In the biggest ever defeat for a subsidized project in history, Amazon announced February 14th that it was canceling its planned half of HQ2 for New York City, which was to receive subsidies worth at least $3.133 billion. After facing months of public opposition, the company provided a Valentine's Day present in the form of capitulation. Amazon showed that, like Electrolux, its efforts to extract maximum subsidies from 238 cities constituted corporate rent-seeking on a grand scale. Not only did Amazon conduct an exploitative public auction for the supposedly single HQ2 facility, it furthered the impression that it was engaging in rent-seeking by its refusal to discuss alternatives with New York officials, by its absolute insistence on opposing a union for its workers, and by its sudden though not unexpected cancellation announcement. Activists scorched the firm, too, for the fact that for the second year running, Amazon will pay 0 in federal income tax despite earning $11.2 billion in profits in 2018 and $5.6 billion in 2017.
This is not to be confused with Foxconn, which is looking more and more like an economic development failure. There, it appears that the company will not be able to provide the investment and benefits it promised in Wisconsin. With Amazon, what we have is a case of the company being unwilling to continue the political battle to obtain its $3+ billion in incentives. While Amazon is by far the largest project ever defeated, such defeats are not unprecedented. I participated in two successful campaigns in the late 1990s and early 2000s against abusive tax increment financing (TIF) projects in the St. Louis suburbs of Olivette and O'Fallon, but these were on the order of $40 or $50 million, not $3 billion. Alas, I was also on the losing side of an exceptionally bitter battle against a TIF-funded mall in Hazelwood, Missouri, which still hurts to think about. The residents lost their homes to eminent domain, the city administration was high-handed and manipulative, and the new mall contributed substantially to the death of at least two nearby malls, part of the $2 billion retail subsidy merry-go-round during 1990-2007 documented by the East-West Gateway Council of Governments.
In addition, as Richard Florida reports at Citylab and Good Job First points out at length, the victory has also energized reformers around the country searching for a solution to the problem of corporate bidding wars. I myself have received inquiries from multiple elected officials' offices about the European Union's systematic control of investment incentives, and I know of other efforts to make the shocking subsidy and perhaps even more shocking victory against it into a national teachable moment. For the first time in the over 20 years I have been fighting wasteful corporate subsidies, which is to say the vast majority of them, this is the first time it feels like it's possible that we could really see reform take place -- though not without a political battle royal. Buckle up!
Showing posts with label Amazon. Show all posts
Showing posts with label Amazon. Show all posts
Friday, February 15, 2019
Tuesday, November 20, 2018
Amazon Wins!!!
Well, what did you expect? With 238 entrants and 20 finalists, the Amazon HQ2 location tournament resulted in a resounding victory for Amazon: Billions of dollars in subsidies and binders full of detailed information on the contestants. Plus, we got a surprise twist at the end, when Amazon announced it would choose two "headquarters" instead of one. Of course, I never thought that having two headquarters made economic sense ("Doesn't that defeat the idea of a headquarters as a central coordinating site?" I asked last year), and the same is even truer when you have three "headquarters."
Leaving aside how Amazon plans to coordinate three headquarters' operations, the subsidies boggle the mind and insult our intelligence. Let's lay out what we know about the subsidies so far, remembering that there are other subsidy elements that are likely to be discovered as things play out. That is what happened with Foxconn, for example: Its subsidies in Wisconsin were originally reported as $3 billion in state subsidies plus local tax increment financing (TIF). By June of this year, Good Jobs First was reporting that further subsidies plus a huge TIF award brought the total to $4.8 billion (Megadeals spreadsheet, June 2018 update; download here). Something is likely to up the total incentives Amazon will receive, above what we know today.
So, which cities got half of HQ2? Amazon split the project in half, with 25,000 jobs set to go to Long Island City, Queens, New York, and 25,000 to Crystal City, Arlington County, Virginia. This much leaked out the week before the official announcement, but the November 13th official notification added that Nashville would get a 5,000 job consolation prize (for $138.7 million in incentives) as well as the incentive packages from each of these three jurisdictions -- well, some of the incentives, anyway. As with Foxconn, this announcement was rapidly followed by the discovery of new incentives. I'll skip the various updates and skip straight to what is currently known.
