Don’t Believe the NYPost — New York Mayor de Blasio Isn’t Headed for Budget Disaster

The NYPost argues that major New York-based financial firms will provide a shock in the coming year to New York city’s budget. This will be in the form of a sharp drop in the revenues bankers contribute to the budget in the form of corporate taxes and taxes from their employees’ bonuses.

Large institutions, such as JPMorgan Chase and investment bank Goldman Sachs, are still profitable according to the most recent earnings reports covering the second quarter of 2016. But they have in fact been undergoing a consolidation over the past year due to sluggish US economic growth and low interest rates that are a drag on profits, especially from fixed income trading.

Mayor de Blasio seems perfectly aware of this trend and even makes a point of commenting on it in his recently approved budget. His balanced budget was speedily adopted by the city council with little debate at the end of June in advance of the July 1 start of New York’s budget year. With the respect to the consolidation of the financial services sector, de Blasio’s budget acknowledges:

“Banks are still looking to cut costs and staff, and bonus reserves based on 2016 activity are already being lowered. After the 
first quarter, the compensation specialist, Johnson and Associates, forecasted that bonus pools could be cut up to 20 percent, 
particularly in fixed-income, currency and commodities (FICC) operations. Goldman Sachs is moving to cut about 10 percent 
of its debt-trading staff this year, well beyond its typical five percent annual cull. It is one of the last large banks to capitulate to 
weakness in FICC…”

De Blasio’s budget then goes on to note that Morgan Stanley, Bank of America, and Credit Suisse have already undergone downsizing. This shrinkage in the financial services sector is likely behind the budget’s projection of only a very modest increase in revenues from taxes from $53.8 billion in FY2016 to $54.6 billion in FY2017. But we can’t tell for sure because New York’s budget documents don’t contain an explanation to the public of the factors such as a down turn in a major industry that might influence revenue estimates — which would be a welcome addition in future budgets. That said, substantial downsizing in the industry has already occurred, and should revenues fall below projections in the coming year, the budget contains a reserve fund of $1 billion for unanticipated shortfalls during fiscal year 2017.

While the NYPost’s prediction of imminent budgetary disaster might be alarmist, and in part driven by concerns emanating from the financial sector about its own profitability, what it does underscore is that the impact of low interest rates on the banking sector bear watching. Second quarter earnings reports for 2016 indicated that most major banks did unexpectedly well as a result of Brexit and of the cost cutting measures they adopted. But it is unclear what the impacts on banks will be of relying indefinetly on low interest rates to bolster the US economy. Accomodative monetary policy has been a second best policy that has been necessary in the face of political gridlock and resistance to the appropriate use of fiscal policy. And what the US economy truly needs is to be served a bracing shot of fiscal stimulus followed by several chasers.

Larry Summers provides a good idea of what a bracing shot might consist of in this must-read argument laying out the benefits of coordinated fiscal stimulus: http://voxeu.org/…/how-secular-stagnation-spreads-and-how-i…. His analysis is notable for laying out the mutually reinforcing benefits of a fiscal stimulus for the US, for other industrial countries experiencing sluggish growth, and for emerging markets. And Jared Bernstein provides a useful description of what some of the chasers that might benefit long term growth in the US might look like here:http://www.washingtonpost.com/…/the-economy-didnt-really-c…/.

Whether or not one believes that such a fisical stimulus as described above might be necessary is very much tied to how one might view Summers’ concept of secular stagnation, and its implications for such things as whether forces drinving interest rates low can be expected to persist. Last year Brad DeLong wrote the ultimate ‘guide to the fight’ on the debate over secular stagnation, found here: http://www.milkenreview.org/…/the-scary-debate-over-secular…. DeLong termed the debate over secular stagnation as one of the most important in economics, and it would be interesting to know almost a year later if we are able to declare any winners on any points covered in the fights — and thus have a clearer sense of policy responses to pursue.