New York City and the Sixteenth Theorem of Government

New York City seems to be a contradiction, a place with terrible governance yet also a city of immense riches. How can this be the case?

The short answer is that NYC became rich because, for much of its history, capitalism flourished and government was constrained.

And, as shown in this new video, this allowed the growth of finance.

I could use this opportunity to make some wonky but important arguments about how capital, entrepreneurship, and innovation drive prosperity.

And the video certainly makes the point that the evolution of financial markets made New York City the economic capital of the world.

But I want to focus instead on economic history. Today’s column deals with the quality of governance because the city is actually a good example of my 16th Theorem of Government.

The simple way to think of the city’s economic history is that the private sector was dominant for nearly 350 years. And that is the period when NYC became an economic Colossus.

This does not mean the city had perfect government. Far from it. Anybody who knows the history of “Boss Tweed” knows that there was plenty of graft and corruption (things that seem inherent with government).

But it does mean that the predatory behavior of the political class was within tolerable limits. And this gave the private sector plenty of “breathing room” to create wealth.

To elaborate, the city’s leaders understood the importance of economic growth and mostly focused on financing “public goods” rather than what today are called entitlements.

Here are some excerpts from a book by Roger Starr, who was an columnist at the New York Times in addition to being an author.

Its park system, its highways, the airports that it started…all mark New York’s government as active… Yet its eyes were firmly fixed on economic growth as the necessary prerequisite to a generous interest in the health and welfare of its needier residents. …the plan of 1811…was very successful in its basic intention of stimulating the growth of economic activity… New York City’s government…built the streets without which all economic activity would have stopped. …The city built the docks and bulkheaded the river edges. It built sewage systems… The municipality also built a water-supply system…that has become the envy of the world.

And here are some excerpts from a 2010 article in the New York Times.

Clubhouse politics has been much maligned…, but at least party regulars could claim credit for an organization that, while skimming its share of graft, also rammed through landmark legislation when the public and political interest coincided… As Mr. Moynihan wrote in The Reporter in 1961, the Irish ascendancy began in early 1870s with the prosecution of William Marcy Tweed, the Tammany boss… Mr. Moynihan later wrote that in his tribute to the Irish bosses, …“The Tammany chieftains, like the really good Roman emperors, were master builders of public works,”… He credited the bosses with building (not selling) the Brooklyn Bridge, adding: “And, of course, they had warm feelings for the contractors. Croker got the subways going as a favor to a friend, and made Manhattan in the process.” …Jimmy Walker…could throw up the George Washington Bridge in four years and one month.”

Since both Starr and Moynihan were Democrats, they obviously were not trying to portray pre-1960s NYC as a libertarian Nirvana.

But they both made the point that the city functioned well when politicians spent money on things that at least in theory (and often in reality) generated a positive rate of return.

Yes, there was corruption, but at least residents got things that facilitated commerce.

Sadly, New York City in recent decades has gone downhill. Since I’m a tax wonk, I’ll make the argument that a turning point involved a shift to bad tax policy. And here are two pieces of information that document the city’s decline.

• Between 1957 and 1961, the state’s top income tax rate doubled from 7 percent to 14 percent.
• In 1966, New York City adopted a local income tax, a levy that now has a top rate of nearly 4 percent.

Those two changes obviously made the state and the city much less attractive to investors, entrepreneurs, and business owners.

Also, as one might suspect, higher taxes led to higher spending.

No wonder the city now ranks #48 out of 50 in one measure of economic policy in major cities and ranks #49 out of 52 in another measure.

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Image credit: Fred Hsu | CC BY-SA 4.0.