Transcript

410:

Social Contract
Transcript

Originally aired 06.18.2010

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Full audio: http://tal.fm/410

Prologue.

Ira Glass

Everywhere lately, the news seems like it's the same. You go to Germany.

Man 1

Germany's long-term unemployed, parents, and the country's army are among those with the most to lose from budget cuts announced yesterday.

Ira Glass

Or England-- Here's the Prime Minister explaining that massive cuts in government are essential.

Prime Minister Gordon Brown

How we deal with these things will affect our economy and our society, indeed our whole way of life.

Ira Glass

In California, Republican State Senator Bob Dutton--

Bob Dutton

I don't think myself, my colleagues-- I don't think any of my Democrat colleagues obviously-- nobody likes making any of these cuts. We don't want to do this. This is counterproductive. I agree.

Ira Glass

California is not alone, of course. Forty-eight of the 50 states have budget shortfalls. And, of course, there's Greece, whose collapse is threatening the stability of the entire European Union.

Man 2

We're standing here on this building overlooking the Parliamentary square, and we could actually see into the crowd when it turned violent. They turned, in fact, on Giannis Panagopoulos who is the head of the biggest trade union here. They beat him up, claimed that he'd sold out to the government. The crowd then turned on the parliament. They tried to storm parliament.

Ira Glass

Everywhere, governments are cutting back. But watching this process, it's hard not to wonder if our politics are simply incapable of handling this in a thoughtful way, if our politics are just too crude for the problems that we face. In so many places, you see posturing along very familiar lines, for example, people digging in their heels against all taxes. And other people digging in their heels against any cutbacks in certain kinds of services. And it drags on for months, and we stay in crisis.

And so today, we have two stories of people trying to be thoughtful, and really step above partisan bickering, and solve these problems in the least painful way. And we hear what happens to these idealists when they confront reality. And surprise, one of them is actually successful.

From WBEZ Chicago, it's This American Life distributed by Public Radio International. I'm Ira Glass with a little summer cold, but feeling just fine and excited at the amazing stories we have for you today. Stay with us.

Act One. Mister Fix It.

Ira Glass

Act One, Mister Fix It.

New York State has the same problem most states have right now, not enough money to cover its expenses. But it's reaching a crisis point in New York. This week, the government nearly shut down, because though it's two months into the new fiscal year, the legislature and governor can't agree on a budget. Every week, they pass an emergency spending bill to keep state services going. The legislators are getting pretty fried. Here are State Senators Hugh Farley and Roy McDonald.

Hugh Farley

It's time to pass a budget. We've got to get this act together. It's an absolute disgrace.

Roy Mcdonald

We have lost the respect, justifiably so. We've lost the respect of real people in this state.

Ira Glass

What New York does have going for it is that it brought in somebody to help solve the crisis. The guy they brought in is exactly the sort of person you would hope for, nonpartisan, liked by everybody, and experienced. He stepped in and solved this kind of financial crisis, not once, not twice, but three other times in New York. Though he says he's found that this time it's different, that all of us, not just in New York but everywhere, are in uncharted territory. That we don't even understand the trouble that we're in.

But before I introduce you to him, let's set the stage, especially for those of you who live far from New York. You need to understand a few things about just how terribly run New York State is. A study by the Brennan Institute named New York State the most dysfunctional state government in the country, and that was three years before the state started making national headlines by sinking far lower than anybody thought possible. At the State Capitol building in Albany a few weeks ago, I asked Karen DeWitt, the New York Public Radio reporter who covers this stuff, and some of her colleagues for a quick review of what happened. Karen started with a scandal I'd actually forgotten, the state comptroller being forced to resign.

Karen Dewitt

Because he got in trouble for using a state car to drive around his wife. And we thought that was bad. We thought that was a terrible scandal.

Ira Glass

It would pale against what happened next. Eliot Spitzer came in as governor, and began berating legislators, even allegedly sicced a state trooper on the senate majority leader, a somewhat of a Troopergate scandal. All prologue to March 10, 2008, which was, coincidentally, Erin Billups' first day as a political reporter for New York One TV.

Erin Billups

And I was driving to the Capitol, and I was excited about my first day of work. And I got a call from my producer that was like, "Ah, have you heard the news?" And I was like, "No." And they're like, "Oh well, Spitzer is involved with a prostitution ring." And I was like, "Oh, he busted a prostitution ring?" No.

Man 3

The governor of the state of New York has reportedly told his senior officials that he was involved in a prostitution ring.

Woman 1

Sources are telling Fox News Channel that Governor Spitzer is expected to resign.

Erin Billups

So what happened after that, David Paterson became governor. The day after he became governor, he had a press conference to tell us about adulterous affairs he and his wife had had, just to get it out of the way.

Gov. Paterson

I betrayed a commitment to my wife several years ago, but both of us committed acts of infidelity.

Kyle Hughes

You know, he starts talking, and immediately we realized what he's starting to tell us. And we're all looking at each other like, oh my gosh, not again.

Ira Glass

Kyle Hughes is a 20-year vet covering the Capitol, now for NYSNYS.com.

Kyle Hughes

He'd given us way too much information, just stuff that you don't necessarily want to hear from your governor. It's like hearing from your dad.

Ira Glass

A prime example, Paterson told The Daily News that he would sometimes take his wife to the same hotel that he had gone to have affairs, the Days Inn in Harlem, on the advice of a counselor who told them to spice things up in their marriage.

Erin Billups

And, what was the next thing that happened? I guess there was a coup in the State Senate.

Ira Glass

Right, a coup. Here's how that went down. The Democrats had just won the State Senate for the first time in four decades, but they only had a two vote majority. There were 32 Democrats, 30 Republicans. Until, in June 2009, two Democrats made a deal where they switched sides. They became Republicans in exchange for top Republican positions with a lot of power, which suddenly gave the Republicans control of the Senate. Now, they were the ones with a 32-30 majority. And their first order of business? Voting out the Democratic head of the Senate, and replacing him with one of their own.

Erin Billups

I have to say it was almost kind of breathtaking, because they stood up, and we couldn't even figure out what they were doing at first. They said, "OK, we're making this motion. We're all going to vote."

