Wall Street’s War Against the Cities: Why Bondholders Can’t – and Shouldn’t – be Paid
by Michael Hudson, New Economic Perspectives
The pace of Wall Street’s war against the 99% is quickening in preparation for the kill. Having demonized public employees for being scheduled to receive pensions on their lifetime employment service, bondholders are insisting on getting the money instead. It is the same austerity philosophy that has been forced on Greece and Spain – and the same that is prompting President Obama and Mitt Romney to urge scaling back Social Security and Medicare.
Unlike the U.S. federal government, most states and cities have constitutions that prevent them from running budget deficits. This means that when they cut property taxes, they either must borrow from the wealthy, or cut back employment and public services.
For many years they borrowed, paying tax-exempt interest to wealthy bondholders. But carrying charges on these have mounted to a point where they now look risky as the economy sinks into debt deflation. Cities are defaulting from California to Alabama. They cannot reverse course and restore taxes on property owners without causing more mortgage defaults and abandonments. Something has to give – so cities are scaling back public spending, downsizing their school systems and police forces, and selling off their assets to pay bondholders.
This has become the main cause of America’s rising unemployment, helping drive down consumer demand in a Keynesian nightmare. Less obvious are the devastating cuts occurring in health care, job training and other services, while tuition rates for public colleges and “participation fees” at high schools are soaring. School systems are crumbling like our roads as teachers are jettisoned on a scale not seen since the Great Depression.
Yet Wall Street strategists view this state and local budget squeeze as a godsend. As Rahm Emanuel has put matters, a crisis is too good an opportunity to waste – and the fiscal crisis gives creditors financial leverage to push through anti-labor policies and privatization grabs. The ground is being prepared for a neoliberal “cure”: cutting back pensions and health care, defaulting on pension promises to labor, and selling off the public sector, letting the new proprietors to put up tollbooths on everything from roads to schools. The new term of the moment is “rent extraction.”
So having caused the fiscal crisis, the legacy of decades of property tax cuts financed by going deeper into debt are now to be paid for by leasing or selling off public assets. Chicago has leased its Skyway for 99 years to toll-collectors, and its parking meters for 75 years. Mayor Emanuel has hired J.P.Morgan Asset Management to give “advice” on how to sell privatizers the right to charge user fees for previously free or subsidized public services. It is the modern American equivalent of England’s Enclosure Movements of the 16th to 18th century.
By depicting local employees as public enemy #1, the urban crisis is helping put the class war back in business. The financial sector argues that paying pensions (or even a living wage) absorbs tax revenue that otherwise can be used to pay bondholders. Scranton, Pennsylvania has reduced public-sector wages to the legal minimum “temporarily,” while other cities are seeking to break pension plans and deferred-wage contracts – and going to the Wall Street casino and play losing games in a desperate attempt to cover their unfunded pension liabilities. These recently were estimated to total $3 trillion, plus another $1 trillion in unfunded health care benefits.
Although it is Wall Street that engineered the bubble economy whose bursting has triggered the urban fiscal crisis, its lobbyists and their Junk Economic theories are not being held accountable. Rather than blaming the tax cutters who gave bankers and real estate moguls a windfall, it is teachers and other public employees who are being told to give back their deferred wages, which is what pensions are. No such clawbacks are in store for financial predators.
Instead, foreclosure time has arrived to provide a new grab bag as cities are forced to do what New York City did to avert bankruptcy in 1974: turn over management to Wall Street nominees. As in Greece and Italy, elected politicians are to be replaced by “technocrats” appointed to do what Margaret Thatcher and Tony Blair did to England: sell off what remains of the public sector and turn every social program into a profit center.
The plan is to achieve three main goals. First, give privatizers the right to turn public infrastructure into tollbooth opportunities. The idea is to force cities to balance budgets by leasing or selling off their roads and bus systems, schools and prisons, real estate and other natural monopolies. In the process, this promises to create a new market for banks: lending to vulture investors to buy rights to install tollbooths on the economy’s basic infrastructure.
Elected public officials could not engage in such predatory and anti-labor policies. Only the “magic of the marketplace” can break public labor unions, downsize public services and put tollbooths on the roads, water and sewer systems while cutting back bus lines and raising fares.
To achieve this financial plan, it is necessary is to frame the problem in a way that rules out less anti-social alternatives. As Margaret Thatcher put matters, TINA: There Is No Alternative to selling off public transportation, real estate, and even school systems and jails.
Dismantling public education and police departments to pay bondholders
Local tax policy used to be about education. The United States was divided into fiscal grids to finance school districts, along with roads and bus lines, water and sewer systems. Municipalities with better schools taxed their property more, but this made it more desirable to live in such districts, and thus raised rather than lowered real estate prices. This made urban improvement self-feeding. Lower-taxed districts were left behind.
This no longer is the American way. Education in particular has been demonized. California’s formerly great school system is the most visible casualty of the state’s Proposition 13, the property tax freeze enacted in 1978. The Los Angeles Apartment Owners Association employed its political front man, Howard Jarvis, as a lobbyist to promise voters that little would change by cutting back education and libraries. He claimed that “63 percent of the graduates are illiterate, anyway,” so who needed books. Education and other parts of public spending was frozen as property taxes were slashed by 57% – from 2.5 or 3% down to just 1% of assessed valuation, and were frozen at 1978 price levels for owners who have kept their property. The result is that California’s school system has plunged to 47th rank in the nation.
For neoliberals, the silver lining is that downgrading education makes citizens more susceptible to the Tea Party’s false consciousness when it comes to how to vote in their economic interest. Back when Prop. 13 was passed, for instance, commercial investors promised homeowners that across-the-board tax cuts would make housing more affordable and that rents would fall. But they rose, along with real estate prices. This is the Big Lie of neoliberal tax cutters: the promise that cutting tax will lower costs rather than provide a windfall for property owners – and also for banks as rising rental values are “free” to be capitalized into larger mortgage loans. New buyers need to pay more, raising the cost of living and doing business.
Back in 1978 on the eve of Proposition 13 commercial owners paid half the real estate taxes and homeowners the other half. But now the homeowners’ share has risen to two-thirds, while commercial taxes have fallen to one-third. Bank loan officers have capitalized the tax cuts into larger mortgages, so housing prices have risen, not fallen. Los Angeles Mayor Antonio Villaraigosa exclaimed ruefully last year that “the time is now to address the inequity of Prop 13 that allows large corporate interests to get a windfall meant for homeowners. We are not funding government. We are just decimating government and the services it provides.” He proposed a two-tier property tax, restoring higher rates for commercial and absentee investors.
School teaching is an exhausting occupation. That is one reason why teachers are one of America’s strongest labor unions. Their wages have not risen as fast as their expenses, because they have agreed to take less income in the short run in order to get pensions after their working days end. These contracts are now under attack – to pay bondholders. States and cities are now insisting that bondholders cannot be paid without stiffing their labor force.