How will American cities be changed by the pandemic? A Q&A with Nicole Gelinas

Nicole is a senior fellow at the Manhattan Institute and a contributing editor of City Journal, where she writes on urban economics and finance. She is also a columnist for the New York Post and the author of “After the Fall: Saving Capitalism from Wall Street — and Washington.”

What follows is a lightly edited transcript of our conversation, including brief portions that were cut from the original podcast. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Pethokoukis: Let’s say we get a vaccine for the coronavirus tomorrow and all the doses are distributed in a very quick and efficient manner. What is the long-term impact on New York City from this pandemic?

Gelinas:Well, I think the long-term impact would extend far beyond getting a virus. I think that the last three months have changed people’s behavior, maybe not permanently because I guess nothing in this world is permanent, but certainly indefinitely. We’re seeing more structural change than we’re seeing temporary change. And what does that mean? For example, are we going to come back to a world where white collar workers come to an office five days a week from 8:00 AM to 6:00 PM? That seems highly unlikely right now.

Even if the vaccine came into being tomorrow and New York City said, “Okay, everyone come back to work,” I think it’s fair to say that a lot of people have found that they are pretty productive working at home. It’s not that they have to work at home five days a week, but we may end up going to a model where people come in two days a week: one day to have external meetings and one day to have internal meetings, doing the rest of their work at home. Or even three days a week, which would be a tremendous change for the foot traffic of Manhattan.

The entire economic model of Manhattan is built on moving four million people to the island of Manhattan every morning — most of them on public transit — and moving those four million people out at the end of the day. That is really something that is at long-term risk.

The entire economic model of Manhattan is built on moving four million people to the island of Manhattan every morning — most of them on public transit — and moving those four million people out at the end of the day. That is really something that is at long-term risk. So this pandemic is more like the invention of the car than it is like a snowstorm, in terms of its impact on the city.

So that, I think, presents a problem. If you have fewer people coming in, how are they going to get in? Are they all driving in their cars?

About 76 percent of the people who come to Manhattan every day take some form of public transportation — most of them on the subways, buses, ferries, or bicycles. Bicycles are not really public transportation, but they depend on people being densely packed in together, which in turn depends on transit. If we went back to last fall and only 10 percent of the people who took transit decided to take cars into the city instead, that would mean a 30 percent increase in Manhattan traffic. And if we look to just the impact of tens of thousands of new Uber and Lyft cars that arrived a decade ago, that alone basically meant that Manhattan traffic came to a standstill over the past half-decade. To think about another 300,000 cars versus a few tens of thousands of cars — it just doesn’t work in a dense environment.

So there are a lot of very difficult-to-answer questions: Do you want to discourage people from driving? Well, normally you do, but what if you’re discouraging them from coming back to the city altogether, and maybe you don’t want to discourage that? But even if they drive, they’re not going to be able to drive because there’s not enough room for them. So there are a lot of questions whose answers create new questions.

Among the people who were thinking about how cities are going to weather this crisis and what they look like on the other side, I think there was this instinctual idea that cities are over: “We’re all going to move out to the suburbs. People in the suburbs are going to move out into the exurbs, and it is just going to be catastrophic for major cities, not just New York, but major cities around the world.” And my flippant answer was, “Well, people have been coming to cities and dense urban areas for a long time.” That cities or densely populated regions are all going to clear out, I think, seems unlikely.

I think people are still going to want to live in dense areas. I think people are still going to want lots of restaurants. People are still going to end up going to concerts. We’ve had pandemics before. There are these big trends over hundreds or thousands of years, and they’re not going to be reversed. That’s my flippant answer. But what you’ve just described is a city, and arguably the most important city in the United States, that isn’t going to work the way it used to. And we don’t know how it’s going to work, and we assume it needs to work. But like you said, there are a lot of questions. Where are we on the answers? Or do we even know the right questions?

Yeah. I think you raised a lot of interesting stuff packed in there. And when we think about the world versus America, well-planned cities can survive this. But are any American cities well-planned? Particularly a city that fits the definition of a city where most people rely on public transportation, not cars. And then under that definition, a lot of American cities aren’t really even cities. They’re very car-dependent.