Man 4

All in favor on Senator Winner going to the Chair, stand and raise your hands, as a temporary president.

Erin Billups

I felt like we were in a third world country.

Man 4

Mr. President, I have the-- Mr. President, I have the floor. You have been removed from the Chair.

Erin Billups

The Democrats turned the lights off. They tried to run out of the chamber.

Man 5

Would you be quiet?

Man 4

I have the floor, Mr. President.

Man 5

Mr. President, I move we adjourn.

Man 4

The resolution is pending. [INTERPOSING VOICES] Immediate vote on adjournment. The resolution is pending.

Erin Billups

They actually turned off the sound system so it couldn'te be broadcast out to anybody.

Man 4

Rollcall on the vote.

[INTERPOSING VOICES]

Erin Billups

Then, they locked the chamber, and there was an argument for a couple of days of whether this newly formed coalition would even be able to get a key to get into the Senate chamber. And finally, somebody slipped them a copy of the key, and they were able to get in.

Ira Glass

A week later, one of the defecting senators, Hiram Monserrate, decided to switch back to the Democratic Party. The Senate later kicked Monserrate out of office, by the way, after he was convicted of assaulting his girlfriend. But at the time, Monserrate's switch back to the Democrats left the Senate split down the middle, 31 Republicans, 31 Democrats. And since you need 32 votes to pass legislation, New York's legislature essentially shut down. If there'd been lieutenant governor, that would have solved the problem, because in New York, the lieutenant governor can cast a vote to break a tie in the Senate. But there was no lieutenant governor. The former lieutenant governor, David Paterson, had become the governor.

And so Paterson decided to appoint somebody to the job. But they needed somebody that people respected, somebody whose allegiances and history would not be an issue. And that's when he reached out to a 75-year-old veteran of New York crises, the hero of our story today, Richard Ravitch. And Paterson offered Ravitch the job.

Richard Ravitch

Well, I was totally taken aback from it. It was out of the clear, blue sky.

Ira Glass

Ravitch is a big-bellied, ready, man, the kind of old school New Yorker who is still enjoying bacon with his breakfast and cocktails at dinner. His charm comes from his utterly straightforward frankness. Three different times when I asked people who know him to describe him, there's a moment before they speak where they pause and smile fondly at the very thought of him.

The night the governor announced his intention to appoint Ravitch to the lieutenant governors' job, Ravitch was out to dinner at a famous old New York steak house, Peter Luger's, with his wife and another couple. They got a call from the governor's lawyer saying the Republicans wanted to block the governor from appointing anybody.

Richard Ravitch

And therefore, we would like you to sign the oath of office now, and we'll send a lawyer and a notary out to wherever you are. So they came out to Peter Luger's. I signed the oath of office, raised my right hand.

Ira Glass

Had your meal been served yet?

Richard Ravitch

No. But certainly I'd had a couple of vodkas by then.

Ira Glass

And was there a part of you-- I was trying to figure out a politically sensitive way to ask this question. It was chaos out there. Did you feel like, I'm going into a madhouse?

Richard Ravitch

Yes, but I'm also-- this sounds terribly pompous, forgive me. But I have a kind of a romance with the whole idea of government and public service. So at the same time that I knew I was going into a mad house, I also-- it was a matter of pride that perhaps I could be helpful. And there was nothing more useful I could do with my life.

Ira Glass

Ravitch was first drafted into saving New York government, back in the 1970s, by a phone call from a different governor, Hugh Carey, a man he'd never met and didn't know, to solve a crisis involving low income housing. Ravitch, at the time, was just a civic-minded guy in the construction business. He'd help to integrate the construction unions in New York. And he made it his personal mission to build low income housing. He knew all about public financing.

And in 1979, he was called in to fix the New York agency that runs the subways and commuter rail lines, which were falling apart for lack of money before Ravitch turned them around. But Ravitch's greatest achievement, he was part of the small team that saved New York City from bankruptcy in 1975. He was involved in completely overhauling the way the city did its finances, and getting banks, and labor unions, and the state legislature, and the city government to do all kinds of things that they'd never done, and were reluctant to do. Ravitch was the team member who invented the method that they used to raise the short term cash the city needed.

And Ravitch was the one called into action October 16, 1975, the day New York came closest to actual financial collapse.

Richard Ravitch

This is a very long story. I have notes on all this stuff. It's for a book I'll never write.

Ira Glass

On October 16, 1975, the teachers union declared that it would not purchase $150 million in special government bonds that were being sold to raise money for the city. With the city so close to insolvency, it just seemed too risky. Ravitch knew that without this 150 million, it would be the end of the line, and throw the city into bankruptcy the next day. He couldn't stop thinking about it, and went to bed early, depressed.

Richard Ravitch

At about 10:00 at night, the phone rings. It's Governor Carey. He says, "Please come to my office." I got dressed. I went down to his office. And he was in white tie and tails. And he said, "You gotta call Shanker and get him to change his mind."

Ira Glass

Shanker was Albert Shanker, head of the teachers union, an old friend of Ravitch's.

Richard Ravitch

So I met Al in his apartment at 11:30 at night. I said to Al, I understood his reluctance, that I respected his dilemma. On the other hand, this is one of those unique circumstances in life where the consequences of going into bankruptcy were so disastrous, that you had to take some risks. So he didn't make up his mind. He said, "I'll call you at home, first thing in the morning."

I got home about 6:00 AM. So I'm at home, and I'm listening to the radio and showering, because I've been up all night. And, all of a sudden, they interrupt. They said, "We're interrupting this program to announce that the City of New York is going into bankruptcy today." I never heard from Shanker.

Ira Glass

Finally, hours later, Shanker calls. He wants a private meeting away from the press. So Ravitch, and the governor, and some others meet Shanker at Ravitch's apartment. The beds aren't made. There's barely anything to eat. Ravitch puts out some matzah. And finally, they convince Shanker that really his back is against the wall, all of theirs is. And yes, the bonds are risky. But if New York defaults, all the city contracts would become invalid including the teachers union contract, which of course, would be awful for Shanker and his union. Shanker, reluctantly, buys the bonds and New York City is saved.

