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Municipal Debt Crises: Some Historical Perspective

Tuesday, March 29, 2011

Lessons from the Big Apple merit keeping in mind today.

What should happen when a government runs out of money and no one will lend it more? We all know that many U.S. municipalities and states are facing severe financial pressures, including huge unfunded pension commitments. As lawmakers in Wisconsin recently stepped up to address the fundamentals of the problem, they  generated some interesting crowd behavior in the state Capitol.

But if you think the antics of the Wisconsin public employee unions were something new, they were not.

Here is some instructive historical perspective:

• “In the spring of 1975 the city of New York could not find any takers for yet another offering of its notes. Mayor Beame was forced to plead publically for the investors to buy the notes.” They didn’t.1

But if you think the antics of the Wisconsin public employee unions were something new, they were not.

• “Something had to be done. But what? When Beame called for city workers to forgo a 6% pay increase the city’s Municipal Labor Coalition responded by bringing tens of thousands of protestors into lower Manhattan in a raucous protest against First National Bank (now Citibank), which union leaders had declared ‘the number one enemy’ because it had expressed doubts about the city’s solvency. Beame’s program of limited layoffs sparked a wave of sickouts, protest strikes, and walk outs by city workers performing essential services. City Hall itself came under siege. Laid off cops blockaded the Brooklyn bridge, hurling beer cans at their still uniformed brethren and letting the air out of tires to form a huge traffic jam.”2 

• “The firemen’s and policemen’s unions published a leaflet which they distributed to tourists. Titled ‘Welcome to Fear City,’ with a skeleton’s head on the cover, the pamphlet advised visitors to New York to stay indoors after 6 pm, avoid public transportation and ‘until things change, to stay away from New York.’ The sanitation workers went on strike illegally. They threatened to turn New York into ‘stink city’ and yelled from their picket lines, ‘Wait till the rats come!’” 3

Many New York politicians, intellectuals, and financial figures argued that the federal government must offer a bailout—a viewpoint that taxpayers in the rest of the country did not share.

What if there was no bailout? What would a default mean? Here is what some distinguished men thought a generation ago:

Felix Rohatyn announced that a New York default would be evidence of ‘the failure of capitalism.’ George Ball topped him by insisting that a New York default would constitute ‘a victory for world communism.’ David Rockefeller [the chairman of the Chase Manhattan Bank as it was then], which held the most New York paper, warned that the entire international financial system would disintegrate if New York defaulted.4

President Gerald Ford and Treasury Secretary William Simon famously turned down a bailout, and New York did default, but the world financial system did not disintegrate. However, New York City had to institute budget cuts and serious financial reforms.

Alex Pollock is a resident fellow at the American Enterprise Institute.

FURTHER READING: AEI recently hosted a conference entitled “Municipal Debt: Learning from Municipal Financial Crises.” Pollock has recently written “Can Our Last International Advantage Withstand the Dodd-Frank Act?” “Living in the Political Wake of the Bubble,” and “Why the Fed Cannot Regulate ‘Systemic Risk.’” He has discussed “Taking the Government Out of Housing Finance: Principles for Reforming the Housing Finance Market,” explained “The Political Finance of Covered Bonds,” and offered “A Dozen Ideas: What to Do about Fannie and Freddie.”

Footnotes

1. E.J. McMahon and Fred Siegel, “Gotham’s Fiscal Crisis: Lessons Unlearned,” The Public Interest, Winter, 2005.

2. Ibid.

3. William E. Simon, A Time for Truth, 1978, Chapter 5.

4. Ibid.

Image by Darren Wamboldt/Bergman Group.

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