New York city and state both provided large incentives to the company. State benefits comprise mainly $1.525 billion in Excelsior employment tax credits, plus another $325 million based on the size in square feet of the Amazon offices, or a total state package of $1.85 billion. New York City will provide a job creation tax credit of $897 million over 12 years, plus a partial property tax abatement of $386 million over 25 years, according to a Good Jobs First analysis of the city's press release on the project.
But wait, there's more! Good Jobs First reports that the city will also provide a subsidy known as a payment in lieu of taxes (PILOT) that could itself cost another $100+ million. Last, as far as we know, but not least, the project will be located in a federal Opportunity Zone, which will provide further, though not-yet-estimated, benefits to long-term capital investors like CEO Jeff Bezos.
Total so far: $1.850 billion + 0.897 billion +0.386 billion = $3.133 billion, and likely more. While Amazon wants to emphasize the cost per job of its incentives, it only considers the first of these subsidies in its public calculation. But with just these three programs, we are already at a cost of $125,333 per job. While this doesn't sound horrible compared to some incentive packages we've seen recently, it completely omits that with such large numbers of jobs, there are diminishing returns in the value of each job due to the increasing likelihood of dumping thousands of workers and their families on a locality's infrastructure and educational system. Further, as I predicted in January, it normalizes the use of aid intensities* above 100%: $3.133 billion/$2.5 billion = 125%! Mind you, this is the nominal subsidy, not at present value, but with the 10-year Treasury note at 3.08% on November 16, the proper discount rate will be in that (low) vicinity, as has been the practice of the Organization for Economic Cooperation and Development in estimating the present value of U.S. subsidies for over 20 years.
To add a final insult to injury, the Amazon site will be in a federal Opportunity Zone, but the company's project is destroying one of the things that would be most welcome there, affordable housing. Politico (h/t Daily Kos) reports that the New York outpost of HQ2 will displace a planned 1,500 units of affordable housing from two developers.
In Virginia, a second $2.5 billion investment, 25,000 job facility will be opened by Amazon as well. There, the company will receive $573 million in job creation tax credits. Virginia Tech University also plans to open a new "Innovation Campus" less than two miles from HQ2/Virginia. The $1 billion campus has been considered one of the biggest draws for Amazon in its location decision, and Good Jobs First includes the entire $1 billion as a subsidy for Amazon. I disagree; building new educational infrastructure will provide benefits to the students that they will always possess regardless of who their future employers may be, so I see the company as unable to capture much of the $1 billion as a subsidy. A university is a great economic draw, but this extends far beyond any single employer. If we exclude the new campus as a subsidy, the aid intensity in Virginia is only 22.92%.
Combining the two locations, we now find, even without the new Virginia Tech campus, that Amazon will receive $3.706 billion in subsidies for the HQ2 project proper. For the combined project, that brings us to an aid intensity of 76.1% of the investment.
Long-time readers know it's time for a comparison with how this would be treated in the European Union under its regional aid guidelines. First, no region in the European Union is eligible for a 76.1% aid intensity, not even the poorest part of Bulgaria. Second, HQ2 is not going to the non-existent U.S. equivalent of Bulgaria, but to two of the richest places in the United States. What would Amazon get in state aid (=subsidies) for locating such a facility in London or Paris? Not one penny. Rich regions can't give investment attraction incentives, period. So the entire $3.7 billion and counting subsidy for the company would be disallowed if rational regulation of the bidding wars existed.
Happily, these subsidies have come in for a great deal of criticism around the country. As The New York Times editorialized, "New York's Amazon Deal is a Bad Bargain." And how does it know New York overpaid? The same way I recommended back in 2014, comparing to a similar deal. And there's no more similar deal than the other half of HQ2 that went to Virginia. Seeing that New York paid more than twice as much as Virginia for an equivalent project, the Times rightly concludes that New York paid more than it had to. Whether much political resistance to HQ2/New York develops or not, it's great to see the press analyzing these deals well.
To end on a down note, though, we need to recognize the harm the Amazon auction did to transparency. The company made the finalists sign non-disclosure agreements, although a couple did make it into the public eye (Newark, New Jersey, and Montgomery County, Maryland, two of the largest finalist offers, though it appears Pittsburgh topped them all). Hopefully some of the losers will now come forward. However, that's not the point; we need real-time transparency if there is to be any democratic oversight of the multi-billion giveaways that look to become more common than ever.