And where Ravitch talks about the difference between what happened in 1975 and the financial crisis that New York State finds itself in today, and that most states find themselves in, he says that one of the big differences is something that might not seem so important or obvious to you or me. Cities can go bankrupt. But states can't. It's just the way bankruptcy works.

Richard Ravitch

And the virtue of being able to go into bankruptcy-- Everybody was terrified. It would have abrogated all existing collective bargaining agreements with all public employee unions. And it would've exposed the financial institutions. And the consequence of not doing something was so catastrophic to all the parties, and they wanted to avoid that. And they did just enough to avoid that. And now, there is no triggering event to make people recognize that this is very serious.

Ira Glass

But you think it's just as serious a crisis.

Richard Ravitch

I think it's more serious, because there is no triggering event to force the political system to address it in a serious manner.

Ira Glass

Ravitch has turned himself into an expert on the current state budget at the request of the governor who asked Ravitch to use his expertise to shape a long term solution for New York's fiscal crisis. One of Ravitch's closest advisors in this project is the governor's budget director, Bob Megna. When I visit Megna, more than month into the fiscal year with no budget yet passed, I see a grocery bag full of bright, green, rubber balls, stress balls, sent by the National Association of State Budget Officers.

[SOUND OF BALL BOUNCING]

Bob Megna

Yeah, I'll do that a lot.

Ira Glass

Just in the last month?

Bob Megna

Oh no. I've always done that, but in the last month, it's really increased in more frustrating moments.

Ira Glass

Not one, but two, state employees went out of the way to make sure that I understood that the state did not spend money on these balls. They were free. Megna pulls out this chart with two lines going across it. One line shows all the income that the state brings in. As you can imagine, that one's not looking so great. All states, with this recession, bring in less in taxes than they used to. That's a big part of the crisis. That line rises anemically at the rate of 3.5% increase per year. Now there's a much steeper line, twice as steep as the revenue line, showing the growth of spending by the state.

Bob Megna

Exactly. And that extends out over time. We refer to it, in fact, as the Jaws Chart in our kind of day-to-day kind of work, because it just looks like a shark's mouth wide open where the spending line is on the top, and the revenue line is on the bottom.

Ira Glass

Megna remembers the moment that Ravitch fully grasped the implications of this particular chart.

Bob Megna

I think that was an ah-ha moment for him. I think he saw the essential ingredient there, which is that this is not a one year problem. This is a four or five year problem, and that we weren't making a dent in that bigger problem. I think also the moment for him was-- and this is something every state is confronting, and it's not just New York. And I think that was another thing he noticed in talking to folks in Washington was it wasn't just New York.

Richard Ravitch

States are in an unbelievable fiscal meltdown that has been, in my opinion, sadly underreported. States, collectively, reportedly have deficits of over $300 billion in this next fiscal year. Illinois, California, New York are most severe as I understand it. I just read in the paper this morning that Hawaii has limited school weeks to four days. And I gather there's something like a dozen states that have authorized local school boards to reduce school weeks.

Ira Glass

And when you first looked at the budget, did you suspect that this was the state that it was in? Were you surprised when you first got into the numbers?

Richard Ravitch

Yes. I didn't know how serious the problem was. I didn't realize that the state had been faking balanced budgets for so many years.

Ira Glass

This is one of the most alarming things that Ravitch found, and it bears some explaining. During the previous decade of prosperity, the state had committed itself to spending certain amounts of money on education, and state police, and healthcare, and all the other things that a state pays for. But it made those commitments without actually having enough revenue to pay for all of it. And so every year, there was a shortfall, a gap, and every year, the state had to figure out ways to plug that hole. And rather than come up with steady revenue sources, the state would invent all kinds of shenanigans to do it, what they call, one-shots. Like when Blue Cross Blue Shield went private, a billion dollars went to the state, or they borrowed against the winnings from a tobacco lawsuit, or they sold state property. The most famous example of that is when New York sold Attica prison to a private company for some quick cash, and then had to pay that company rent each year to keep using the prison.

Lots of states resort to these one time gimmicks. Idaho is delaying $135 million in Medicaid payments it owes nursing homes and hospitals. New Jersey, Colorado, and Kansas put off payments that they owed state pension funds. Even during good times, they did that. That's a common one. Sometimes states will push a payday for state employees into the next fiscal year.

Richard Ravitch

Yes, in Arizona, they sold the Capitol and leased it back to plug a hole in an operating deficit.

Ira Glass

So forever into the future, they'll have to pay rent on their own Capitol building?

Richard Ravitch

That's correct.

Ira Glass

To solve a short term problem?

Richard Ravitch

Yes. So eventually, you only have one Capitol building. Eventually, that's why this is not sustainable. You run out of assets to sell. But we did that in New York State during a period of unbelievable prosperity, because the political system was not willing either to cut expenditures or to impose enough taxes to pay for recurring expenses.

Ira Glass

This past year, the one-shot that saved New York State and many other states was something that you may not have realized was being used this way, the stimulus money passed by the Obama administration. It allocated billions to go into the hands of state governments specifically to plug the gaping holes in their budgets. In New York, it was 5 billion last year, 4 billion this year.

Bob Megna

That money is scheduled to go away over the next two years.

Ira Glass

Again, the governor's budget director, Bob Megna.

Bob Megna

That exacerbates our situation in unprecedented ways. That really has gotten us through the last year. When that money goes away, we either cut that spending, or we have to figure out a way to replace that revenue.

Ira Glass

Which means that New York needs a plan. Without it, the Jaws Chart shows that New York's deficit will grow from 9 billion this year, to 13 billion next year, to 60 billion in the next five years with no end in sight. And, the longer New York waits to fix the problem, the deeper the cuts in government services will have to be.

Richard Ravitch

Any reason not to start, whoever's in charge of this? First of all, I apologize for sitting down, but it's, as I'm sure you'll appreciate, a hectic few weeks.

Ira Glass

In March, at a press conference in Albany, Ravitch presented his plan to resolve, long term, the state's fiscal crisis. Ravitch's proposal copies a few things from the successful scheme that fixed New York City's finances back in the '70s, like it would force the state to use what are called, Generally Accepted Accounting Principles. Yes, it sounds crazy, but many cities and states, including Florida, Texas, Ohio, and New York, don't use those accounting rules that require you to have real revenue sources to cover your debts. Switching to Generally Accepted Accounting Principles would make it much harder to do the one-shots and the one time gimmicks that have been used in the past to fix the budget in New York.

