Ford to New York City: Drop Dead?
On October 30, 1975, the New York Daily News printed one of the most widely heralded headlines of the 20th century: “Ford to City: Drop Dead.” As Ford himself later said, the banner was both inaccurate (Ford had never uttered the words) and unfair, yet the story behind it offers vital lessons for the contemporary US political scene.
The headline stemmed from a speech Ford had given on the previous day to the National Press Club, during which he declared that the federal government would not provide federal assistance to spare the city from bankruptcy. Ford’s Treasury Secretary, William Simon, had stated that such a bailout would amount to nationalizing municipal debt.
In some respects, the crisis was not entirely the city’s fault. Nationally, inflation had been running high, and the Arab oil embargo the previous year had precipitated a worldwide recession and a dramatic drop in the stock market. Financial institutions felt obliged to charge cities higher interest rates.
Yet other cities were not going bankrupt, and New York City bore its share of the blame. It had been running growing deficits, which in 1974 reached nearly half a billion dollars. It relied on loans to cover such shortfalls, but the debt had reached $13.5 billion, and the city’s banks decided they would no longer underwrite its bonds.
A combination of poor budget and accounting practices and very high rates of public expenditure were other contributing factors. Mayor Abraham Beame’s administration was forced to disclose that the city could no longer meet its normal operating expenses and would soon default on its loans, effectively declaring bankruptcy.
In essence, the city had long been operating in a fiscally irresponsible manner, as called for by former mayor Robert Wagner, who declared in 1965, “I do not propose to permit our fiscal problems to set limits on our commitments to meet the essential needs of the people of this city.” Instead, the city would begin “borrowing now and paying later.”
As the debt reached a breaking point, the city turned to the state and federal governments. Governor Hugh Carey agreed to provide loans, but only if the city would agree to allow the state to assume financial oversight, with the creation of the Municipal Assistance Corporation, followed by the creation of the Emergency Financial Control Board.
Two months after his infamous “Drop dead” non-remark, Ford signed into law the New York City Seasonal Financing Act of 1975, providing $2.3 billion in federal loans, in exchange for which the city would be required to increase fees for its services and cut labor costs through a combination of reductions in force and delayed wage increases.
Thanks to these interventions, the city began creating budgets according to generally accepted accounting practices, developing a four-year financial plan, and providing regular updates on expenditures and revenues. As a result, it achieved a balanced budget in only three years instead of the required four.
The two words Ford never spoke likely cost him the presidency, something Ford himself suspected. In his campaign against Democratic nominee Jimmy Carter, Ford won the vast majority of New York State’s counties, but Carter carried New York City and the other urban areas of Albany and Buffalo, tipping the state’s 41 electoral votes to him.
Had Ford carried New York, which Carter won with 52% of the vote, he would have won the election and retained the presidency. Yet Ford remained firm, saying that the money the federal government eventually provided the city was not a bail out, and that the city had in fact “bailed itself out.”
The story of New York City’s near bankruptcy continues to offer many insights today. For one thing, the US government’s expenditures have exceeded its revenues every year since 2001, and annual budget deficits are now nearing $2 trillion, while the national debt, $37 trillion, has more than doubled in just the last 10 years.
Like New York City in the 1960s and 1970s, we are borrowing now with a promise to pay later, effectively encumbering our children and grandchildren with debts that they have not chosen to accumulate. To fix the problem, the federal government needs to emulate some of New York’s reforms.
The Peterson Foundation offers two principal paths to reducing the debt, the first of which is to raise revenues. Options include eliminating itemized income tax deductions, creating a value-added tax, imposing new payroll taxes, and imposing a surtax on adjusted gross income, each of which would raise trillions of dollars.
On the spending side, the US could establish caps on Medicare and Medicaid spending, standardize the social security benefit for all recipients, and reduce the budget of the Department of Defense, which accounts for nearly half of all discretionary spending, and which for the first time is now exceeded by interest on the national debt.
One thing is certain. Just as Ford’s “Drop dead” speech once galvanized the leaders of New York, political courage and resolve are called for. For example, the city’s park’s commissioner later said that “Ford was good for New York, because he made us clean up our act.” Who will do the same for the United States?
Richard Gunderman is Chancellor's Professor of Radiology, Pediatrics, Medical Education, Philosophy, Liberal Arts, Philanthropy, and Medical Humanities and Health Studies, as well as John A Campbell Professor of Radiology, at Indiana University.
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