5 questions for Nicole Gelinas on American cities and the pandemic

As Americans adjust to the coronavirus pandemic, what long-term changes to life in the American city should we expect? And what sorts of policy measures should be taken to account for these changes? Nicole Gelinas recently joined the podcast to explore these questions and more.

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.”

Below is an abbreviated transcript of our conversation. You can read our full discussion here. You can also subscribe to my podcast on iTunes or Stitcher, or download the podcast on Ricochet.

Pethokoukis: What will be the
long-term impact on New York City from this pandemic if we get a vaccine
tomorrow?

Gelinas: I think that the last three months have changed people’s behavior, maybe not permanently but certainly indefinitely. We’re seeing more structural change than we’re seeing temporary disaster change. 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 a.m. to 6:00 p.m.? That seems highly unlikely right now.

I think it’s fair to say that a
lot of people have found that they are pretty productive working at home. We
may end up going to a model where people come in two or three days a week for
meetings and doing the rest of their work at home. This 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 and from the island every day.
This is more like the invention of the car than it is like a snowstorm, in
terms of its impact on the city.

People
may not feel confident living in a dense area in the event of another outbreak.
How can cities respond to that?

I
think cities can adjust in the long term. But one of the keys to this is price
adjustments. And it’s very difficult to view price adjustment on a large scale
because of the amount of debt that is in the economy. Major buildings can’t
physically disappear, but they will really need to adjust the rents down to
attract tenants — but that probably requires defaulting on the mortgage. And we
have hundreds of buildings in this position.

The north view of the Manhattan skyline is seen from the 86th floor observation deck of the Empire State Building in midtown Manhattan, as the iconic tower prepares to open to more tenants and visitors following the outbreak of the coronavirus disease (COVID-19) in New York City, New York, U.S., June 24, 2020. Picture taken June 24, 2020. REUTERS/Mike Segar

You’re
probably looking at hundreds of billions of dollars of commercial real estate
debt adjustments and defaults. Same thing on the retail and 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?” Some of that even contributed to
the resurgence of the 1980s, with 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.

Some
people would say, “It’s time for some tough love for New York City. Don’t ask
for help. You need to make tough decisions.” Why are they wrong? And what
expectations should the rescuers have of the rescuee?

It’s
quite reasonable to say we cannot bail out these cities and states 100 percent.
Illinois, for example, hasn’t funded their pensions for 30 years, so that’s a
preexisting problem. But the economic impacts of this are not going to stay
in-state — other states depend on business from states currently in need of
assistance. So 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. This could
include basic police, fire, sanitation, and public parks.

And
I also think that Washington should be funding a sales tax holiday, which would
cost around $500 billion for a full year. A sales tax holiday for the month
leading up to Christmas, where Washington just underwrites the cost of the
state and local sales tax, would be a big help to some of these retailers who
really can’t afford to lose the Christmas season.

What
about the rest of the country? In this political 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?

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
places that they’d rather live, and cheaper places. 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. 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. 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.

If
we’re going to look back in 10 years and conclude that New York and a lot of
other big cities are thriving in the wake of this crisis, what will have
happened?

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, and a 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.