Ravitch's plan also has strict procedures for when the budget slides out of balance with a control board and special powers for the governor. But the item that got the most attention in Ravitch's proposal was borrowing. Ravitch believed that, looking realistically the budget, it would be too politically painful for the legislature to make all the necessary cuts to balance the budget in just one year. And so, as a practical matter, he said, if the legislature felt a need to ramp down in four or five years to a balanced budget, his plan let them borrow money to help do it, 2 billion a year.

Richard Ravitch

I want to emphasize again, borrowing is never a good way of solving operating budget deficits. But I also know that borrowing on a short term basis was an essential tool to get us out of the mess we were in in 1975.

Ira Glass

Ravitch made it clear that this borrowing was only acceptable if it was part of his bigger plan to control the budget in the future, and if it came with harsh penalties attached if the overall budget went out of balance. In the chaos of New York State politics, there was this sense, when Ravitch laid out this plan, that finally an adult had arrived in the room to restore some sanity-- at last, a nonpartisan approach, the only real solution on the table, tough medicine.

And after the pandemonium of the previous two years, for the Democrats who run both houses of the legislature and the governor's office by raising a serious long term solution could finally show voters that they weren't a bunch of Bozos. What happened next was nothing.

Tom Libous

I like many of the things that he proposes. I hold my breath on the borrowing.

Ira Glass

This is State Senator Tom Libous, a Republican. Like other lawmakers that I interviewed in Albany, he fixated on the borrowing in Ravitch's plan, and said it made it unacceptable. Here's Republican Assemblyman Jim Hayes, and Republican Minority Leader Brian Kolb.

Jim Hayes

Almost all of the proposals that he has made are all good, but I think, unfortunately, he rolled out the proposals at the same time he rolled out a proposal to borrow $2 billion.

Brian Kolb

Well, I've had several meetings with the lieutenant governor. I like him. I really liked him up to the point he talked about borrowing.

Ira Glass

Keep in mind that this is the same legislature that has balanced its budgets for years using borrowing under Democrats and Republicans. And I actually heard the same from the Democrats. Here are two of the most reform minded legislators in Albany, Assemblywoman Sandy Galef and State Senator Liz Kreuger.

Sandy Galef

Well, I like the way he would do the accounting. I'm not in favor of the borrowing.

Liz Kreuger

The borrowing question. The Senate, officially, has been on record as not accepting the borrowing.

Ira Glass

Borrowing became the shorthand the politicians could use to dismiss the Ravitch plan, even though he wasn't advocating borrowing. He was just saying, if you have to, here's the one way it would be acceptable. Editorial writers condemned the borrowing. Newspapers basically reduced the plan to its borrowing. And this year, when the press corps in the State Capitol did their annual musical review, a tradition that goes back over a hundred years with reporters playing the various state politicians on stage, the reporter playing Dick Ravitch, a Capitol vet named J. Gallagher, sang this number, which tells you a lot about the reputation that Ravitch was getting.

J. Gallagher

[SINGING TO THE TUNE OF "TRY TO REMEMBER"] Back in the '70s, I cooked up remedies so New York did not kick the bucket. My plan was clever, a brilliant endeavor, and it is the plan that you now should follow. You haven't tried it, but I have decided to borrow.

Ira Glass

Then, it gets even more rich. While the State Senate opposed any borrowing, the other house of the legislature, the State Assembly, decided to adopt the $2 billion borrowing that Ravitch said would be acceptable, but without the stringent controls that he said had to be tied to the borrowing. The governor, meanwhile, who put Ravitch up to the task of fiscal reform, had his own priorities. His priority was trying to pass a budget which had no borrowing in it at all. And he just had a few weeks to do that.

And once the Assembly was using the Ravitch plan as the excuse to borrow, it became politically complicated to oppose the borrowing, but support the Ravitch plan. So while the governor didn't overtly turn his back on the plan, he didn't throw himself behind it either. He didn't make any effort to sell it to legislators, or get it turned into law, which pretty much left the plan in icy limbo.

Gov. Paterson

Well, what I don't like is not the plan, but borrowing itself. So I'm against that, but I think the lieutenant governor is as well.

Ira Glass

When I interviewed Governor David Paterson, he was surprisingly sympathetic to the plan for somebody who had exiled it to limbo, even when it came to the borrowing. He said that he understood that Ravitch was just setting a ceiling if there had to be borrowing.

Gov. Paterson

And what happened to the lieutenant governor in his first year is what happens to all of us in Albany. The ceiling became the floor, because on Planet Albany, there is no gravity, and light bends right around the Capitol. So rather than people understanding that this was a way to control borrowing, the legislature viewed it as a ticket for $2 billion.

Ira Glass

And so, at some point, the governor makes clear he's not embracing the plan. When do you find out about that? Does he talk to you about it privately? Do you see it?

Richard Ravitch

Well, I take it emerged-- I don't remember precisely when-- He didn't criticize my plan. He just didn't support it.

Ira Glass

Were you surprised?

Richard Ravitch

Was I surprised? No, I actually felt that I didn't-- I wasn't able to convince him, and that maybe it was my failure.

Ira Glass

Over the last few weeks, I've spent a lot of time trying to understand the politics of all this, why the legislators wouldn't embrace Ravitch's plan to show voters they were getting things under control. And I heard all kinds of explanations, on the record and off the record. Though some Republicans actually like the Ravitch plan and the fiscal order it imposes, it's just taken as a given that Republicans will vote as a group against any plan that comes from the Democrats. That's been the pattern lately, like in Washington.

As for the Democrats, some support big parts of the plan of course. Others, I was told, don't want Generally Accepted Accounting Principles and transparency in budgeting. They like the current system where they can hide money and fudge things with last minute gimmicks. Some don't want the governor to get extra power to cut budgets without their approval, which he would get under the Ravitch plan if the legislature is unable to come up with their own cuts or revenue. I was told that some Democrats are so fed up with the governor-- he's a lame duck at this point-- they don't want to give him a victory on anything, including the Ravitch plan. And finally, Liz Kreuger, the Chair of the Select Committee on Budget and Tax Reform, told me the political reality is a lot of legislators simply don't feel the sense of emergency the lieutenant governor feels about the budget.

