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Commentary By Nicole Gelinas

Losing Wall Street

Cities, Economics New York City

THE Empire State has a surplus of more than $2 billion this year, Gov. Pataki boasted yesterday during his budget speech. But the governor didn't mention that far too much of that surplus is derived from one industry: Wall Street.

Pataki can balance this year's state budget in large part because Wall Street did well last year — in fact, smashed a record: Bonuses for securities-industry workers totaled $21.5 billion in 2005, breaking the high reached in 2000. The bonuses alone will dump $2 billion into state and city coffers.

Yet the sober truth remains: New York — state and city — grow ever more dependent on Wall Street, even as Wall Street grows less dependent on New York.

The state has long benefited from the city's position as the world capital of capital, but over the past half-century, Gotham's reliance on Wall Street as a source of tax revenues and jobs has grown as the rest of the city's private economy has stalled.

In 1958, when New York still boasted a robust manufacturing industry, Wall Street jobs accounted for just 1.21 percent of city employment. Today, despite massive losses in securities-industry employment after the stock market tanked in 2000 and after 9/11, Wall Street accounts for 4.7 percent of the city's jobs.

This may not sound like much. But Wall Street jobs generate a disproportionate share of total city income — 20 percent today, up from 5 percent three decades ago. And each Wall Street worker creates at least two more local jobs — plus another in New York outside of the city — in fields like media relations, law and high-end sales.

Yet even as New York has become increasingly dependent on Wall Street's success, Gotham has steadily lost its share of national securities-industry jobs — from 43.2 percent of the U.S. total in 1958 to 22 percent today, a market-share loss of nearly half in five decades. Wall Street now employs about 170,000 New Yorkers, just 10,000 more than it did right before the 1987 crash.

Why hasn't New York shared much in the financial sector's national growth? The shortfall stems from permanent changes in the industry's structure that predate 9/11 by decades — changes that the state and city have yet to confront.

Just look at the transformation of the New York Stock Exchange.

For most of its 213-year history, the NYSE didn't have to worry about the competition. Much like the city itself, it drew strength from its role as a central meeting place for the exchange of information. But today information is everywhere — and much that was once done on an exchange floor is now done faster and cheaper over computer networks.

New competitors to the NYSE spent the 1990s and early 2000s investing in technology that puts intense pressure on traditional markets. The NYSE had much to lose if it failed to adjust radically.

But it had one option available to it that's not available to New York City or the state: buying a piece of the competition. Its members have approved a merger with one of those upstart electronic trading firms, Chicago-based Archipelago.

What will happen to the 1,000 NYSE employees and the 3,000 people who work on the exchange floor for other firms? NYSE evolution means more cost-cutting automation — and that means fewer middle-class jobs in New York. Indeed, the NYSE recently announced a layoff of 60 middle-income staffers.

The NYSE's merger isn't the beginning of a trend — just another milepost in an ongoing one. Over more than two decades, a diverse array of business lines on Wall Street, from stock brokerage to stock trading to debt and equity underwriting, have had their profits ground down to razor-thin margins by technology, competition and regulation. What's left are just a few spectacularly profitable lines and many low-margin businesses — and an industry that can no longer afford armies of mid-level employees in Gotham.

Wall Street's first cost-cutting target, back in the'80s, was the back office. Today, it's moving higher-end jobs out of town. Investment banks now headquarter some sophisticated trading operations in northern New Jersey — staffed by employees who earn mid-six figures and more.

Worse, more of these jobs are moving farther away. Where Wall Street created thousands of jobs in Jersey in the '90s, now investment firms are moving further afield in their bid to keep costs down.

JPMorgan Chase announced in early December that it would create 4,500 new securities-industry jobs in Bangalore, India, by 2007, joining UBS (with 500 jobs there) and Goldman Sachs (750). Twenty-five years ago, most of those jobs would have been created in New York; 15 years ago, perhaps half, with the rest going to places like New Jersey and Florida.

What's left on Wall Street? Mainly the highest-level, highest-paid industry stars. In Manhattan, the securities industry has fewer workers, each of whom earns more money — because ones left are mostly those whose productivity can justify the high cost of being here.

This evolution is in part good for New York. The city is a perpetual magnet for top global talent, and the securities industry is increasingly dependent on that talent as it jockeys to create and trade exotic new products.

But even when profits are up spectacularly in New York, middle-class jobs won't be — meaning fewer openings for New Yorkers in an industry that once offered vast opportunities to those who wanted to work their way up from the bottom.

New York City and the state, like the NYSE, must work harder to keep much of the business they once took for granted — and attract new business. So what can Pataki and Mayor Bloomberg do to keep Wall Street's elite anchored in the city and infuse new energy into the local economy so that it's not so dangerously dependent on a single industry?

First, they can cut state and city spending and taxes — since New York's high tax rates put the city at a greater disadvantage now than they did 20 years ago, when more top earners were stuck in New York. (The income-tax cut Pataki proposed yesterday can't even be called a good start: It's so tiny that taxpayers would barely notice it even if it were to become law.)

Second, state and city officials can encourage office-space construction in Gotham, since more office space means cheaper office space, which attracts start-up businesses in other fields. (Instead, Pataki has dragged out Ground Zero reconstruction, while Bloomberg is discouraging developer Larry Silverstein from rebuilding the World Trade Center.)

Finally, Pataki and Bloomberg must remember: They have little room for error today when it comes to issues like crime and public transportation.

In the '70s, '80s, and early '90s, Wall Street firms and workers stuck it out in New York — and helped the city to recover from its fiscal and social problems — because they had no choice. But today, New York's top earners and its top firms are here for only as long as New York continues to be a profitable and pleasant environment for them.