* Aid intensity is a metric, first used in the European Union, that allows us to compare the size of subsidies regardless of the size of the project. It is calculated as subsidy divided by investment. An intensity of 100% at present value means that the government is paying the entire cost of the investment. Thanks to reader TM for pointing out that I should have clarified this in the original article.
Leaving aside how Amazon plans to coordinate three headquarters' operations, the subsidies boggle the mind and insult our intelligence. Let's lay out what we know about the subsidies so far, remembering that there are other subsidy elements that are likely to be discovered as things play out. That is what happened with Foxconn, for example: Its subsidies in Wisconsin were originally reported as $3 billion in state subsidies plus local tax increment financing (TIF). By June of this year, Good Jobs First was reporting that further subsidies plus a huge TIF award brought the total to $4.8 billion (Megadeals spreadsheet, June 2018 update; download here). Something is likely to up the total incentives Amazon will receive, above what we know today.
So, which cities got half of HQ2? Amazon split the project in half, with 25,000 jobs set to go to Long Island City, Queens, New York, and 25,000 to Crystal City, Arlington County, Virginia. This much leaked out the week before the official announcement, but the November 13th official notification added that Nashville would get a 5,000 job consolation prize (for $138.7 million in incentives) as well as the incentive packages from each of these three jurisdictions -- well, some of the incentives, anyway. As with Foxconn, this announcement was rapidly followed by the discovery of new incentives. I'll skip the various updates and skip straight to what is currently known.
New York city and state both provided large incentives to the company. State benefits comprise mainly $1.525 billion in Excelsior employment tax credits, plus another $325 million based on the size in square feet of the Amazon offices, or a total state package of $1.85 billion. New York City will provide a job creation tax credit of $897 million over 12 years, plus a partial property tax abatement of $386 million over 25 years, according to a Good Jobs First analysis of the city's press release on the project.
But wait, there's more! Good Jobs First reports that the city will also provide a subsidy known as a payment in lieu of taxes (PILOT) that could itself cost another $100+ million. Last, as far as we know, but not least, the project will be located in a federal Opportunity Zone, which will provide further, though not-yet-estimated, benefits to long-term capital investors like CEO Jeff Bezos.
Total so far: $1.850 billion + 0.897 billion +0.386 billion = $3.133 billion, and likely more. While Amazon wants to emphasize the cost per job of its incentives, it only considers the first of these subsidies in its public calculation. But with just these three programs, we are already at a cost of $125,333 per job. While this doesn't sound horrible compared to some incentive packages we've seen recently, it completely omits that with such large numbers of jobs, there are diminishing returns in the value of each job due to the increasing likelihood of dumping thousands of workers and their families on a locality's infrastructure and educational system. Further, as I predicted in January, it normalizes the use of aid intensities* above 100%: $3.133 billion/$2.5 billion = 125%! Mind you, this is the nominal subsidy, not at present value, but with the 10-year Treasury note at 3.08% on November 16, the proper discount rate will be in that (low) vicinity, as has been the practice of the Organization for Economic Cooperation and Development in estimating the present value of U.S. subsidies for over 20 years.
To add a final insult to injury, the Amazon site will be in a federal Opportunity Zone, but the company's project is destroying one of the things that would be most welcome there, affordable housing. Politico (h/t Daily Kos) reports that the New York outpost of HQ2 will displace a planned 1,500 units of affordable housing from two developers.
In Virginia, a second $2.5 billion investment, 25,000 job facility will be opened by Amazon as well. There, the company will receive $573 million in job creation tax credits. Virginia Tech University also plans to open a new "Innovation Campus" less than two miles from HQ2/Virginia. The $1 billion campus has been considered one of the biggest draws for Amazon in its location decision, and Good Jobs First includes the entire $1 billion as a subsidy for Amazon. I disagree; building new educational infrastructure will provide benefits to the students that they will always possess regardless of who their future employers may be, so I see the company as unable to capture much of the $1 billion as a subsidy. A university is a great economic draw, but this extends far beyond any single employer. If we exclude the new campus as a subsidy, the aid intensity in Virginia is only 22.92%.
Combining the two locations, we now find, even without the new Virginia Tech campus, that Amazon will receive $3.706 billion in subsidies for the HQ2 project proper. For the combined project, that brings us to an aid intensity of 76.1% of the investment.