Liz Kreuger

It's not clear that the sky is, in fact, falling. Some people realize it's an emergency, and some people think, "Well, everybody has always said there were problems, but we get by. Somehow we make it to the next year, and the next year, and the next year."

Richard Ravitch

They haven't yet understood the consequences. They think that if somehow they can get through this year, they'll worry about next year, next year. And that is irresponsible given the fact that next year the deficit is going to be as great, if not greater.

Ira Glass

And what do people say to that when you talk to them about that?

Richard Ravitch

They thank me very much for my advice.

Ira Glass

So if they don't want the Ravitch plan, what are these legislators thinking should be done to get the state budget under control? Well, to understand a little about that I turned to State Senator Ruben Diaz. This week, Diaz nearly brought state government to a close by refusing to vote for the weekly emergency funding that's been keeping the state going for two months in the absence of a real budget. Diaz voted no because the governor had inserted into the emergency bill deep cuts in the overall state budget, cuts that Diaz opposes.

Ruben Diaz

Last week, we cut services to the poor and the needy, all the hospitals in New York City. Those are the hospitals that the people that send me here use. I cut them. What I'm doing, it doesn't feel right.

Ira Glass

How do you think that the state should balance the budget?

Ruben Diaz

I am not a crazy person that only says, don't cut, don't cut. Because I understand that we, in the state of New York, have a fiscal crisis. And I know that money has to be found somewhere, or we have to cut. But I have presented two pieces of legislation--

Ira Glass

One of these, he explained, would streamline the way that taxes are delivered to the state from credit card purchases. The other would let the state buy pharmaceuticals from Canada. Total savings, he says, $2 billion. He also wants to tax cigarettes sold on Indian reservations, something that's led to armed conflict and bloodshed when the states tried to impose it in the past. That would save another billion or two.

Ruben Diaz

If you add my $3 billion or $4 billion, and you borrow 1 or 2 billion more, you don't need to cut anything. You have a balanced budget.

Ira Glass

Can I ask you-- the numbers that the budget office in the governor's office have presented, and that the lieutenant governor presented, show that this year, there would be a $9 billion deficit, next year, $13 billion, and increasing every year until it's $60 billion. Do you think those numbers are wrong?

Ruben Diaz

I don't know. I don't know. I don't know if they're real or not. I know that people use scare tactics most of the time, trying to inflict pain and fear. So I don't know how real it is.

Ira Glass

And when the lieutenant governor says that there's a structural problem in the budget, that every year there are more expenses than we're bringing in revenue, and that's increasing over the course of every year going forward, do you think he's right?

Ruben Diaz

Again, I am not in here to double guessing what people are saying. I'm here saying, we have other means, other ways, to balance the budget, not necessarily have to be on the back of the poor and the needy.

Ira Glass

Ravitch is an old school liberal. He not only idolized Franklin Roosevelt, he sits on the board of the Roosevelt Library, and owns an old WPA painting with scenes of The New Deal in action. His first political appointment was in 1966 by LBJ to a commission on urban problems. But he says we're in the worst economic contraction since Roosevelt's day. And we're not bouncing back any time soon.

Richard Ravitch

We're in different waters, and the world is in different waters. Just look at the stories in the paper about Greece, and Ireland, and Spain, and Chile. We have all been spending more money than we are collecting in taxes.

Ira Glass

And so Ravitch has been going around telling people in private conversations, in public speeches that he's been rethinking, and he thinks we all need to rethink, what government can do. Here he is at a group called The Association for a Better New York.

Richard Ravitch

You know most people go into politics because they want to help people. And for years, that's what they've done. They've tried to help education, make healthcare available for more people. All of those are noble things, and what people in politics have done and have done very effectively. But there's a new economic paradigm out there, a very unpleasant one as we all know. And the political paradigm has not yet changed enough to accommodate the fundamental changes that have happened to our economy.

Ira Glass

So Ravitch says that we need to have a conversation about what it is that we can afford. When I ask what this means, he throws out all kinds of ideas. One in four New Yorkers, he says, qualifies for Medicaid. Maybe those rules are too lenient. Maybe dozens of small school districts in the state should be consolidated to eliminate administration costs. And then there are taxes. Ravitch says we have to be careful, because higher taxes have driven people out of the state in the last decade. But he says there are some taxes that we should discuss.

Not only is nobody engaging in that conversation, Ravitch says that our politics seem incapable of handling a fiscal crisis of the size that we are facing. Politicians today need to either cut services or raise taxes, which are the exact opposite of the things that they are used to doing to get elected.

The one politician that I talked to who seemed to understand at a cellular level the new paradigm that Ravitch talks about, as fate have it, is the man who decided not to carry Ravitch's fiscal plan to victory, Governor David Paterson.

Gov. Paterson

I think something very alarming is happening, because the only group that ever seems to understand me when I'm talking to them-- and it doesn't matter whether they're Republicans or Democrats-- are other governors. No one wants to accept that our state is running out of money. And so the building can literally be burning, and they're still talking about programs that they want you to fund.

Ira Glass

Paterson says the worst has been when he's had to cut programs that he personally supported back when he was a legislator from Harlem.

Gov. Paterson

I was an advocate on issues such as domestic violence, and child sexual abuse, on hate crimes, and a lot of the social programs, and a supporter of some of the same individuals I've had to say no to. And I think because I'm saying no, and I'm a former supporter and friend, it's like a civil war. I've been insulted personally, and basically abused by some of those who have not liked the decisions that I've had to make. I think that my mind hasn't changed. I think my reality has changed, and I'm in the same circumstance that Lieutenant Governor Ravitch describes. We may have to step back and take a little different look at what government can accomplish right now. Because we've asked government to take on too many tasks that cost too much money. And here we are in a quagmire in many ways because of it.

