Rather than a tax and spending binge, how about a campaign for competence?
The American Rust Belt is full of cities, such as Cleveland, Detroit and St. Louis, that are shadows of their past selves. As these places declined, there were crucial moments when large employers and wealthier citizens decided that enough was enough. Between 1970 and 1980, Detroit’s population dropped by one-fifth. At the end of the decade, Dodge shuttered its factory in Hamtramck that had once employed more than 30,000. Will the exit of Ken Griffin and Citadel appear equally momentous to the history of Chicago in 50 years? Will San Francisco’s claw back to safety under moderate Mayor Dan Lurie come to resemble New York’s resurgence after 1990?
New York faces a similar set of questions. Mayor Zohran Mamdani ran as a full-throated redistributor eager to take from the rich and fund everything from groceries to housing. Yet his agenda faces constraints of law and constraints of location. Mayors don’t get to set income tax rates, but taxpayers do, because they can change where they live. Moreover, the mayor’s announcement on May 28 of a “Commission on Government Efficiency, or COGE, a Charter Revision Commission tasked with making City government work better for New Yorkers,” suggests he may understand that the most successful left-wing mayors, from Milwaukee’s sewer socialist Daniel Hoan to New York City’s own Fiorello LaGuardia, were also fantastic managers.
New York’s economy would face fewer risks if the mayor coupled his progressive agenda with a campaign for competence that improves the quality of City services for rich and poor alike. This campaign could target spending more efficiently, for instance, by providing transit passes for people who are currently looking for work, rather than giving everybody free buses, or by targeting childcare spending on the children of working low-income residents. Better measurement of outcomes, like police respect for citizens, would make it easier for Mamdani’s managers to achieve his goals. Instead of funding city groceries, the mayor could push for one-step permitting for the city’s less wealthy entrepreneurs, which would be a blow for both upward mobility and delicious food. Deputy Mayor Dean Fuleihan enjoys a strong reputation as an administrator. Perhaps he could lead a big push to cut costs.
The redistributor’s dilemma
Mayor Mamdani faces the redistributor’s dilemma. How much can he burden New York City’s wealthier taxpayers before they depart for sunnier, lower-tax climes? All local leaders who are keen on redistributing from rich to poor face the challenge of figuring out just how much their tax base is willing to endure.
Harvard Ph.D. students Matthew Jacob and Rene Livas examine the impact of post-World War II changes in Philadelphia’s wage tax on the location of jobs. They compare the workplace choices of city residents, who face the city’s wage tax no matter where they work, and suburbanites, who pay the tax only if they work in the city. Jacob and Livas look at how changes in Philadelphia’s wage tax impact the difference in the probability of working in the city between people who live right inside and right outside the city border. They find that “a 1% increase in the tax rate reduces suburb-to-city commuting by 6.39%,” which should surprise no one who has watched the hedge fund industry blossom in the lower-tax suburb of Greenwich, Connecticut.
While the number of millionaires in New York City has remained steady over the last five years and increased from 2010 to 2022, the share of America’s millionaires living in the city fell by about one-third from 6.5% to 4.2% over those same 12 years. The Citizens Budget Commission estimates that if “New York State and City had the same share of millionaires in 2022 as they did in 2010, the State would have received $10.7 billion more in PIT (personal income tax) revenue, and the City $2.5 billion more.”
But the difficult part of the redistributor’s dilemma is that the tax base’s willingness to suffer depends on local economic conditions that are largely outside the mayor’s control. Like Mayor Mamdani, Mayor John Lindsay was full of charisma and progressive plans, and Gov. Nelson Rockefeller mostly shared this progressivism. In 1957, the year before Rockefeller was first elected, the top State income tax rate was 7%, and New York City had no income tax. By 1973, when both Rockefeller and Lindsay stepped down, the top State income tax was 15%, and the City had its own income tax, which topped out at 3.5%. Despite those high tax rates, the City lurched into a fiscal crisis that almost turned into a bankruptcy.
If New York City’s economy had been stronger, the scope of Lindsay’s ambitions would probably have been manageable. Unfortunately for Lindsay, his term coincided with massive deindustrialization and spiraling crime rates. Between 1950 and 1976, overall manufacturing employment in New York City declined from just over 1 million to 544,000, and employment in the once-mighty apparel industry fell from 340,000 to 155,000. Social trauma accompanied economic dislocation, and the number of murders in New York City rose from 634 in 1965 to 1,680 in 1973. The city’s image morphed from the urban playground seen in “Breakfast at Tiffany’s” or the Doris Day-Rock Hudson romantic comedies to the hellscapes of “Taxi Driver” and “Escape from New York.”
While the New York City of 1970 couldn’t handle the high taxes and overwhelmed policing of the Lindsay Era, the strong New York City economy at the turn of the millennium stoically endured the terrorist attacks of Sept. 11, 2001.
