The Frail Bonds of Liberalism: Pensions, Schools, and the Unraveling of Fiscal Mutualism in Midcentury New York

Capitalism: A Journal of History and Economics

35 Pages Posted: 16 Mar 2020 Last revised: 1 Feb 2021

See all articles by Michael Glass

Michael Glass

Boston College

Sean Vanatta

University of Glasgow - School of Social and Political Sciences

Date Written: May 25, 2020

Abstract

Between 1940 and 1965, state-level officials changed the relationship between two pillars of the postwar social contract: secure retirement and modern public schools. In the early twentieth-century United States, state pension managers, following an investment regime we call “fiscal mutualism,” funneled the savings of government workers into government securities. By purchasing municipal bonds, pension officials lowered the borrowing costs for local governments. We analyze this regime through a close examination of New York State’s pension fund. During the 1950s, the comptrollers who managed the New York State Employee Retirement System (NYSERS), the nation’s largest state pension, subsidized suburban school construction by purchasing the bond issues of local school districts. But as changes in the financial landscape made this arrangement less viable, New York Comptroller Arthur Levitt Sr. began lobbying for the liberalization of the pension’s investment powers. After state lawmakers approved the regulatory changes, Levitt disinvested from municipal bonds in favor of higher-yielding corporate securities. Pension liberalization secured higher returns for state retirees, but it also left school districts to navigate bond markets without the backstop of fiscal mutualism. As school budgets, and the property taxes supporting them, soared to repay the interest costs, tax revolts became a permanent response to the fiscal volatility. These transformations, we argue, stemmed from postwar liberalism’s dependence on financial markets to deliver retirement security, public education, and other social benefits.

Keywords: Pensions, Public Schools, Liberalism, Arthur Levitt Sr., New York History

JEL Classification: N22, N32, N42, N92

Suggested Citation

Glass, Michael and Vanatta, Sean, The Frail Bonds of Liberalism: Pensions, Schools, and the Unraveling of Fiscal Mutualism in Midcentury New York (May 25, 2020). Capitalism: A Journal of History and Economics, Available at SSRN: https://ssrn.com/abstract=3540161 or http://dx.doi.org/10.2139/ssrn.3540161

Michael Glass

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Sean Vanatta (Contact Author)

University of Glasgow - School of Social and Political Sciences ( email )

United Kingdom

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