New Jersey’s Ruin

By Steven Malanga, senior editor of City Journal and a senior fellow at the Manhattan Institute.

The state’s leaders seem determined to drive it off a cliff.

Adam Smith once wrote that there’s a “great deal of ruin in a nation,” by which he meant that it takes an awful lot of bungling by political leaders to bring down a powerful and prosperous state. Today, New Jersey pols are giving Smith’s thesis quite a test drive. They are steering the Garden State toward ruin at an astonishing pace, and no amount of bad economic news seems capable of deterring them.

The latest indication of the state’s decline is the rapid deterioration of its newspapers, which rely heavily on the local economy and thus are good barometers of a community’s conditions. New Jersey’s biggest newspaper, the Star-Ledger, once one of America’s most profitable papers, is cutting 20 percent of its workforce because it’s losing more than $30 million annually, while the Bergen Record, to stay viable, is closing its headquarters and sending most of its reporters to work out of their homes. Six Gannett newspapers in the state are cutting jobs and planning early retirements for their employees.

Though Jersey’s papers are to an extent suffering the afflictions—like the flow of advertising dollars to the Internet—that plague the newspaper industry generally, they are also being hammered by the state’s considerable economic woes. The Star-Ledger’s owner, Advance Publications, says that the paper is doing far worse than the company’s papers in other markets. That’s not surprising, because Jersey never recovered as did the rest of the nation (New York included) from the recession of 2002. Only government employment soared in the state from 2003 through 2007, while private job rolls grew a meager 1.8 percent, mostly through the addition of low-wage service employment. In 2006, when the country was in the middle of an economic boom, New Jersey, virtually alone among the states, faced a crushing budget deficit of $4.5 billion that prompted an embarrassing shutdown of state government.

Jersey’s decline has been rapid and astonishing. Back in the 1960s, one study judged it among the country’s ten most business-friendly states because of its light tax burden, which allowed it to attract a steady stream of businesses and residents from New York. Though there were occasionally signs of trouble over the years—like the pension shenanigans of Governor Christie Whitman, in which government shirked its long-term obligations—the state’s real decline started with the election of Jim McGreevey and a Democratic-controlled legislature in 2001.

In the middle of a recession, McGreevey and the legislature raised taxes and fees an astonishing 33 times to raise $3.6 billion. The state also passed a heap of labor-friendly, antibusiness laws that rapidly worsened conditions. The McGreevey administration hammered an executive at one of the state’s biggest employers, Federated Department Stores, for announcing that the new taxes would force the company to reevaluate future growth plans in Jersey; is it any surprise that one reason the state’s newspapers are suffering today, according to an ad executive, is retrenchment of local department stores? In 2002, the Beacon Hill Institute rated Jersey 26th among the states in overall competitiveness, but by 2004 Jersey had plummeted to 44th, the largest decline of any state, noted the institute, which also ranked Jersey’s government performance next to last among the states—in case you were wondering what prompted the decline.

Yet Jersey’s leaders have learned little. In 2006, the state enacted several billion dollars of new taxes. And Governor Jon Corzine recently signed into law one of the most astonishingly anti-growth and simply foolish (there is really no other word for it) pieces of state legislation in memory. The new law requires towns hosting private-sector commercial or residential development to build subsidized affordable housing as well. Towns say that they will have to tax developers and raise property taxes to pay for this. If you knew nothing about New Jersey, you might assume that the state was prospering and that its developers were rolling in money. But the state’s commercial vacancy rate is a whopping 19 percent (by contrast, Manhattan’s is about 7 percent), and prospects for filling up that empty space are slim, considering that a recent national survey of corporate executives ranked Jersey as one of the least attractive places to expand. A state in desperate need of business just made doing business even more expensive.

Given the constant stream of bad news, why has reform been so difficult? In part because the kind of big-government, tax-consuming policies that are doing so much damage have also given more and more residents a stake in the current system. State and local government employment is among the highest in the country on a per-capita basis, having increased by 15 percent from 2000 through 2006 alone. Hundreds of thousands of current and retired public employees aren’t about to vote for changing the system, for fear it would eliminate their perks and benefits.

Meanwhile, the state’s recent tax increases have fallen entirely on upper-income residents. Those earning more than $200,000 a year, who account for just 4.9 percent of households filing tax returns, are paying 60 percent of all personal income taxes. Jersey has even managed to make its onerous property taxes progressive by instituting a means-tested rebate program: higher-income residents don’t get cash back.

The effect of all this is to make New Jersey a place where just a few businesses and residents pay the freight while so many others are on the public dole, in one way or another, that reform becomes virtually impossible. Of course, such a system cannot sustain itself very long before collapsing, as some businesses balk at expansion, others (like the newspapers) shrivel, and declining opportunities stifle job growth. That’s why Jersey now lurches from crisis to crisis.

The question for New Yorkers is whether their own politicians learn anything from the mess across the Hudson. While for years people pointed to New Jersey’s business environment as something New York should emulate, the state now stands as a cautionary tale. A few years ago, when asked about New York’s high tax rates, former governor George Pataki was quick to point out that Jersey had recently raised its own taxes. That was the wrong answer, because businesses and residents chased out of Jersey by high taxes aren’t about to come to New York. Rather, Jersey’s decline is likely to push businesses out of the region completely. More ominously, New York, with its dysfunctional politics, may not be immune to Jersey’s fate. Only Wall Street and Gotham’s international tourist appeal have insulated the state from its neighbor’s woes—but with Wall Street now in crisis, New York may face the prospect of a Jersification of its own budget and economy.