Mayor Bloomberg sounds exultant these days when he describes Gotham’s economy. “Rising tax revenues are evidence that our economy is strong and growing stronger,” he crowed recently. “Tourism is at record levels.”

But the picture is nowhere near as rosy as the mayor paints it. The city’s economy is stuck in neutral, and the budget could be deeply in deficit by next year. After all, though Wall Street’s rebound, boosted by federal tax cuts, has sent tax revenues gushing into the city’s coffers, the Street’s gains have had depressingly little effect on the larger economy.

Take employment. Although securities firms added about 3,000 jobs last year, those gains can’t even replace continuing losses throughout the rest of the city’s financial services sectors, as industries like insurance and commercial banking continue to desert the city. Financial services continue to shrink in a city that considers itself the world’s financial capital.

Even Wall Street’s future remains a question mark. Just days after Democratic mayoral candidate Fernando Ferrer proposed a $1 billion tax on stock transfers, the New York Stock Exchange announced a merger with Archipelago, a Chicago company specializing in electronic trading. The deal is a sign of the pressure that the NYSE faces from low-cost, high-tech trading systems, and the exchange may soon be forced to abandon its costly trading floor, where about 3,000 people work.

Under Mr. Bloomberg, New York is slipping back into an all-too-familiar pattern of lagging behind national job growth, after having outperformed the rest of the nation in the late 1990s under Mayor Giuliani. Record-breaking profits on Wall Street have not re-ignited growth in business services – the high-paying fields like management consulting, computer technology, and human-resources management that serve corporations.

Meanwhile, New York’s outer-borough economies – which contributed nearly half of job growth during the late 1990s – have been mostly going in the wrong direction: Through mid-2004, the latest period for which we have data, three of those four boroughs were still shedding jobs in the post-September 11, 2005, recession, with only Brooklyn growing modestly. Even the city’s small-business community, which sparked so much entrepreneurial growth in the 1990s boom, seems demoralized. “This is the worst environment for small business in New York City in 20 years,” the head of a neighborhood retail group recently complained to the City Council.

While the mayor touts gains in real estate prices (fueled by a worldwide surge in property investing) and increases in tax revenues as signs of economic life, New York is no longer a cauldron of economic opportunity. From the start of the last recession just before September 11 until the end of 2004, the city actually lost 170,000 jobs – a decline of 5%. Of course, tens of thousands of those jobs evaporated immediately after September 11. But the losses nevertheless continued over the next two and a half years.

Even in late 2003, when city officials were declaring victory over budget woes thanks to Wall Street’s revival, Gotham was still shedding jobs. And last year, as the national economy created a healthy 1.5 million new jobs on an annualized basis, the city added a feeble 10,000 new jobs, a growth of less than 0.3%, or one-fourth the national rate.

Equally troubling, the city slowly seems to be trading its reputation as a financial and mercantile capital for a place as America’s urban theme park and tycoon playground. Lately, the city has mostly been producing employment in low-wage industries that serve tourists and the megarich – like restaurants, where the average job pays only about $25,000 a year, and retailing, which pays on average some $30,000 annually.

A big chunk of what has passed for private-sector job growth in New York has also occurred in industries that are nominally private but are actually supported by tax revenues. These industries – health care and social services – have accounted for nearly half the city’s job growth in the past 12 months and now represent 18% of all “private”-sector jobs in the city.

Anyone who has watched the long decline of New York’s economy – which today employs nearly 200,000 fewer people than 35 years ago – will understand what’s happening, because it has happened before, repeatedly. The city’s economic slide began in the mid-1960s; politicians began sharply raising taxes to pay for an expanded social agenda – saddling New York with the heaviest tax burden among American cities. Over the past 35 years, those high taxes have sucked billions out of the private sector.

The city’s Giuliani-era economic revival should have provided a blueprint for how to address Gotham’s post-September 11 challenges, for the 1990s was the one period in the last 35 years when the city’s economy outperformed the nation’s, growing by 440,000 jobs and bringing New York back to its 1969 job peak shortly before the terrorists struck. Faced with budget deficits when he took office in 1993, Mr. Giuliani refused to raise taxes but instead shrank the size of government and slowly began cutting taxes. When Wall Street boomed and poured tax dollars into the city’s coffers, Mr. Giuliani used the resultant budget surpluses to cut taxes further.

By contrast, when the city faced new budget deficits after September 11, Mr. Bloomberg and the City Council piled on billions in new taxes and jacked up fines on citizens and small businesses. “We are being treated as cash cows,” says Sung Soo Kim, the head of the city’s Small Business Congress, a coalition of more than 100 separate groups.

To understand how much more costly tax hikes have made the city, look at the tax-driven price of commercial real estate. With the latest property tax increases and outlandish new assessments by city tax agents, real estate taxes now account for on average $12 a square foot of a lease in a Manhattan office building, while in new buildings the tax averages $19 a square foot. By contrast, the average total price of a lease in a New Jersey office building is about $28 a square foot, including only about $3 a square foot in property taxes.

The rising property taxes have put the squeeze on landlords and homeowners and have channeled billions out of the private economy that would otherwise have been used for reinvestment. Total property taxes paid by office-building owners have increased by 50% on Mr. Bloomberg’s watch, even as their average asking rent has declined by 20%. Apartment-building owners are faring even worse. Pressed by tax increases and rising fuel costs, the average apartment-building profit has slumped to 1989 levels, while the number of distressed buildings, whose income doesn’t cover their expenses, has increased to nearly 11% of all buildings from about 6% five years ago.

But even Mr. Bloomberg looks almost prudent compared with the economically devil-may-care City Council. Deep in the midst of the local recession, this aggressively antibusiness council passed “living-wage” legislation that forced employers to raise the salaries of 50,000 health-care workers, though economic research consistently shows that such laws destroy low-income jobs. The council has passed legislation limiting the ability of new owners of large buildings to dismiss existing workers. It has lobbied heavily to require owners of buildings in a new waterfront zone in Brooklyn to pay above-market union wages to their staffs.

Given the anti-business policies of the Bloomberg administration and the current City Council, it’s hard to imagine how things could get worse. But they can. Campaigning to take Mr. Bloomberg’s job is an array of Democratic hopefuls whose tax-and-spend agenda takes anti-business, anti-development politics to a whole new level.

All this would pile a heavier load onto an already overburdened private sector. For the past two years, New York’s budget has remained balanced only because of extraordinary circumstances – the Washington-driven Wall Street revival in 2003 and a national real estate refinancing boom last year that helped produce record realty-tax receipts in Gotham, which, unlike most cities, taxes these transactions. But New York cannot count on such circumstances continuing, and the only way to get control of the city’s budget for the long term is to be a revolutionary – to stop piling on new taxes and instead to reduce the cost of city government.

But you won’t hear any of this from the mayor and his Democratic challengers, who seem to have learned exactly nothing from the success of the Giuliani era and to yearn instead, alas, for a return to the New York of Mayor Lindsay or Mayor Dinkins.

Mr. Malanga is a contributing editor of City Journal, from whose latest issue this is adapted.