But if we think about what it means to be a well-planned city — what places like Tokyo and Seoul have done, not perfectly, but continuous testing of asymptomatic people, spot shutdowns, for lack of a better term, when outbreaks reappear, competence contact tracing — that is not what US cities are doing. What we’re doing is basically calling people up and hoping they might remember who they’ve been in contact with, not really requiring them to divulge their contacts. It’s not really contact tracing, like what Seoul and other cities are doing.

And also having a public that is willing to comply with these measures, which is a problem as we see both in dense cities in the US and in more suburban and exurban places in the South and southwestern US. So on any of these measures, are we fitting the definition of well-planned cities? Probably not.

And I think that goes to longer-term issues, too. How are we going to fund a transit system that has lost 90 percent of its ridership now and probably will lose more than half of its ridership over the next couple of years? Other cities have national governments that are willing to provide this funding. So far, we really don’t. And so I think these are important issues when we talk about whether urbanism works or not.

Well-planned, well-governed urbanism works. The other kind doesn’t.

Well-planned, well-governed urbanism works. The other kind doesn’t. And I would also say that there’s always this impulse to claim New York will always bounce back. Actually, that’s not true. We went through 15 years between the late 1960s and the early 1980s — which was the last time we had to make an adjustment to a big structural change in the economy, which arguably this is — and we didn’t do it very well. We got very, very lucky in the early 1980s when Wall Street took off and yuppies started moving to the city. There were a lot of tax dollars requiring few tax services, which helped to rebuild the tax base to deal with other issues like crime and education a decade later. Will we see the return of both good economic luck and demographic trends that work in our favor where people want to live in these cities? These are open questions.

I suppose people have short memories, but I have a feeling people are going to remember this pandemic, and it will sit inside their heads when they think about where to live. I don’t think they’re just going to quickly put it behind them. And to feel confident living in a dense area, especially if you have some flexibility about where you live, requires your confidence in the event of another outbreak — and there have been several of these so far in the first two decades of the century. That’s going to require us to be very good about getting tests up and running, being able to trace people, and all of these kinds of things that we’ve seen in places which have gotten this virus under control.

Why would I be confident at all that our reaction next time will be better? We already have some 120,000 dead, so I would want our reaction not just to be modestly better, but better by orders of magnitude if I’m going to think about living in that kind of area, if I have a family. I guess I’m becoming more and more pessimistic about American cities as we chat.

Yeah, I think in the long-term — and again, long-term can be a long time, like more than a decade — cities can adjust. But one of the keys to that adjustment is price adjustments. I think we’re going to need, and we’re already starting to see the inklings of, a discontinuity in prices in terms of a reset of what it costs to rent commercial office space. Or what does it cost to rent or buy a market-rate apartment in New York City? What does the retail space go for? And it’s very difficult to view this price adjustment on a large scale because of the amount of debt that is in the economy.

If I look at the office building across the street from me right now, they’ve got a billion-dollar mortgage. The mortgage doesn’t amortize, so basically they’re paying interest for 10 years. At the end of the 10 years, they have to come up with a billion dollars or convince somebody else to lend them a billion dollars. Their major tenant was actually moving before this pandemic to a new, heavily-subsidized office development called Hudson Yards. (It’s probably a bad decision for the city government to subsidize office development when the vacancy rate was already 10 percent.) And since the pandemic, their second biggest tenant, which is a global bank, has decided all of their overseas employees, including their US employees, are going to be working at home. So you’re looking at a building that can’t physically disappear but is really going to need to adjust the rents down to attract tenants that might want to take a different kind of risk than a global bank wants to take. But that probably requires defaulting on the mortgage.

We have hundreds of buildings in this position. You’re probably looking at hundreds of billions of dollars of commercial real estate debt adjustments and defaults. Same thing on the retail side. Same thing, frankly, on the market-rate housing side. So the faster we can do these price adjustments, the more you entice a new group of people to say, “It’s 30 percent cheaper to live and work in Manhattan, so why not give it a shot?” And, of course some of that contributed to the resurgence of the 1980s: people buying cheap houses and fixing them up. But to the extent that we want to extend and pretend our way through this crisis, that is going to be bad for cities. There will be a lot of empty real estate at nominally expensive prices.

