Lessons of financial resilience: how the experience of New York in the 1970s can help Ukraine
A useful skill is the ability to retrospectively analyze someone else’s experience, even if it is not always successful. This allows you to learn lessons and apply them in your own practice. Especially when such examples demonstrate the need to strengthen fiscal and socio-economic policy at the level of the city, region or state.
In this context, the story of the economic decline and subsequent recovery from the crisis of New York in the 1970s, the largest city in the USA and the world’s financial center, is indicative. But the crisis changed the approach to management, bringing to the fore not so much negotiations and compromises as the rhetoric of financial necessity and market laws.
Today, financial crises are often accompanied by accusations against civil servants and criticism of social programs. In recent years, several American cities, such as Detroit, Stockton and San Bernardino, have declared bankruptcy. These upheavals mostly affect cities that have been in financial trouble for a long time. For example, the decline of Detroit has been known for years, but in the 1970s the financial difficulties of New York came as a real shock to many.
Saving a drowning person is the work of the drowning person himself
In May 1975, the mayor and governor of New York met with President Ford to request financial assistance for a city that was on the verge of bankruptcy. Ford refused to help, and New York had to solve its own problems. During the year, the city tried to avoid default by cutting social and municipal services. The fiscal crisis of the 1970s and subsequent budget cuts changed the city, and these changes are still felt today.
By 1975, when the recession hit the US, banks and investors became more cautious about New York’s debt. Business leaders demanded from the mayor to reduce costs and balance the budget. In the spring, banks closed the bond market for the city.
Without loans, New York could not pay its debts and salaries. The state created the Municipal Assistance Corporation to issue special bonds, but that didn’t help. Then the Council for Emergency Financial Control was created to oversee the city’s finances. Eventually, with the help of the federal government, the city worked out a deal with the banks and unions that saved it from bankruptcy, but resulted in significant budget cuts and rate hikes.
New York’s financial crisis was caused by local economic problems, high Medicaid and Social Security costs, and scarce funding. It became a symbol of the collapse of liberalism in the 70s. New York then embodied social democratic politics with a strong welfare system, support for workers, and a belief in the government’s role in helping the underprivileged. In 1975, the city had many public hospitals, public transport, public housing, kindergartens, schools and free higher education. However, the financial crisis showed that the city could no longer support such services. As Christopher Lash wrote, those who dreamed of world power could not even rule New York now.
The New York financial crisis of the 1970s became for conservatives a symbol of the failure of liberal policies. They believed the city had lost control of its spending and acted irresponsibly. President Ford, in a speech in October 1975, noted: “Other cities, other states, and the federal government are not immune to the insidious disease from which New York is suffering….If we continue to spend more than we earn, give more goods and services than we can afford, then the day of reckoning will come for Washington and for the whole country, just as it happened for New York.
What is balance of payments according to Moynihan
Ford’s conservative advisers were against bailing out New York. Only after considerable pressure from influential people did the administration agree to provide loans to the city on the condition that it balances its budget.
Moynihan, who later became a US senator, calculated the balance of federal spending and tax revenue for each state, which he called the “balance of payments.” Eventually, New York enacted reforms, made possible only by Ford’s tough love, that solved the city’s financial crisis. However, Moynihan’s balance of payments measure lives on, calculated annually by the State University of New York’s Rockefeller Institute of Government.
The financial crisis in New York in the 1970s led to a change in the city’s leadership. The old Democrats were replaced by young liberals who supported business. They considered budget cuts necessary and sought efficiency, moving away from traditional support for the working class.
The crisis caused mass protests. New Yorkers fought against the cuts, accused banks of refusing to lend money and organized demonstrations. This led to a new political division and the growth of conservatism in the city.
The New York financial crisis of the 1970s may seem as distant a memory as the old graffiti on subway cars. However, its consequences are still felt today: reduced expectations of the public sector and difficult conditions for the middle class. The current city government is focused on attracting private investment, which has led to growing inequality.
First give, then ask
The Rockefeller Institute examines the amount of federal funding each state generates and receives and the net difference between the two, which the now late Senator Moynihan called the state’s balance of payments. The Rockefeller Institute’s annual balance of payments analysis helps policymakers understand whether there is too much reallocation of funding or too little. After all, the consequences of budget decisions can greatly affect the economies of their states and the lives of their voters.
In its latest report, the Rockefeller Institute shows, that while most states “receive” more than they pay (because the US runs a large federal budget deficit), the most unfavorable states on this measure tend to be Democratic, while their opposites lean Republican. The point of the study, and the reason New York is paying to produce this analysis, is to argue (as Moynihan has done for decades) that states with net payers deserve more federal largesse.
How Ukraine can apply these lessons
Ukraine could probably learn some important lessons from the financial crisis and subsequent recovery in New York to overcome its own economic challenges. Although this experience will be more useful in peacetime, the principles of the New York reforms can still be useful today. Like New York, which has implemented significant reforms to stabilize finances, Ukraine must focus on long-term economic stability, not temporary solutions. This involves addressing key structural issues such as corruption, inefficient spending of public resources and tax evasion. Building strong and transparent institutions is a necessary condition for the successful implementation of reforms and their support in the future. In addition, Ukraine should develop more productive cooperation between the central government and local self-government bodies. State support should be used strategically to stimulate local reforms and develop infrastructure projects.
Giving local governments more autonomy and resources can lead to more effective and tailored solutions to local problems.
Data-based advocacy, that is, the use of statistics to demonstrate regional contributions and needs, can be an important tool to ensure the equitable distribution of resources. Similar to the concept of the balance of payments, it will allow to defend the interests of regions that make a significant contribution to the national economy, providing them with appropriate support. Achieving consensus among political leaders on the need for economic reforms and equitable distribution of resources is a crucial step. This requires transparent communication and orientation to national interests, not to narrow party goals.
To prevent a financial crisis, it is important to strictly adhere to budget constraints and avoid excessive borrowing. This involves setting realistic budget indicators and careful monitoring of expenditures. Increasing the transparency and accountability of public finances will help strengthen public trust and ensure efficient use of resources. Cooperation with international organizations and other countries can provide technical support, financial resources and access to best practices for implementing reforms. Creating a stable and transparent economic environment is an important factor for attracting foreign investments, which play a key role in stimulating economic growth and development.
Tatyana Morarash
