The legend has it that New York City avoided bankruptcy, and recovered to become the thriving city it was until recently, because all of its interest groups got together and agreed to “shared sacrifice.” The public employee unions agreed to contract givebacks, and having their pension funds invested in the city’s bonds. The banks agreed to roll over the city’s debts. The rest of New York State, under the leadership of Governor Hugh Carey, agreed to shift resources to NYC. And the federal government, after initially telling New York City to “Go to Hell,” finally decided it had sacrificed enough and agreed to a bailout. These powerful players made the sacrifices, and ordinary New Yorkers reaped the benefits.
I’m here to tell you that the legend is a lie, a politically convenient lie. The people negotiating in the room deferred and lent a little, but gave back nothing. The ordinary New Yorkers outside the room then made all the sacrifices required to pay back every dime, and then some, in higher taxes and collapsing public services. The poor were left to suffer and die unaided, with the Bag Ladies dying in the street, the schools collapsed, the infrastructure deteriorated, the police allowed city residents to be victimized by crime on a large scale, and the streets and parks filled with garbage. Property in large areas of the city was abandoned, and life expectancy fell.
Decades later, some city services hadn’t fully recovered. The beneficiaries, relocating to the suburbs, a few enclaves within the city, or retired to Florida, and the better off, were mostly unaffected.
In reality New York City recovered because things happened that those negotiating over its corpse could not have expected. This post will explain, and use data to show, that high inflation was real reason New York City recovered from the 1970s fiscal crisis.