Ira Glass

Getting out of that quagmire, it's hard to stand on principles. Just last week, there was news out of Albany that to balance the budget, the governor and the legislative leaders, who'd spent the last few months adamantly opposed to any and all borrowing and had rejected Ravitch's plan mainly on that basis, figured out a way to patch another few billion into the budget by borrowing against state pension funds. Though officially, they don't call it borrowing. Ravitch was not surprised.

Coming up, as promised, crusaders trying to do the right thing for their country during a budget crisis, and this time, actually succeeding. That's in a minute from Chicago Public Radio and Public Radio International when our program continues.

Act Two. If You Were Stranded on a Desert Island and Could Only Bring One Economic Plan...

Alex Blumberg

When you hear the story of Barbados in the 1990s, you'll think yourself, "I have never heard of people getting together and doing what this entire nation decided to do. It's remarkable." And it's even more remarkable when you compare Barbados to one of its neighbors, Jamaica.

The two countries should be very similar. Both were colonized by the British. Both gained independence in the mid-1960s, and then became parliamentary-style democracies. And both started from essentially the same place economically. One wasn't much richer than the other. But to give you a sense of life in Jamaica today, let's go to the side of a road next a little strip mall as a couple of women selling fruit out of cardboard boxes. And they say life here is so bad that the police-- the metroman they call them-- steal from them regularly.

Woman 1

The metroman come here, [UNINTELLIGIBLE PHRASE]

Woman 2

They take away our stuff and lock we up.

Alex Blumberg

Wait. The police come and take away your stuff?

Woman 1

Yes. We have to beg [UNINTELLIGIBLE PHRASE]

Woman 2

We don't get it back. Them carry out their children's homes and take it for themselves.

Woman 1

Some days I will cry, hungry, you know.

Alex Blumberg

Compare that to this.

Alex Blumberg

Now, we're in a mall in Barbados, which looks basically like a mall in the United States. Tell me about life in Barbados. How is it?

Man

For me, it's great absolutely. Absolutely fantastic.

Alex Blumberg

And why do you say that?

Man

Well, over the years, we have had excellent governance in terms of the people who run the country. We've had--

Alex Blumberg

I'm just laughing because you never, ever hear anybody say that. I'm just trying to imagine going out in the United States.

Man

This is a fact in Barbados. You just have to compare us to the rest of the world.

Alex Blumberg

Some quick statistics for comparison. Five decades after independence, median income in Barbados-- twice what it is in Jamaica. Literacy rates in Barbados are over 95%. In Jamaica, it's estimated that 1/5 of the population is functionally illiterate. And Jamaica has one of the highest murder rates in the world, while Barbados is near the bottom.

So what did Barbados do so right? Well, to answer that question, come with me now to the 1990s.

[MUSIC - "EVERYBODY DANCE NOW" BY C&C MUSIC FACTORY] This is C&C Music Factory's monster hit from 1991. It actually has nothing to do with Barbados, but 1991 is when our story begins. And as the '90s were getting under way, Barbados was doing OK. But then, oil prices went up. The world went into recession. Tourism is a huge industry on Barbados and foreigners weren't taking as many beach vacations, which created a big, big problem for Barbados.

When you're a small country, you rely on the rest of the world to make almost everything you need, toothpaste, or wheat, or C&C Music Factory CDs. And if you want to buy things from say, the US, some importer somewhere in your country has to have actual US dollars to pay for those things. So where do they get these dollars?

Well, this is an over simplification, but basically, Americans come to Barbados and spend them on hotels and coconut drinks, or importers from America buy Barbados rum and pay in dollars. And then, Barbados can turn around and spend those dollars on stuff from America. It's iron clad. No foreign dollars, no goods from abroad.

This is a problem a lot of countries get into. You may have heard the term foreign exchange crisis. That's what this is. And in 1991, Barbados was facing one. The first people who knew this were employees of The Barbados Central Bank where the supply of American dollars and all those other foreign currencies had been steadily dwindling. DeLisle Worrell is the Governor of The Barbados Central Bank.

Delisle Worrell

In about mid-1991, we had no foreign exchange reserves.

Alex Blumberg

You literally had no reserves at all?

Delisle Worrell

Yeah, maybe about $10 million or something like that.

Alex Blumberg

$10 million to a central banker, even one on a tiny Caribbean island, that is nothing. And so, the Barbadian government did what almost every government in this situation does, it went to the IMF, The International Monetary Fund, and asked for a foreign currency loan. The idea being, we'll borrow a couple hundred million dollars US now, and then, when Americans start coming back to our beaches, we'll pay you back in dollars. The IMF did what it always does. It said, "Sure. We'll give you the money, but there are strings attached so you don't get into this situation again. You need to rearrange your economy so you don't need as many foreign dollars, which means basically, you want your citizens to spend less money on stuff from abroad."

But since almost everything in Barbados comes from abroad, that basically amounts to the entire nation of Barbados needs to spend less. And the way you keep people from spending is sort of dreadful. You need them to get poorer.

So here's how you do that. You can devalue your currency. So if it costs five Barbados dollars to import a C&C Music Factory CD, now it would cost 10; ditto for bread, toothpaste-- Prices for everything go up. Or, you can cut government services, which-- think about it-- means all kinds of people have less money in their pockets. Neither, of course, is very popular.

Leroy Trotman

I am Leroy Trotman. I am the general secretary of the Barbados Workers' Union.

Alex Blumberg

Leroy Trotman is often called, Sir Roy. Knighthood seemed pretty common in Barbados. I ran into a couple of knights while I was there. And Sir Roy was one of several people called to an emergency meeting by the prime minister in mid-1991 to discuss the crisis and what the IMF wanted Barbados to do.

Now Sir Roy, and most people in Barbados at the time, had no love for the IMF. They'd seen what had happened to other countries in the Caribbean when the IMF got involved, higher unemployment, massive currency devaluations, sometimes riots and violence. It seemed everywhere the IMF went, trouble followed. Fairly or not, they blamed the IMF and the terms it imposed on countries it lent money to.

Leroy Trotman

We took a position that we would see ourselves as a country which was being invaded by the IMF. And our approach thereafter was that we had to resist this invasion. And that's what we actually called it.

Alex Blumberg

An invasion?

Leroy Trotman

Yeah, the trade union called it that.