How was New York doing before this crisis?

Well, the sort of traditional, superficial way of looking at the city is that things had never been better. We had a near-record population, near-record transit ridership, and a record four million private-sector jobs. But I think there were a lot of problems under the surface.

First of all, you see all of these very poorly managed racial tensions. The city and state have had basically Democratic government for 40 years but still didn’t make the most obvious reforms on things like releasing police disciplinary records. So when this killing of George Floyd happened on Memorial Day, it was maybe surprising, but maybe not so surprising, to see how little goodwill there was between minority communities and the political power structure in New York City.

But I think beyond that, which is obviously a critical issue right now, things like the record amount of city spending that has gone on under the de Blasio administration and, frankly, under the Bloomberg administration before it. The city now wants to be like the employer of last resort, and not furloughing people and not laying people off. And that’s admirable, but they set aside almost no reserves to do this. I mean, if we had set aside one percent of city tax revenues over the past 10 years, we would have a $10 billion budget cushion right now and it would be much, much easier for us to make decisions during this crisis. But we went into this with virtually no reserves.

We had progressive government during the biggest economic boom that we’ve ever seen really, and a boom that benefited New York City in terms of the Wall Street bailouts flowing into New York City during the early 2010s. New York City is left today with very little to show for that in terms of budgetary cushion or investments in infrastructure that would have made us stronger.

Of course, you have people in Washington who, listening to what you’ve just said, would say, “It’s time for some tough love for New York City and a lot of other cities around the country. We’re not going to keep the pretend game going. Don’t ask for help. You need to make tough decisions. Well now, this pandemic should be a catalyst for making hard financial decisions. You’ll get nothing from us.” There’s certainly a lot of people with that attitude. Why are they wrong?

Yeah, I think it’s quite reasonable to say we cannot bail out these cities and states 100 percent. You look at a place like Illinois where one of the state legislative leaders is saying, “Well, we need our pensions bailed out.” Well, you haven’t funded the pensions for 30 years so that’s a preexisting problem. I think there’s no question cities and states will need more aid from Washington, and also, frankly, not just cities like New York. I mean, Florida, Nevada, Arizona, and Texas are starting to see record hospitalizations and also economies that are heavily dependent on domestic tourism. The top markets for Florida tourism and South Carolina tourism are New York and California. So the economic impacts of this are not going to stay in-state just like the actual pandemic is moving from state to state in its acute phase now. But what should a federal rescue look like?

And what expectations should the rescuers have of the rescuee?

Yeah, I think cities and states should start to draw up menus of essential services that they need to maintain their tax basis, and Washington should pay some share of today’s cost of those essential services. Not pensions, not long-term costs, proportionate to how heavily they’ve been impacted by the pandemic, so your basic police, fire, sanitation, things like keeping public parks open so that kids have a place to play. What is the specific cost on a day-to-day basis of those services? Adjust that for some kind of regional cost of living, but not for things like, “Well, you can retire after 22 years and get a 50 percent pension, but we haven’t put the money away to save for that pension.”

And I also think that Washington should be funding a sales tax holiday. I mean, a full year sales tax holiday for 45 states would be about $500 billion. If we were going to say, “Let’s have a sales tax holiday for the month leading up to Christmas, where Washington just underwrites the cost of the state and local sales tax,” maybe that would be a big help to some of these retailers who really can’t afford to lose the Christmas season or they’ll be out of business forever.

Let me just move beyond that sales issue and sales tax and bailouts. I’ve written a lot about cities, and  I view them as these high-productivity engines of the economy. And we’ve had many guests on the podcast who have talked about how to make cities more productive, how to make them denser, some of which looks silly now since we’re so worried about density. But if you think cities are really important, not just intrinsically important to the people who live there, but as growth engines for the economy, then from the federal level, what else should we be doing to help cities? Or is it fundamentally a state issue and a local issue and there’s not a lot the federal government can do?

I think another thing the federal government will have to start doing is indefinite operating aid for transit systems. We kind of stopped doing this in the Clinton administration. It’s kind of a myth that we stopped during the Reagan administration, but Clinton was not that friendly to maintaining existing legacy mass transit. He wanted to do new infrastructure projects, when a lot of what we need is just maintaining what we have.