Long-time readers know it's time for a comparison with how this would be treated in the European Union under its regional aid guidelines. First, no region in the European Union is eligible for a 76.1% aid intensity, not even the poorest part of Bulgaria. Second, HQ2 is not going to the non-existent U.S. equivalent of Bulgaria, but to two of the richest places in the United States. What would Amazon get in state aid (=subsidies) for locating such a facility in London or Paris? Not one penny. Rich regions can't give investment attraction incentives, period. So the entire $3.7 billion and counting subsidy for the company would be disallowed if rational regulation of the bidding wars existed.
Happily, these subsidies have come in for a great deal of criticism around the country. As The New York Times editorialized, "New York's Amazon Deal is a Bad Bargain." And how does it know New York overpaid? The same way I recommended back in 2014, comparing to a similar deal. And there's no more similar deal than the other half of HQ2 that went to Virginia. Seeing that New York paid more than twice as much as Virginia for an equivalent project, the Times rightly concludes that New York paid more than it had to. Whether much political resistance to HQ2/New York develops or not, it's great to see the press analyzing these deals well.
To end on a down note, though, we need to recognize the harm the Amazon auction did to transparency. The company made the finalists sign non-disclosure agreements, although a couple did make it into the public eye (Newark, New Jersey, and Montgomery County, Maryland, two of the largest finalist offers, though it appears Pittsburgh topped them all). Hopefully some of the losers will now come forward. However, that's not the point; we need real-time transparency if there is to be any democratic oversight of the multi-billion giveaways that look to become more common than ever.
* Aid intensity is a metric, first used in the European Union, that allows us to compare the size of subsidies regardless of the size of the project. It is calculated as subsidy divided by investment. An intensity of 100% at present value means that the government is paying the entire cost of the investment. Thanks to reader TM for pointing out that I should have clarified this in the original article.
Tuesday, January 23, 2018
Amazon scores two more $5+ billion bids
A non-blogging friend points me to the announcement today of Maryland's subsidy bid that puts Montgomery County into one of the 20 finalist slots. Shockingly, Governor Larry Hogan (R-MD) put in a bid that would pay Amazon almost the entire cost of its facility, depending on what you think a proper discount rate should be now (hint: low).
"HQ2," which Amazon has stated will amount to an eventual $5 billion in investment, will receive a subsidy package worth over $5 billion in nominal value (but not necessarily present value) from Maryland. The largest element in this package is a jobs tax credit of 5.75% of wages for up to 17 years, on salaries averaging $100,000 per year (minimum $60,000, maximum $500,000). According to the story linked above, Amazon would max out this incentive with just 40,000 jobs. To simplify the math, this element would pay up to $5750 per year to Amazon X 40,000 employees X 17 years, or $3.91 billion.
Other elements of the package include state and local property tax credits (local governments would be 50% reimbursed by the state for their share), a sales tax exemption on construction materials, and an unspecified amount of infrastructure. According to the linked story, there would be "billions of dollars" in transportation upgrades in the state, though the article does not indicate how much would be Amazon-specific and how much would go elsewhere in the area.
Why do I say this offer is shocking? 1) It normalizes not just billion-dollar incentive packages, but multi-billion subsidy awards. Foxconn got $4 billion last year from Wisconsin, according to the Good Jobs First Megadeals spreadsheet, October 2017 update. Now, Amazon has received at least three (see below for St. Louis) offers of over $5 billion. In the European Union, a $1 billion incentive is virtually impossible even in the poorest EU regions, and absolutely impossible in cities as wealthy as the 20 finalists here. Indeed, few if any of the 20 would be allowed to offer any subsidy whatsoever. 2) What is possibly even worse, it normalizes paying subsidies greater than the cost of the investment (100+ % aid intensity, in terms of European Union state aid rules). Seriously, if a government is going to pay more than the entire cost of the investment, it should have a legitimate, large ownership stake, rather than using "investment" as a euphemism for "subsidy." 3) Have none of these cities noticed that unemployment is at historically low levels? That's precisely a reason not to give away the store. Let's look at the state unemployment rate for the 20 qualifiers in November 2017:
Colorado: 2.9%
Tennessee: 3.1%
Florida: 3.6%
Massachusetts: 3.6%
Indiana: 3.7%
Virginia: 3.7%
Texas: 3.8% (two finalists)
Maryland: 3.9%
Georgia: 4.3%
North Carolina: 4.3%
California: 4.5%
Pennsylvania: 4.6% (two finalists)
New York: 4.7%
Ohio: 4.8%
Illinois: 4.9%
New Jersey: 5.1%
Ontario: 5.5% (December 2017)
Washington DC 6.4%
Source: For U.S. states and DC, Bureau of Labor Statistics, Local Area Unemployment Statistics. For Ontario, Alberta Government Economic Dashboard, published 5 January 2018.