Alex Blumberg

But the unions knew that they'd need help resisting the IMF. And so, they hatched what seems like a fairly strange plan for a trade union. They decided to band together, not just with other unions, but with management as well, the business councils, and chambers of commerce on Barbados, to join together to confront the IMF and set the terms of the loan. Tony Walcott is the executive director of the Barbados Employers' Confederation, a business group. And at first, he says, the employers were dubious.

Tony Walcott

I think employers, traditionally, didn't see themselves as being part of the problem, if you want to put it that way. But it was so serious that something had to be done. And this is when all parties came together and said, "Look, devaluation is not an option. Massive wage cuts or retrenchments in public service was not an option."

Alex Blumberg

And so, Sir Roy Trotman, representing workers, found himself side by side with Tony Walcott's group, representing managers and business owners, in front of the IMF to press the case that some of the IMF solutions would do more damage than good.

Leroy Trotman

We told the IMF, for example, that we would not agree to a larger size of classrooms. They wanted to double the size of classrooms. They wanted to have people going to a hospital have to pay for services. And our position was that we were going to be under an IMF program for awhile, but we were going to come out from it. And that when we came back out, our people had to be healthy, and they had to be educated, and ready to take on the job of building the country again. And the IMF was persuaded by us. I think the government was also persuaded. The employers were side by side with us in these arguments.

Alex Blumberg

These arguments stretched on for months, the employers and employees on one side, the IMF on the other, the government sort of stuck in between. The main sticking point-- wage cuts. Remember, lower wages would mean people would buy less from abroad, which would mean they'd need fewer US dollars. So the government was proposing a big wage cut, which the unions and employers, together, opposed. They staged a general strike, and held a massive two-day demonstration, the largest in Barbados history. It's estimated that 10% of the island's population took to the streets. Here's Sir Roy Trotman addressing the crowd at that march.

Leroy Trotman

Let me tell you, ladies and gentlemen, [CHEERING] the people marched against the walls of Jericho. And because the people had the will to march, the walls of Jericho fell.

Alex Blumberg

But in the end, the speeches, the general strike, the 30,000 marchers in the street, could not contradict the basic reality that the country of Barbados would run out of money unless it figured out a way to get its people to spend less. And so the government, under pressure from the IMF, insisted on an 8% pay cut for all public sector workers across the board. And it's at this point that things depart from the usual script where each side digs in for a brutal war of attrition.

Sir Roy and the leaders of the other unions knew that fighting on-- more strikes, more demonstrations, which might get out of hand and lead to violence-- all of that could kill an already fragile tourist industry. So they went back to their members, and in meeting hall after meeting hall, all over Barbados, explained to the union rank and file, "We're sorry, but this is the deal."

Alex Blumberg

Do you remember a specific meeting in a hall where you felt like, "Man, what am I going to tell these people?"

Leroy Trotman

Every time I stood up. [LAUGHTER] It was difficult. I mean sometimes it didn't become easy to go into groups, because people told you about your heritage. Some of them had wishes for your future that you didn't exactly agree with. But the job had to be done, and if you are leader, you have to lead.

Dennis De Peiza

Yes, we effectively agreed to an 8% pay cut.

Alex Blumberg

Here's Dennis de Peiza, head of another union organization.

Dennis De Peiza

We had to choose between the lesser of two evils, either taking a pay cut, or having many Barbadians on the street without a job. To put it in a very simplistic way, all we said, "Save Barbados." Two words, and we had the interest of the country paramount.

Leroy Trotman

The Barbados workforce in the trade union movement took a very patriotic stance.

Alex Blumberg

Again, labor leader Sir Roy Trotman.

Leroy Trotman

And even now, I still feel a sense of pride that the workers in Barbados rallied behind us, not 100%, but to the great level that they did. And the employers were with us step by step in all of this.

Alex Blumberg

That last part is important. The self-sacrifice was contagious. If the unions could go against their very reason for existence and lend their grudging support to wage cuts, then the business community could go against the thing it held most dear, profits. Here's Tony Walcott who represents the businesses.

Tony Walcott

The mercantile community did was say, "Look, we will accept a lower margin, or a lessening margin, just to be able to hold prices." You kept the retail price fixed at a number. So it eroded your margin a bit.

Alex Blumberg

So here you are. The price of oil is going up. So that means that the price of all sorts of other things are going up, because everything is tied to oil And instead of raising it-- that level-- they just took it. Instead of taking 50--

Tony Walcott

It ate into their margins.

Alex Blumberg

So instead of getting 50%, they were going to get 40%, 30%, something like that?

Tony Walcott

Yes, that's correct. That's correct. Well, as Sir Roy said, nobody wanted the devaluation, and the mantra was, "Save Barbados." And people were just prepared to tighten their belts a bit and ride out the rough patch that we were going through.

Alex Blumberg

Workers and employers came up with other ideas as well. For example, remember the world was in recession at this time. So layoffs were already up in Barbados. These wage cuts were going to make that even worse. So the unions and employers came up with an idea to try to reduce the impact of these layoffs, or as they were termed, retrenchments. Again, here's Tony Walcott with the business community.

Tony Walcott

We started to develop tools like insisting that if there were going to be retrenchments in a household, both bread winners would not be retrenched. At least one had to be retained to ensure that there was money coming in.

Alex Blumberg

Everyone chipped in. Even pension funds sold off their foreign assets, American stocks and bonds, as a way of bringing American dollars back into the system. In the end, this collective sacrifice worked. The recession ended. People came back to spend their vacations in Barbados, and the Barbadian economy continued to grow. Within five years, Barbados had paid back its loan to the IMF, and real wages were higher than they were before the 8% pay cut.

And Barbados society seemed permanently altered. These meetings between employers, employees, and government were so effective that they became formalized into what's called the Social Partnership. I was actually in Barbados during one such meeting, the yearly gathering of all three groups, which is called the Week of Excellence. Tony Walcott, who represented the employers, and Sir Roy and Dennis de Peiza, who represented labor, were all there together in the same room when I was talking to them.