Transit systems from New York, Boston, San Francisco, and Washington have to basically run full service with a fraction of their fare revenue. That gap is going to have to come from Washington, probably for the next five years. But in turn, Washington should create a commission and ask, “Why can Europe and developed Asia provide transit at such a superior level for such a fraction of the costs that American cities do it?” Because functional transit is the key to future cities.

And that’s been a handicap in American cities for a long time, but I would also flip the question around and say, “Well, what if we don’t help cities?” Where are all these people going to go? I mean, are we going to create denser mega-regions in South Carolina, Florida, Arizona — places that on many measures from the murder rate to traffic crash fatalities to public health do much, much worse than Northeastern and Middle Atlantic cities? If we’re going to have a poorly planned population inrush to these places, we are just creating even worse longer term problems for places like Florida, Arizona, and Nevada.

We’ve done a number of shows about productivity and innovation, and they have some big ideas that the US should spend a lot more at the federal level on innovation, a lot more on basic science, and they have to have all these hundred-billion or trillion dollar plans. But they also want to take a lot of that money and create these science cities and hubs all around America. Not so much because they think they’ll be fabulously successful — because the history of such efforts is not great — but to create a raw base of political support so that people aren’t going to say, “Well, you want to spend all this money on innovation, but it’s all going to go to the Bay Area. It’s going to go to New York. It’s going to go to Austin.”

In this environment, especially with one party that does not seem to care very much about the Northeastern cities, don’t you need to pair any of these ideas for increased aid with ideas to help Middle America and left behind areas? Do you think you have to do that, too? Have you given any thought to what that would look like?

Yeah. I have no objection with more funding for basic research.

Or anything else to kind of figure out like, “All right. We’re going to help out all these cities with their transit systems and we’re going to give them sales tax holidays.” What about the rest of the country? What are you going to do for them? I mean, you may think those cities have been doing fantastic, but what about all these other areas in Ohio that have been doing poorly? How are we going to help them, too? So I’m saying that I think, politically, you sort of need to do both to get the other.

In Detroit, 7 percent of people rely on transit to get to work. If they don’t have that option, a lot of people are just going to drop out of the workforce.

Yeah. And if you look at places like Detroit — it basically never recovered from the cataclysm of the 1970s, and it started us off with a couple of years of progress but in a very fragile situation compared to a place like New York. In Detroit, 7 percent of people rely on transit to get to work. If they don’t have that option, a lot of people are just going to drop out of the workforce.

So it is true that New York, even in its sort of suspended animation state right now, has far more resources than most American cities. Many cities, not just Detroit, never really recovered from the 1970s — even places that seem nominally successful. Philadelphia and Kansas City still have very serious revenue and economic development problems. And I think one of the good byproducts of this is that as more people in the tech industry and finance can work indefinitely at home, they can think about other, cheaper places that they’d rather live. And maybe we’ll move some of these higher paying jobs to different areas, and maybe we’ll create smaller research nexuses in places that we don’t normally think about.

But yeah, I think that the impact of this on weaker cities and urban areas is pretty significant. Back before the pandemic, you heard about crises of affordable housing. Most cities have no affordable housing crisis. There are tens of thousands of units of near empty housing.

So what is the good news story with how this ends well? If we’re going to look back in 10 years and figure New York and a lot of other big cities faced this crisis, but now they are thriving — they’re flourishing, they’re America’s crown jewels — what will have happened fundamentally to make that the case?

I think the most constructive approach is to use federal borrowing power to facilitate private sector price adjustments in these economies. Then the private sector could do most of this adjustment by itself, and cities could renew because people are attracted to taking a risk on a cheaper city where more people can afford to live without having to make six-figure salaries or be left living on the fringes of the city because they don’t make six-figure salaries. So federal money to tide over transit systems, to provide some level of basic services, and support competence testing, tracing, and so forth. But do not try to prop up these real estate values as if none of this happened, because then you’re going to get a shell of a city within a few years.

Nicole, thanks for coming on the podcast.

Thank you, Jim!