Does the Fed Love or Hate New York?

To keep the economy from falling into depression, the Federal Reserve has done things no central bank has done before. But how have these policies affected New York?

The Fed’s main policies are twofold: First, it has kept interest rates at near-zero; second, it has conjured up money to buy trillions of dollars of mortgages and Treasury bonds. With this action, the Fed is indirectly serving as lender to homeowners and to the U.S. government, further keeping interest rates down.

The reasoning behind these moves is that more Americans owe money than are owed money. If you can get a cheaper rate on your mortgage, your car note, your student loans and your credit cards, you’ll be less likely to default on the money you owe—and more likely to borrow more to buy a car or pay for a law-school degree. Plus, cheap money allows banks and investors to borrow to speculate in housing, stock and other asset markets, pushing the prices of those assets up and making everyone feel richer and more likely to spend.

So more borrowing keeps the economy going. But what are the real-life effects—good and bad? Herewith are five ways in which Fed policy has changed Gotham, for better or for worse:

1. Empty luxury condos. One57, 432 Park, the renovated Plaza: Manhattan is no longer just home to the rich but home to the absent rich’s money. Citing Census data, the Times reported that half of apartments between Fifth and Park in the 50s and 60s are empty most of the time. Luxury tower construction has displaced neat stores and upended quality of life. But New York wouldn’t see such demand for new towers if it weren’t for zero interest rates. By pushing up stock and bond markets, cheap money has made the world’s rich not only richer but also confused about where to put their money to avoid a crash. So they park it in our sky. 
2. Pumped-up public pension funds. A record-breaking stock market as well as high private equity and real estate returns have pushed the value of the city and state pensions funds to all-time highs. That’s good for now. But in the long run it delays the city and state from coming to terms with the fact that absent a permanent asset bubble, they cannot afford the pledges they have made to future retirees. 
3. Bailed-out budgets. Though Wall Street has 15 percent fewer jobs than before the financial crisis, it has enjoyed record profits in three of the past five years. Those profits have pushed up state and local income taxes, turning budget deficits into surpluses for Gov. Andrew Cuomo and Mayor Bill de Blasio. Without a record-busting Wall Street, de Blasio would not have committed billions of dollars in back pay to teachers in the future. If and when interest rates rise, though, de Blasio will have to lay off workers and cut programs to pay for what he now owes. 
4. The Fed has allowed New York to borrow more for public infrastructure. Gotham and the MTA have each borrowed record amounts of money for capital programs. They’ve been able to borrow so much only because interest rates are so low. Though potholes persist and subways are crowded, they’d be even worse without this D.C.-funded break. 
5. The Fed has brought more global tourists to New York. New York has seen record tourism since 2008 with the biggest growth coming from China, Brazil and other emerging markets. The Fed’s cheap money has helped create a global upper middle class. People who aren’t quite rich enough to buy a luxury apartment here still want to spend a week here. Big-spending foreign tourists have created jobs in hotels, restaurants and in the arts, and the hotel workers’ strong union has ensured that many of these private sector jobs are middle class jobs.

So what’s the verdict? In the private sector, the Fed has made it a little easier to get a job in New York, but a lot harder to get an apartment. In the public realm, it’s given New York a grace period on bills it will eventually have to pay—or cut.

Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.