And what they do during these meetings is essentially try and see things from each other's point of view. For example, hotel management is always like, "Be extra nice to the guests or they'll take their vacations in Antigua." And labor is like, "Uh, I'm on my lunch break." The Social Partnership tries to get labor and management to recognize their common interests in keeping tourists coming to Barbados; for example, this new pilot program they've started to improve productivity in the hotel industry. Basically, that means to get the staff to provide better service to the guests, but also to reduce waste, be more profitable for the hotel. Again, here's Tony Walcott.

Tony Walcott

If they recognize that their reward is going to be based on efficient use of, let's say cleaning supplies. hence, any gains you're able to make is being paid as a productivity bonus.

Alex Blumberg

So basically, what you're doing is you're establishing what exists on Wall Street, whereas if people have a good year, they get a bonus. You're putting it on the level of the gas station attendant, and the chamber maid, and people in the hotel service, and the bartender.

Tony Walcott

That's correct. It's being based on output.

Alex Blumberg

Now we're staying at the Hilton. If I talk to the person who's cleaning my room at the Hilton, will they be familiar with this?

Tony Walcott

Yes, because Hilton is in the pilot scheme.

O'neal

Yeah, Hilton, we do a lot of training.

Alex Blumberg

This is O'Neal, a Hilton bartender I met. He said that as part of this pilot scheme, employees at the Hilton go through lots of trainings where they're encouraged to think like their managers do, i.e. from the point of view of the customer.

O'neal

Like if you're an employee, you put yourself in a guest situation. Well, you can be guests. And you try to do like a role play on it-- you know what I'm meaning-- to get feedback on. You know what I mean? That's how they do it.

Alex Blumberg

And he was also saying there are productivity bonuses. Do you know about that?

O'neal

Yeah.

Alex Blumberg

And how does that work?

O'neal

Extra effort, and if you do something that goes beyond your job commitment, they give bonuses.

Alex Blumberg

Have you gotten a bonus?

O'neal

Yeah. I'm always going beyond. It's part of the job. I always do.

Alex Blumberg

And employers try to see things from labors' point of view, especially when they're in negotiations, and labor might not believe the claims management is making. Again, here's Tony Walcott, of the business community.

Tony Walcott

Several of the companies have opened up their financials to the union. These are private companies. Their financials are not generally published, yet officers in these companies are prepared to sit with the union and to share financial information with the union. The union has been satisfied, based on the presentations we've made, that the companies do not have the ability to pay. But the key driver was we have to sustain existing employment levels. And if it means that we don't take a pay increase to be able to allow our brother to stay employed, that has been the driving force for both the employer and the workers' representative side.

Alex Blumberg

For Tony Walcott, it all comes down to one simple thing, which, when he said it, I could not believe what I was hearing.

Tony Walcott

Trust. And to me, that is a key factor in the whole cohesion of the Social Partnership that we've got here.

Alex Blumberg

The reason I'm laughing is just because you represent the employers on Barbados. And again, I'm just putting this in the American context. It's just sort of like-- I mean it's just hard to imagine an American leader of a business association talking about how much they trust the labor unions. It just doesn't seem possible, right?

Tony Walcott

No, but it's about trust.

Alex Blumberg

In trying to figure out how much the rest of the world can learn from Barbados, people I spoke to are divided. Some point out that what Barbados did would only work in a tiny society. It's only 300,000 people after all. So it's harder to vilify the other side in negotiations. But others say that anyone facing this type of budget crisis, which today, includes Greeks, Spaniards, Hungarians, New Yorkers, to name just a few-- Anyone can do what Barbados did. Bring all sides together, talk, listen, and try to see things from each other's point of view. It's essential, they say, because if you don't, the long-term consequences can be devastating. The long-term consequences look like Jamaica.

Jamaica in the mid-1970s faced the identical crisis Barbados faced in the '90s, a foreign exchange crisis. The Jamaican Central Bank had run almost completely out of foreign dollars. The country had no money to buy the things it needed from abroad, and like Barbados, it was forced to turn to the IMF for a loan.

Jamaica's leader at the time was a bright and charismatic man named Michael Manly, popular with the rich and the working class. But unlike the leaders in Barbados, he didn't bring the country together to share the burden of becoming temporarily poorer. He didn't build trust between workers and business owners. The thing that almost all middle class Jamaicans alive at the time remember-- in 1975, he made a famous speech saying that if Jamaicans didn't like what he was doing, there were five flights a day leaving for Miami. Thousands of middle class Jamaicans took his advice and left, including the guy I first heard this whole story of Jamaica and Barbados from, an economist named Peter Henry.

He was nine when he moved to America with his parents. He's now the dean of the business school at New York University where he takes a professional interest in what happened to his old country. The exodus of foreign capital and middle class Jamaicans, that Peter was a part of, crippled the Jamaican economy. It actually shrunk an average of 2% per year for 15 years in the '70s and '80s, a statistic that makes economists gasp. And successive Jamaican governments faced with the declining tax revenues continued to borrow, so that today, almost 50% of the money the Jamaican government collects goes towards paying interest on debts from the past. Here's Peter Henry.

Peter Henry

You tend to think about economic disasters as happening in autocratic countries where people are trying to fleece the populace. That isn't necessarily the case. This is a smart man, a man with a big heart, who meant to do well. And this is why I think it's all the more powerful, the lesson. Even in places where governments are trying to do the right thing, and trying to actually empower their citizens, if they follow bad policies, there will be substantial, long-run consequences.

Alex Blumberg

Of course, in a crisis like the one Barbados and Jamaica faced that many governments around the world are facing right now, at the time it's implemented, bad policy can feel like good policy. People keep their jobs and their salaries. And good policy can feel bad. There are protests, and marches in the street, and calls for the government to resign. The true consequences to Barbados and Jamaica were only revealed over time as they marched steadily down their divergent paths. Barbados isn't a miracle, but after decades plodding slowly along, it now looks like one.

Ira Glass

Alex Blumberg is part of Planet Money that we co-produce with NPR News. Their blog and twice weekly podcasts, where they explain the world's economy entertainingly and in normal language anybody can understand, is at www.npr.org/money. [MUSIC - "ISLAND IN THE SUN" BY THE MERRYMEN]

Credits.

David Paterson

Because on Planet Albany, there is no gravity, and light bends right around the capital.

Ira Glass

I'm Ira Glass, back next week, hopefully over this cold, with more stories of This American Life.