I'm not the only person who is shocked. Greg LeRoy, executive director of Good Jobs First, told Middle Class Political Economist: "As a Maryland taxpayer, I am aghast that Gov. Hogan would propose to subsidize Amazon's new headquarters 100 percent with public dollars. I refuse to pay higher taxes for a company one-sixth owned by the richest person on earth."
LeRoy also pointed out that the St. Louis bid was released to the public last week after the city failed to be named a finalist. According to the St. Louis Business Journal, a partnership of the state of Missouri, the city of St. Louis, St. Louis County, the state of Illinois, and Illinois' St. Clair County offered Amazon $7.1 billion in subsidies, edging out Newark's $7 billion bid as the largest offering known so far. As with the Maryland bid, this is shocking for all the same reasons. Indeed, Missouri had one of the lower unemployment rates in November 2017, a mere 3.4%.
The Maryland and Missouri subsidy packages are simply horrifying. I wrote over six years ago that state and local subsidies were "more out of control than ever." In these six years, we have already seen five $2+ billion incentive packages, with at least one more on the way, and companies emboldened to request not millions, but billions of dollars of subsidies. I fear we are looking at a new ratcheting up of the investment attraction wars.
"HQ2," which Amazon has stated will amount to an eventual $5 billion in investment, will receive a subsidy package worth over $5 billion in nominal value (but not necessarily present value) from Maryland. The largest element in this package is a jobs tax credit of 5.75% of wages for up to 17 years, on salaries averaging $100,000 per year (minimum $60,000, maximum $500,000). According to the story linked above, Amazon would max out this incentive with just 40,000 jobs. To simplify the math, this element would pay up to $5750 per year to Amazon X 40,000 employees X 17 years, or $3.91 billion.
Other elements of the package include state and local property tax credits (local governments would be 50% reimbursed by the state for their share), a sales tax exemption on construction materials, and an unspecified amount of infrastructure. According to the linked story, there would be "billions of dollars" in transportation upgrades in the state, though the article does not indicate how much would be Amazon-specific and how much would go elsewhere in the area.
Why do I say this offer is shocking? 1) It normalizes not just billion-dollar incentive packages, but multi-billion subsidy awards. Foxconn got $4 billion last year from Wisconsin, according to the Good Jobs First Megadeals spreadsheet, October 2017 update. Now, Amazon has received at least three (see below for St. Louis) offers of over $5 billion. In the European Union, a $1 billion incentive is virtually impossible even in the poorest EU regions, and absolutely impossible in cities as wealthy as the 20 finalists here. Indeed, few if any of the 20 would be allowed to offer any subsidy whatsoever. 2) What is possibly even worse, it normalizes paying subsidies greater than the cost of the investment (100+ % aid intensity, in terms of European Union state aid rules). Seriously, if a government is going to pay more than the entire cost of the investment, it should have a legitimate, large ownership stake, rather than using "investment" as a euphemism for "subsidy." 3) Have none of these cities noticed that unemployment is at historically low levels? That's precisely a reason not to give away the store. Let's look at the state unemployment rate for the 20 qualifiers in November 2017:
Colorado: 2.9%
Tennessee: 3.1%
Florida: 3.6%
Massachusetts: 3.6%
Indiana: 3.7%
Virginia: 3.7%
Texas: 3.8% (two finalists)
Maryland: 3.9%
Georgia: 4.3%
North Carolina: 4.3%
California: 4.5%
Pennsylvania: 4.6% (two finalists)
New York: 4.7%
Ohio: 4.8%
Illinois: 4.9%
New Jersey: 5.1%
Ontario: 5.5% (December 2017)
Washington DC 6.4%
Source: For U.S. states and DC, Bureau of Labor Statistics, Local Area Unemployment Statistics. For Ontario, Alberta Government Economic Dashboard, published 5 January 2018.
