The financial crisis that spawned austerity, corporatized Democrats and gave the world Donald Trump

New York City's near-default in 1975 altered the course of American politics, explains author Kim Phillips-Fein

By Jacob Sugarman

Published May 16, 2017 11:00AM (EDT)

 (AP/Marty Lederhandler)
(AP/Marty Lederhandler)

This article originally appeared on AlterNet.


While Donald Trump stages his own inane production of the Watergate scandal, firing the official tasked with investigating his administration as he would a contestant on "The Apprentice" and inadvertently admitting to obstruction of justice, a bill is wending its way through Congress that threatens the lives of the sick and the vulnerable. The American Health Care Act could strip more than 24 million Americans of their health insurance over the next 10 years, generating perhaps the greatest transfer of wealth from the middle and working classes to the rich in U.S. history. Its passage in the House last week represents not only a breach of the public trust but the triumph of conservative lobbying efforts for the better part of four decades. What many may not know is that its architects' political ideology was born in one of the most liberal cities in the country, if not the world.

In 1975, New York was teetering on the brink of collapse, as deindustrialization, an exodus of affluent taxpayers and a worldwide recession left it unable to pay for the robust social services it had carefully grown and developed since World War II. The big banks, including Chase and First National City Bank (now Citibank), were eager to lend the city money until they weren't. At the behest of New York's creditors, the state established an Emergency Financial Control Board, effectively removing power over the city's budget from then-Mayor Abe Beame. As journalist and historian Kim Phillips-Fein argues in her new book, "Fear City: New York's Fiscal Crisis and the Rise of Austerity Politics", this presaged a government-wide capitulation to big business and a transformation of what it means to be not just a New Yorker but an American. "The crisis," she writes, "saw a group of almost universally white elites remake life in a city that was becoming increasingly black and brown."

"Fear City" is both an illuminating history of some of New York's darkest years, and a book of ideas. What does a government owe its citizenry? How have we come to accept budget cuts and layoffs as the only recourse for a mounting deficit? Why is there "no alternative" to the neoliberal economic model, as Margaret Thatcher famously sloganeered in Great Britain? These questions have been made more urgent by the devastation visited upon the city of Detroit and the Commonwealth of Puerto Rico, to say nothing of the national trendlines that have accelerated since the Reagan administration. For Phillips-Fein, austerity is very much a choice, and it is our responsibility to challenge its inevitability.

We spoke at NYU's Gallatin School of Individualized Study about the legacy of the city's near-default and our culture's strange nostalgia for the decrepitude of 1970s New York. When I found her in her office, she was dashing off an email to her students for a class titled, "Capitalism in the 20th Century."

This interview has been lightly edited for length and clarity.

Jacob Sugarman: New York’s fiscal crisis appears radically, even willfully misunderstood by liberals and conservatives alike. To this day, officials are still blamed for their gross budget mismanagement. Can you explain how one of the wealthiest cities in the world found itself in such financial straits?

Kim Phillips-Fein: It's best to think about fiscal crises as expressions of underlying conflicts. There are revenues and expenses, but the budget is a pressure point for much broader social forces. It's the final conclusion of a story, in a way. The problems of New York in the '70s were the same problems facing cities across the country: deindustrialization, suburbanization and white flight. They came to bear on New York with special force partly because it had developed an unusually generous welfare state after World War II. The public sector expanded considerably, with a network of more than 20 public hospitals, free tuition at City University, an extensive set of programs in the public schools for art, music and athletics, and the largest mass transit system in the country, among other services. New York increased Medicaid and welfare spending at the same time its population and employment were decreasing. This continued into the 1960s during the War on Poverty. But toward the end of that decade, federal funding began to dry up and that laid the foundation for a fiscal crisis.

JS: Anyone who lived in New York in the 1970s, and many who didn't, recognizes that infamous Daily News headline of Gerald Ford telling the city to "drop dead." How did his administration and the broader conservative movement exploit the crisis for their political ends?

