Add another headache to the next mayor’s growing pile: inflation.
Over the past few months, Americans have seen large increases in the cost of living for the first time in four decades. Inflation also hits the city budget. It does not have to be disastrous for public services – but keeping it in check at the local government level requires a firm stance with trade unions.
The numbers support what people see every day, from McDonald’s raising its menu prices to the record high cost of Thanksgiving. Over the past year, the consumer price index has risen 5.4 percent, but some groceries cost far more: The price of meat, poultry, fish and eggs has risen 10.5 percent.
In contrast, inflation, generally at less than 2.5 per cent, has not been on the mind for the last 2½ decades. The higher cost of living is appalling for older Americans, who remember the high inflation of the late ’70s and early’ 80s that peaked at 14.6 percent in 1980.
For now, the Biden administration’s argument is that inflation will disappear. Things cost more because of “supply chain” problems, code for people who don’t have to work (“strike-tobs”, “stop-tobs” and all that).
Maybe. But the private sector labor force, the biggest factor in inflation right now, is not disappearing. Amazon, which adds another 125,000 workers to its million-strong strength, is actually setting the minimum wage for the country. The company raised its average starting salary in September to $ 18.
This cannot be reversed. People who have worked for $ 18 will not go back to work next year for $ 15 or $ 12 or $ 10. Wages never fall unless there is a full depression.
So what does that mean for New York’s budget? Already, spending rose 3.2 percent this year to $ 104 billion.
Mayor Bill de Blasio has also bequeathed to his successor a lot of kicked cans. To make future years’ deficits – already at $ 4.1 billion next year – seem lower than they would otherwise, they assume Blasio that spending will remain unchanged.
The most important way in which de Blasio “achieves” this is to project the wages of the workers to fall, after growing by 6.2 percent over the past year, to $ 31.4 billion, mainly due to overtime. Next year, they assume the Blasio budget will go down by 1.9 percent and then stay below this year’s levels until 2025.
As it happens, all of the city’s major employment contracts will have expired by next fall. If inflation remains above 5 percent, or rises, labor leaders will want wage increases to compensate – meaning Eric Adams, almost certain to be elected Tuesday, will look for shouts of 15 percent or higher increases over three years.
In 1980, with inflation raging, the Koch administration actually managed to use higher prices to its advantage: Ed Koch agreed to two-year wage increases of 8 percent annually, below double-digit price increases. But the state-run MTA did less well and went on strike after a strike that spring with 22 percent wage increases over two years.
The unions are also likely to ask for an automatic “inflation” escalator in their contracts – something leaders asked for from the ’70s. The city, backed by the state financial control agency, always refused. What will Adams do?
It will have an impact on the health of the city. It may be tempting to say that inflation, even with high wage increases, would be neutral for the city budget. If everyone gets more in pay and things cost more, people will pay higher income and sales taxes.
Then there is the city’s debt of $ 8.4 billion a year in repayment costs for next year, which the city can pay off in cheaper future dollars.
But none of this is guaranteed. Inflation is generally not high for stock and bond markets, which govern the city’s tax base. In the past, the higher interest rates needed to curb double-digit price increases have hurt the wider economy.
Plus, any savings the city would reap on existing debt can be undone by the higher cost of borrowing new money at higher interest rates.
By then, construction costs are already sky-high, meaning the price of the city’s $ 9 billion, four-district prison project is already rising with each day’s delay.
While Adams is celebrating election night, he’d better stay away from reruns of “That ’70s Show.” He may be appearing soon enough.
Nicole Gelinas is a contributing editor of the Manhattan Institute’s City Journal.