I'm not the only person who is shocked. Greg LeRoy, executive director of Good Jobs First, told Middle Class Political Economist: "As a Maryland taxpayer, I am aghast that Gov. Hogan would propose to subsidize Amazon's new headquarters 100 percent with public dollars. I refuse to pay higher taxes for a company one-sixth owned by the richest person on earth."
LeRoy also pointed out that the St. Louis bid was released to the public last week after the city failed to be named a finalist. According to the St. Louis Business Journal, a partnership of the state of Missouri, the city of St. Louis, St. Louis County, the state of Illinois, and Illinois' St. Clair County offered Amazon $7.1 billion in subsidies, edging out Newark's $7 billion bid as the largest offering known so far. As with the Maryland bid, this is shocking for all the same reasons. Indeed, Missouri had one of the lower unemployment rates in November 2017, a mere 3.4%.
The Maryland and Missouri subsidy packages are simply horrifying. I wrote over six years ago that state and local subsidies were "more out of control than ever." In these six years, we have already seen five $2+ billion incentive packages, with at least one more on the way, and companies emboldened to request not millions, but billions of dollars of subsidies. I fear we are looking at a new ratcheting up of the investment attraction wars.
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!
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!
Sunday, October 22, 2017
Now Amazon wants to break the bank UPDATED
On Thursday (October 19), the first stage of the Amazon sweepstakes for a second headquarters, dubbed "HQ2," was completed as cities submitted their bids to the Internet giant. With a possible $5 billion investment and eventually 50,000 jobs at salaries over $100,000, this is one of the very best economic development projects to come along in a long time.
BUT IS IT?* I have a hard time understanding how this project even makes economic sense. Why does a company need two headquarters? Doesn't that defeat the whole idea of having a headquarters as a centralized coordination site? Dean Barber has gone so far to suggest that Amazon will "A/B test" the two headquarters: See which one does better, and close the other one (h/t Greg LeRoy). I can believe it, but as long-time readers know, this is an area where we're looking at the terrible information asymmetry that bedevils governments in site selection bidding wars. In other words, we have no idea whether Amazon intends to close its existing headquarters in Seattle or close HQ2 if it doesn't work as well as the current headquarters. This is kind of an important point for assessing the impact of HQ2 on the United States as a whole. And then there's the effect that subsidizing Amazon will have on its competitors, which will reduce net job creation and net benefits for the country as a whole. On top of everything, unemployment is pretty low in most states, so why would they want to shell out billions of dollars for this project?
I'm not going to try to prognosticate the HQ2 location (I almost said "the winner," but there is a good chance of overbidding in a public auction with so many competitors), because there is no way to wave away the information asymmetry problem. I think we can be confident that it will be a place that is already a tech hub. CNN offers eight plausible contenders (Atlanta, Pittsburgh, Toronto, Dallas, Austin, Boston, San Jose, and Washington, DC), while the New York Times predicts Denver. Instead, I want to highlight some specific bids that caught my eye.
One of the good stories is Toronto. Both the city and the province of Ontario were quick off the mark to say that while they would certainly do things like facilitating land assembly, there would be no cash subsidies for Amazon. The city's application to the company emphasizes its abundance of tech talent. As a sign that this "no subsidies" talk is not empty, we can point to the announcement earlier this month that Ontario had secured a new investment from Thomson Reuters, adding 400 jobs over two years, scheduled to eventually grow to 1,500 jobs. This project received no financial support at all, only what provincial officials described as "concierge service" (h/t Carpentry of the Heart).
Another major city not getting involved in the bidding war is San Jose. Like Ontario officials, Mayor Sam Liccardo argues that talent availability is the key to attracting businesses. While this tells us nothing about incentives the state of California might provide, it is good to see two of the major potential sites taking an anti-subsidy position.
