In New York City, discussions are intensifying about funding the expanded social services promised by Mayor Zohran Mamdani, especially in light of limited federal support during the Trump administration. This issue is significant for other U.S. cities facing similar challenges. Given the friction between federal and local governments, there is a strong case for New York City to implement countercyclical fiscal policy to bolster its economy and manage downturns.
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Countercyclical fiscal policy involves government action on spending and taxation to mitigate business cycle fluctuations. During economic downturns, for instance, a government may increase or maintain spending while cutting taxes, which can stabilize demand, employment, and income while minimizing “economic scarring.” However, local adoption of such policies has been limited due to longstanding borrowing and spending restrictions in New York since the fiscal crisis of the 1970s.
A recent report by Dr. Amanda Page-Hoongrajok illustrates the effectiveness of countercyclical measures in economic downturns. The report outlines various types of spending with strong countercyclical potential, examines the challenges of utilizing taxation in this context, and suggests that adjustments in asset positions could facilitate countercyclical fiscal policy. Dr. Page-Hoongrajok advocates for New York City to reconsider deficit financing as a means to adopt this approach, presenting ten specific recommendations for this fiscal policy shift.
Amid changing political dynamics and increasing demand for socialized government services, New York City policymakers are presented with a unique opportunity to rethink their strategies and incorporate countercyclical perspectives into their discussions and initiatives.