KPF: First, a lot of people would say the kinds of programs New York was spending money on in the '60s and early '70s were pointless, foolish and irresponsible. They were things the city shouldn't have been undertaking in the first place. I don't believe the programs were inherently inefficient or a boondoggle. The city was trying to remedy real racial and economic inequality, and it was being pressured to do so by civil rights and rising public sector labor movements. But the right framed this as the city just wasting money, that it was going to no cause whatsoever.

Second, I think conservatives have used the fiscal crisis to say, "Liberalism just can't work." It crystallizes the idea that the welfare state is unsustainable and doomed to failure. I'm not arguing that the financial pressures weren't real, but city officials simply didn't know how they would play out at the time. Talk of their irresponsibility and naivete has dominated the political discourse ever since. It's how Ford described them at the time.

JS: Let's fast-forward to 1975. The banks have stopped lending New York money, and the city establishes an Emergency Financial Control Board to avoid default. Why was this such a seminal moment in American politics?

KPF: The Emergency Financial Control Board was a state agency, and the key thing about it was that it gave control over the city's budget to people who weren't elected by New Yorkers. The mayor and the comptroller were on the EFCB, but the other people were state appointees and included several businessmen. Power was taken out of the hands of the politicians.

JS: What kind of toll did the board take on civic life? It seems as if New Yorkers are still living in a city forged by those budget cuts.

KPF: The fiscal crisis caused the layoffs of tens of thousands of city workers and shrunk New York's workforce by as much as one-fifth. Transit fees rose. City University began charging tuition. Hospitals and clinics were closed. Daycares lost their funding. Drug treatment programs were shuttered. A host of extracurricular school programs were radically diminished or shut down.

What made these cuts so destructive was that they were enacted very quickly in a very haphazard way. There were people being laid off, and then rehired, and then laid off again. It was very chaotic, and part of the underlying message was that the public sector was weak, unreliable and unsustainable. You should not look to the city government to actually build institutions that could make a meaningful difference in your life.

JS: The crisis not only transformed the ways in which we looked at city government, but state and federal government as well. Was this the death knell of the Great Society?

KPF: I don't think that's an exaggeration at all. One of the things that struck me as I was researching this book was the amount of national attention to this story. It wasn't seen as just a local problem or crisis. People thought that the bankruptcy of New York would have a profound effect on the national economy, that it would affect the bond market for cities and states across the country, and that it would make the United States look bad in the Cold War.

JS: They weren't wrong. The Soviet Union played an excellent troll.

KPF: Right, yeah. The New York Times reported on Pravda's gloating about how Moscow would never go bankrupt. European leaders, including the chancellor of Germany, were all very concerned. It really was a national story with deep philosophical implications. Ford himself took it there, saying in his famous speech, "We can't bail New York out. Who will bail out the United States of America? Look at its entitlement programs, and cut them back, and if not, we will be in the same straits as the city."

People saw the crisis of New York as the problems of American liberalism, the inevitable failure of the Great Society, and maybe even the entire vision of the New Deal.

JS: Ford's neglect has been well-documented, but I was surprised to learn that Jimmy Carter was reluctant to send federal funds to New York after the blackout of 1976. To what extent were liberals complicit in this seismic shift toward austerity, and how did the fiscal crisis reshape the Democratic Party?

KPF: Carter did provide some money, but he didn't want to label New York a disaster area, which would have meant federal aid was more easily available. It was similar to Ford, because he wanted to say the upheaval that followed the blackout wasn't a natural disaster. It was the city's fault. But the role Democrats played in enacting austerity both on a municipal and federal level was striking. Within the city, you could see this really clear reorientation of what it meant to be a liberal. Previously there had been at least some skepticism toward the power of business and a feeling of solidarity with social and labor movements. After the crisis, people who identified as liberals began to recognize the importance of recruiting and using government to aid business. They reasoned that unless they did so, there would be no funding for social programs. There was a very clear change in their political rhetoric and their sense of what the purpose of government really was.