So is 2026 more like 1976, when the state’s unemployment rate hit 11.3%, or more like 2000, when the unemployment rate dropped to 4.1%? Despite being the port of entry to the U.S. for a once-in-a-generation plague and experiencing a subsequent epidemic of empty offices, the city is holding up well. In March 2026, the state’s unemployment rate was 4.6%, and the New York City metropolitan area’s unemployment rate was 4.9%. The New York City Economic Development Corporation (NYCEDC) tells us that the metropolitan area experienced faster employment growth than the nation in 2022, 2023 and 2024, and that the area’s office vacancy rate is down to 15.5%, which is far below Dallas (26.1%), Atlanta (26.8%) and San Francisco (35.7%). Moreover, the city experienced only 309 murders in 2025, which was fewer than half of the number of murders at the start of the Lindsay Era.
The sharks circling New York City’s economy
Yet risks remain, from a massive decline in human office work (if the artificial intelligence boosters or work-from-home boosters are right) to a massive stock market slump (if the artificial intelligence boosters are wrong). A redistributive agenda that takes the city’s highest earners for granted could go badly wrong if one of those risks becomes reality.
Stock prices are high relative to earnings, which, like pride, often comes before a fall. Among the companies in the S&P 500, the ratio of stock prices to earnings was 27 in early May 2026, which is much higher than the long-run average of about 17. Nobel Laureate Robert Shiller prefers to cyclically adjust earnings by averaging them over the last decade, which produces a price-to-earnings ratio of 40. By that measure, stocks are pricier than they have ever been, except for the dot-com bubble era between January 1999 and September 2000.
There are also economic reasons for anxiety, which echo those held by the naysayers of the dot-com bubble. In 1999, Warren Buffett wrote that “the products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors,” which implies that even a revolutionary technology will not yield outsize profits if there are few barriers to competition. If four or five major AI firms end up selling a similar service that costs far more to develop than it does to deploy, then they are likely to lose money. Standard economic logic suggests that market competition will push prices down to the costs of deployment (“marginal cost”), which will surely fall below the price needed to earn a profit (“average cost”). I have no confidence in my crystal ball, but the commodification of AI is only one scenario among many in which the majority of AI mega investors lose their shirts. If AI follows the kind of winner-takes-all pattern that enriched Google and Facebook, then only one of the firms will enrich its shareholders.
What would a stock market crash do to New York? According to the NYCEDC, “In the 2000s, Finance and Insurance accounted for 21.1% of the city’s GDP; that rose to 22.5% in the 2010s, and has averaged 24.2% so far in the 2020s.” Those figures understate the region’s dependence on finance, because GDP also includes nontraded services, such as “retail trade” and “health care and social assistance,” which bring less outside money into the system than traded services like finance. Nonetheless, the 2001 internet stock bust did relatively little to the city, partially because other assets, especially those associated with real estate, continued to boom until 2006. The busts of 1929 and 2006 and the stock market malaise of the mid-1970s were much tougher on New York. Employment in this sector has already begun to shrink.
The city may be as vulnerable to AI success as to AI financial failure. The region has 370,000 workers in finance and insurance, but more than 1 million New Yorkers toil in the four sectors called “information,” “management of companies and enterprises,” “professional, scientific and technical services,” and “administrative and support services.” These office workers are responsible for New York’s relatively low vacancy rate, but their jobs are surely vulnerable to both AI and working from home.
For 30 years, I have argued that technology is more likely to make face-to-face contact — and the cities that enable that contact — more important. AI could certainly make the knowledge learned at the water cooler and over drinks after work more, not less, valuable. Yet despite my optimism about the power of live human collaboration, it would be foolish to ignore the AI-related risks to New York City’s office-based economy. New York City seems especially vulnerable because of the enormously high costs of doing anything from buying a home to building a subway.
We should marvel at New York City’s resilience over the last five years, or indeed the last 45 years, but we shouldn’t forget that New York has grown far less than its lower-cost Sunbelt competitors. Between 2001 and 2024, the real value of output went up by 61% in Manhattan and 89% in Harris County, Texas, which contains Houston. Since 2000, the population of New York City has grown by about 6%, and the population of Houston has risen by 23%.
Houston is, in a sense, New York’s political opposite. It has no state or city income taxes, it has limited land-use regulations, and its public sector unions aren’t allowed to engage in collective bargaining. The power of private-sector housing supply is well illustrated by the fact that red-state Texas does a much better job at providing low-cost housing for ordinary Americans than blue-state New York. According to the National Association of Realtors, the median price of a home sold in the first quarter of 2026 was $331,000 in Houston and $750,000 in greater New York.
