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Friday, January 19, 2018

Amazon moves closer to breaking the bank with "HQ2"

Yesterday (Jan. 18), Amazon announced the 20 finalists for its "HQ2" project, that will supposedly create a second headquarters (why?) for the company somewhere in North America, most likely in the United States. With an alleged 50,000 jobs and $5 billion in investment, this development attracted 238 bids from cities and counties in the United States, Canada, and Mexico.

The finalists: Atlanta, Austin, Boston, Chicago, Columbus, Dallas, Denver, Indianapolis, Los Angeles, Miami, Montgomery County (MD), Nashville, New York, Newark, northern Virginia, Philadelphia, Pittsburgh, Raleigh, Toronto, and Washington.

The finalists will now be subject to months of unremitting pressure to give up as much as possible. It will not be pretty. Information asymmetry, capital mobility, and rent-seeking are the hallmarks of the site selection process. In the European Union a set of rules on subsidies limits this competition, whereas in the United States, it's the Wild West. This leads to much higher investment incentives being given in the United States than are given by EU Member States for similar projects even by the same company (AMD/Global Foundries, for example).

Interestingly enough, both the highest-known bid ($7 billion in Newark) and the lowest (0 in Toronto) are still under consideration. (Unfortunately, the other known 0 bid, by San Jose, was rejected.) I can think of scenarios where either might be chosen, but I can't get inside the mind of Jeff Bezos and other Amazon decision-makers. This is the heart of information asymmetry. So again, we have to wait and see what Amazon does. Will the company subject a smaller group of cities to still more torture? Stay tuned!

2 comments:

  1. Could the US enact EU-style rules on subsidies like this? What would happen if they did?

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  2. Let me take the second question first. Under the EU's current subsidies rules, rich areas can't offer location subsidies (via regional aid, the most common method) at all. If there is an area within these cities with low enough per capita income to be eligible to give some "state aid" (the EU term for subsidies), it would surely be limited to 10% of the investment. Then the regional aid rules for large projects would kick in, and the maximum would be scaled down for every dollar of investment over $100 million (technically euros, of course). Since that's only 2% of the projected investment, essentially the maximum allowable would be 3.4% of the investment, or $170 million. But in all 20 finalists, it's more likely the maximum would be 0.

    The first question is harder: Can we actually get such rules? We are very far from it. I think first we need more transparency; the Government Accounting Standards Board's Rule #77 will help achieve this. The results are only now coming in; Good Jobs First is tracking the required filings very closely. My feeling is that only when enough people realize how bad the situation is will we have enough political pressure to make major reforms.

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