The economic misery caused by the nation’s financial meltdown has hit New York especially hard. Since September 2007, the city’s financial sector has lost 13,400 jobs, according to the state Labor Department. An additional 65,000 financial jobs will be gone in New York and its suburbs by mid-2010, says BusinessWeek.
With Wall Street accounting for a quarter of New York City’s salaries, the state stands to lose a boatload of tax revenue. That is horrible news for legislators, who are grappling with a projected $12.5 billion shortfall next year. The total budget deficit could reach a record $47 billion over the next four years.
State lawmakers are understandably searching for a way out of the wreckage and will no doubt make a number of painful budget cuts. But to put the Empire State’s economy back on track over the long term, lawmakers should instead focus their efforts on a bigger, broader goal: expanding economic freedom.
What is economic freedom? It’s the right of individuals to pursue their interests through voluntary exchange of private property under the rule of law.
On this score, New York has a lot of room to improve. For the third consecutive time, the Empire State landed dead last in the Pacific Research Institute/Forbes U.S. Economic Freedom Index, which ranks each of the 50 states according to its relative level of economic freedom.
What did New York do to deserve such an ignominious distinction? The state scored at the bottom in a number of categories because of its confiscatory tax rates, overbearing regulations on businesses and residents, out-of-control welfare spending, bloated state government and overlawyered legal climate.
When times were good on Wall Street, these policy faults escaped notice. Financial services companies bolstered state coffers with the taxes they paid on stellar profits. Tax increases on income and gasoline were swallowed with relative ease.
The excess cash allowed the government to spend lavishly. The state covers more than 5 million New Yorkers – 26% of the population – under Medicaid at a cost of more than $45 billion a year. New York spends nearly two-thirds more than the average state on each Medicaid enrollee.
The high tax rates needed to maintain such massive spending are not an option anymore. The state cannot hope to attract new businesses to replace the financial titans if it does not reform its crushing tax burden.
New York could also dig its way out of the financial doldrums by implementing common-sense legal reforms. The state suffered more than $16 billion in tort losses in 2006 alone. Sensing an environment favorable to lawsuits, more lawyers have flocked to New York since 2004 than to any other state. All these attorneys translate into high tort costs – only three states spend more on torts as a share of their economy than New York does.
That, in turn, translates into a climate that’s hostile to economic activity and job growth, costing the state needed tax revenue. Thriving businesses are critical to the state’s tax base; if businesses and jobs are not growing or leave the state altogether to avoid tort costs and the risks of meritless lawsuits, the government misses out on tax revenue it needs to fund the budget. Also, state and local governments pay out millions of dollars each year as defendants in tort lawsuits. Ultimately, taxpayers are on the hook for these tort costs and higher insurance premiums.
New York could put an end to the legal bloodletting by enacting meaningful reforms, such as monetary caps on damages in medical malpractice lawsuits. Many parts of the state face a shortage of physicians, as doctors flee New York for less threatening environs.
With the collapse of the financial industry, there is no one left to bankroll New York’s out-of-control spending. Now the state’s unfriendliness toward rank-and-file businesses can no longer be ignored.
If lawmakers truly want to rescue New York’s economy, they must undertake bold reforms that will loosen regulatory and tort strangleholds and oppressive tax regimes now in place. Without such reforms, this financial crisis could mark the beginning of a long period of stagnation for New York’s economy.