If New York’s information-intensive economy continues to work magic, then the city will still thrive. But if asset markets crash or AI radically reduces the need for urban office workers, then the low costs of places like Houston are only going to look more appealing to businesses and their employees. If a local downturn were coupled with a public push that radically raised costs for businesses and the rich, then this could turn into one of those moments of swift urban decline.
The campaign for competence
The best way to avoid that risk is for Mayor Mamdani to model himself after the most capable progressive mayors, like Hoan and LaGuardia, and start a campaign for competence. Many of his more ambitious redistributions have been stymied by political realities. He cannot unilaterally raise taxes on the rich, and Gov. Kathy Hochul understands that New York is “in competition with other states who have less of a tax burden on their corporations and their individuals.” Their jointly proposed “pied-à-terre tax” is not a particularly sensible policy (since nonresident owners already pay full property taxes and impose little cost on City or State government), but at least it creates fewer economic risks than increasing income taxes. Moreover, a reasonable estimate is that the tax will raise between $340 million and $380 million, which is tiny relative to the City’s budget of $125 billion.
The enormous size of that budget and the political limits on tax increases mean that the mayor can do far more for low-income residents by improving the efficacy of the existing spending than by fighting for dribs and drabs of extra revenue, more by reducing the regulations that hold back economic vitality than by providing public grocery stores. Here are five ideas that could help turn the zero-sum redistribution agenda into an agenda to expand the well-being of all New Yorkers in ways that particularly help lower-income New Yorkers.
First, target spending. Instead of trying to make all buses free, the mayor could provide free transit passes for jobless people who are actively looking for work. Oluchi Mbonu (my former Ph.D. student) and Seth Chizeck evaluate a program that randomly gives out free and reduced-fare transit passes in Allegheny County. They found little positive impact on the overall population, but for the initially unemployed, “free fares cause a 3.5 pp (percentage point) increase in the likelihood of being employed and a $2,845 increase in total earnings during the first six quarters.” If these results held up in New York City, the program could easily pay for itself with increased taxes and reduced reliance on City services. The mayor could also improve the currently weak targeting of road repaving to make sure that the City repaves the roughest streets first.
Second, the mayor could improve the quality of policing through better measurement. Management guru Peter Drucker famously declared, “What gets measured gets managed.” We measure crime much better than we measure community satisfaction with treatment by police officers. The mayor would find it easy to cajole left-leaning donors to fund an independent, repeated survey that asks ordinary people in precincts throughout the city about their experiences with police. Commissioner Jessica Tisch could then use that data to demand that her captains do more to ensure police treat every New Yorker with dignity and respect.
Third, instead of funding public groceries, the mayor could do more to unleash the immigrant entrepreneur. Current City regulations impose much greater costs on lower-income entrepreneurs than on rich entrepreneurs. It is easy to start your internet or AI phenomenon, since most of the action occurs in cyberspace. It is far harder to start a grocery store in the Bronx. The Mayor should level that playing field. He has already started along this path, and that is good, but freeing the food vendor will require a long administrative battle.
Despite heroic efforts over many decades to streamline permitting, starting a business in New York City still requires far too many steps. The mayor should create a one-stop permitting office with sufficient linguistic capacity to handle New York’s rich cultural mosaic. This has often been promised but never delivered. He should keep that office accountable by measuring the time to permit and insist on continual improvements in speed.
Fourth, the mayor should pivot from promising to deliver free, universal childcare for every child over six weeks old to improving the quality of educational services (both pre-K and in upper grades) for the children of working low-income residents. The younger the child, the more expensive the care. We have long known that pre-K programs, like Head Start, can achieve remarkable results for children of lower-income families, but providing universal care for all children will mean enormous spending on middle-class and upper-middle-class households. Targeted and regularly evaluated interventions deliver far more value than universal entitlements.
Finally, Dean Fuleihan has a strong reputation as a capable administrator. The mayor should charge him with producing a plan to get more out of every dollar spent by the City, rather than relying on a network of “chief savings officers.” This program appears to have identified $1.7 billion worth of savings, which is far short of the budget gap. I also worry that his COGE will lack the unified leadership that is almost universally required to make tough administrative decisions. Budget cuts by lower-level administrators didn’t solve New York’s mid-1970s fiscal woes. Felix Rohatyn and the State-created Municipal Assistance Corporation did. A strong enough budget cutter within the City government today should be able to follow the Rohatyn path to fiscal health.
New York City has shown remarkable resilience in the face of a terrible pandemic and the rise of working from home. Yet the pace of technological change means that there are plenty of things that could still go wrong. If New York’s taxpayers experience the combination of an economic meltdown and a government that is determined to use them as a piggy bank, then the City could re-experience the traumas of 1975. The city and its economy will be much safer if the mayor’s redistribution is coupled with a big push to use City dollars more efficiently.
