Gotham's fiscal crisis: lessons unlearned.(New York city )

IT IS certainly a memorable image: New York City mayor Abe Beame standing before the Wailing Wall in Jerusalem and leaving a plaintive, one-word note--"HELP." At that time, 30 years ago, the Big Apple needed all the help it could get. It was in the midst of a financial crisis the likes of which had rarely been seen in any American metropolis before. At that point, not even a spectacularly effective mayor could have pulled the city back from the brink, so all the spectacularly ineffective Beame could hope for was an answer to his prayer. He didn't get it.

Thirty years later, much has changed for the better in New York. But since the April 1975 fiscal crisis the world's financial capital has continued to lurch from one fiscal crunch to another, up to the present day. Sometimes the symptoms have been more obvious, but even when it has appeared healthy the city's disease has always been lurking there, just under the skin, waiting to flare up at any moment.

"Syndrome" might actually be a more apt description of the situation than "disease." New York's affliction has consisted of a complex web of different, but closely related, ailments. Dissecting Gotham's budget, it is hard to know where the malign influence of the city's over-powerful civil service unions leaves off and the crushing burden of its overgenerous social welfare spending takes up. The malevolent effects of City Hall's growth-stifling taxes and its cringe-inducing bonding practices are practically inseparable.

All of which might lull other civic leaders into a delightful bout of Schadenfreude. The only problem is that New York's syndrome is spreading, and not just to other cities and towns but to state capitals, as well. The news out of Albany and Sacramento these days sounds eerily similar to New York City's turbulent fiscal history. Therefore, with three decades of history under the Brooklyn Bridge it is now possible to put the Big Apple under the microscope. And with other cities and states starting down the same path to financial ruin, it is doubly important to analyze the New York experience--it provides a compelling cautionary tale for local leaders who care to listen.

A bad case of the "British disease"

New York City can be seen as the first large-scale American outbreak of what used to be called the "British disease" (France and Germany are also afflicted at the moment)--the economic sclerosis suffered by liberal democracies held hostage to the demands of politically powerful labor unions and social service providers. A more technical term for this is "distributional politics," and Mancur Olson has provided a particularly useful framework for understanding the nature of the problem. Relative prosperity and the illusion that a local economy can sustain the higher taxes that go with bigger government encourages weak government leaders to offer small concessions to special interests, such as municipal unions or vocal advocates for the poor. These concessions snowball over time, creating an ever-larger constituency for government spending and making it increasingly difficult to turn back the clock. New York is a classic example.

Gotham certainly has an overinflated social service network that contributes to its budget woes, but of the two elements of the "British disease," labor is the older and bigger problem. It results from a mix of ideology and a politics organized around the systematic purchase of votes. A string of New York mayors either found it convenient to expand the unionized municipal work force or wilted in the face of union strong-arm tactics.