This was a battle being fought in the national Democratic Party as well. Carter spoke in the late '70s about how we couldn't look to the government to solve all our problems. There was this desire to define the Democratic Party as not critical of business but open to the market, interested in deregulation and finding ways to reinvent and slim down the state. This all culminated in the Clinton administration, but that shift began with the fiscal crisis.

JS: Donald Trump lurks between the pages of "Fear City" and finally shows himself toward the end of the book, like the creature in a monster movie. How did New York's financial turmoil help launch his real estate career, if not his celebrity?

KPF: Trump was a young man in 1976, but he was already a wealthy guy interested in getting into Manhattan real estate and breaking out of his father's empire of tens of thousands of outer borough apartments. He accomplished that with the Commodore Hotel deal. The Commodore Hotel was near Grand Central Terminal, and it had been owned by the Penn Central Railroad, which itself went bankrupt in 1970. The hotel was becoming decrepit and dilapidated, and it was going to be closed down. Trump proposed a deal whereby he would purchase it, sell it to a state agency and then lease it back with the Hyatt Regency on the condition he paid a reduced property tax. The New York Times actually did a story on this last fall and found that Trump and Hyatt have cost the city upwards of $350 million since the mid-'70s.

In a very literal way, his career in Manhattan real estate was launched by the fiscal crisis and its aftermath. Trump was a canny operator taking advantage of a desperate city, but it's also important to acknowledge the city actively pursued him. These kinds of deals were supposed to be the wave of the future. Officials really thought they would send a signal to the whole business community. Of course they did not generate the kind of good jobs or steady economic development that people thought they would. What they did was divide New York between the extremely rich and the public sector.

JS: Trump speaks often of the "carnage" in the inner city. It's almost like he's describing the worlds of "Escape from New York" (1981) and "Death Wish" (1974). How much is his understanding of urban life a product of that time?

KPF: I think it's still shaping his sense of things. He seems to believe cities are violent, lawless places, and the role of business people and executives is to impose order upon them. Given the pivotal nature of that moment in his own life, maybe that makes sense, but he is channeling that sensibility about the city's dangers, with all of the racism implicit in those ideas, from the '70s and '80s. These weren't fringe ideas at the time, they were embraced by the liberal establishment. Mayor Abe Beame was praised for bringing business executives into his administration. The business sector was supposed to be strong because it wasn't democratically accountable.

JS: Not everyone shares Trump's conception of '70s New York. As you note in your book, there's quite a bit of nostalgia for that broken, dilapidated city.

KPF: The 1970s saw the birth of punk, hip-hop, the downtown arts scene and performance culture. Beyond that, I think there is a real longing for a New York that was less unequal and hierarchical. There was a very open conflict about the nature of the city, and a sense that there was a different future available.

JS: Forty years later, a different future seems almost unimaginable. How does this absolute faith in austerity take root, and what can we do to combat it?

KPF: Those are great questions. One of the criticisms of "Fear City" has been that it fails to lay out some of the alternatives. I would punt slightly by saying I'm a historian, and my job is to illuminate the ways in which certain choices were made. But I'd like to think the book is raising a set of questions about what people owe to each other. How can it be that in the one of the wealthiest cities in the world, in one of the wealthiest countries in the world, we can say, we can't pay for teachers, or we can't pay for homeless shelters, or we can't pay for decent public hospitals? What should people in a city, in a community, in a country, be able to expect from each other?

In my research, I found that fear — of bankruptcy, of chaos and upheaval — made people do things that they otherwise would have thought were impossible. I think the only way to confront that feeling of paralysis is through political organization and action, the articulation of alternatives and the strengthening of citizens' public relationships and connections to each other. Actual politics can save us.

Jacob Sugarman

You can follow Jacob Sugarman on twitter @jakesugarman.

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