebound in city tax revenue. The superior fiscal performance of NYC reflects the strength of the underlying economy, in both real estate prices and jobs. This fiscal strength has in turn moderated the degree of fiscal austerity, avoiding the need for drastic cuts in public services.
THE FACTORS BEHIND NYC'S POST-9/11 STRENGTH
Why has NYC’s economy performed as well as it has since 9/11, and been able to weather not only the terrorist attack, but also the financial crisis and resultant deep recession? Several factors are important. One must acknowledge the importance of the federal bailout of financial service firms under the TARP program. Since most of these firms are headquartered in New York, the bailout could be viewed as the equivalent of a special federal block grant, going mainly to New York City. Putting aside the question of whether this bailout was justified or not, New York City has cleared reaped the benefit.
A second factor is the continuing attraction of NYC as a tourist destination. Even as domestic tourism declined in response to the recession, foreign tourism has increased, pumping billions of dollars into the NYC economy. A third factor is the relatively generous federal compensation for the costs of 9/11. The NYC Independent Budget Office estimates total federal compensation at $20.5 billion. These funds are allowing the rebuilding of the World Trade Center site, and have also been used to rebuild and improve basic infrastructure in lower Manhattan. Some of the funds have also been used to finance other large capital projects, such at the Atlantic Terminal in Brooklyn. A third factor is the city’s diversified revenue structure, which has helped to maintain revenues, even when there were precipitous declines in the income tax, thus minimize harmful cuts in public services.
Edward Glaeser and others have emphasized that changes in the types of jobs that people do and the structure of technology have increased the premium on face-to-face contact in business and social relations. Given NYC’s size, we are the premier facilitator of such contact, perhaps in the entire world. The strength of these forces is illustrated by the fact that the city continues to be a place where both young people and immigrants want to live. A telling example of this trend is the decision of UBS, a major world bank, to relocate many of its employees back to lower Manhattan from Stanford Connecticut. The reason given is that the firm is having trouble attracting skilled workers to the Connecticut site, given the preference of skilled young people for living in NYC.
This optimistic assessment of NYC’s economy does not mean there are no problems. Unemployment is very high, particularly among those with low education levels. The downside of a robust real estate market is higher rents. The number of housing units affordable to households with median income or lower has shrunk dramatically. Steep increases in transit fares, resulting from a weak economy and fiscal pressures on state and local budgets, impose a particular burden on the poor. Poverty rates remain stubbornly high. Improvements in these domains will be important indicators of whether the overall economic success of NYC is being translated into greater opportunities for all of its citizens.
Lastly, the cost of extra security is being borne by all New Yorkers and commuters. The costs of rebuilding the World Trade Center Site, and incorporating strong security measures, have been and will continue to be extraordinarily high. Though denied by the Port Authority, the recent increase in bridge and tunnel tolls is partly a result of these high costs. These toll increases hurt the competitiveness of NYC relative to the region.
— HOWARD CHERNICK is professor of economics at Hunter College and the Graduate Center of the City University of New York. He edited the RSF volume Contentious City.
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