At the other end of the spectrum, New Jersey is offering $5 billion over 10 years, and Newark will provide another $2 billion over 20 years. This is crazy on a number of levels. First of all, it has a nominal aid intensity of 140%: New Jersey and Newark will pay all the costs of the project and give Amazon some more money on top of that. Second, this is 18 times bigger than the largest subsidy the state has given in the past ($390 million). (We saw the same situation with Nevada and Tesla, but that was only 13 times the state's formerly largest incentive package.) Whether the state is really capable of managing a deal of that size is doubtful; indeed, the $390 million American Dream retail/entertainment project has been under construction for more than 10 years. Third, while not all of theapproximately 50 238 bids have yet been revealed, currently the second-highest bid is $500 million from Worcester, Massachusetts (state support is currently unknown), 1/14 the size of Newark's package. This is reminiscent of the disparity in bids between North Carolina and Virginia for a Dell manufacturing facility in 2004: $300 million (nominal) vs. $37 million! Fourth, and finally, this project requires the legislature to tear up the current geographic targeting of the state's Grow NJ subsidy fund, currently restricted to the four poorest cities in the state, Passaic, Paterson, Camden, and Trenton.
Now, we wait. Amazon does not plan to announce its decision until next year. There is plenty of time to announce a list of finalists and subject them to more pressure. I am going to guess that when all first-round bids are revealed, the number 2 bid will be over $1 billion; indeed, there may be several $1+ billion bids. This is going to get ugly before we're done.
*Bonus points if you recognize the literary allusion.
BUT IS IT?* I have a hard time understanding how this project even makes economic sense. Why does a company need two headquarters? Doesn't that defeat the whole idea of having a headquarters as a centralized coordination site? Dean Barber has gone so far to suggest that Amazon will "A/B test" the two headquarters: See which one does better, and close the other one (h/t Greg LeRoy). I can believe it, but as long-time readers know, this is an area where we're looking at the terrible information asymmetry that bedevils governments in site selection bidding wars. In other words, we have no idea whether Amazon intends to close its existing headquarters in Seattle or close HQ2 if it doesn't work as well as the current headquarters. This is kind of an important point for assessing the impact of HQ2 on the United States as a whole. And then there's the effect that subsidizing Amazon will have on its competitors, which will reduce net job creation and net benefits for the country as a whole. On top of everything, unemployment is pretty low in most states, so why would they want to shell out billions of dollars for this project?
I'm not going to try to prognosticate the HQ2 location (I almost said "the winner," but there is a good chance of overbidding in a public auction with so many competitors), because there is no way to wave away the information asymmetry problem. I think we can be confident that it will be a place that is already a tech hub. CNN offers eight plausible contenders (Atlanta, Pittsburgh, Toronto, Dallas, Austin, Boston, San Jose, and Washington, DC), while the New York Times predicts Denver. Instead, I want to highlight some specific bids that caught my eye.
One of the good stories is Toronto. Both the city and the province of Ontario were quick off the mark to say that while they would certainly do things like facilitating land assembly, there would be no cash subsidies for Amazon. The city's application to the company emphasizes its abundance of tech talent. As a sign that this "no subsidies" talk is not empty, we can point to the announcement earlier this month that Ontario had secured a new investment from Thomson Reuters, adding 400 jobs over two years, scheduled to eventually grow to 1,500 jobs. This project received no financial support at all, only what provincial officials described as "concierge service" (h/t Carpentry of the Heart).
Another major city not getting involved in the bidding war is San Jose. Like Ontario officials, Mayor Sam Liccardo argues that talent availability is the key to attracting businesses. While this tells us nothing about incentives the state of California might provide, it is good to see two of the major potential sites taking an anti-subsidy position.
At the other end of the spectrum, New Jersey is offering $5 billion over 10 years, and Newark will provide another $2 billion over 20 years. This is crazy on a number of levels. First of all, it has a nominal aid intensity of 140%: New Jersey and Newark will pay all the costs of the project and give Amazon some more money on top of that. Second, this is 18 times bigger than the largest subsidy the state has given in the past ($390 million). (We saw the same situation with Nevada and Tesla, but that was only 13 times the state's formerly largest incentive package.) Whether the state is really capable of managing a deal of that size is doubtful; indeed, the $390 million American Dream retail/entertainment project has been under construction for more than 10 years. Third, while not all of the
Now, we wait. Amazon does not plan to announce its decision until next year. There is plenty of time to announce a list of finalists and subject them to more pressure. I am going to guess that when all first-round bids are revealed, the number 2 bid will be over $1 billion; indeed, there may be several $1+ billion bids. This is going to get ugly before we're done.
*Bonus points if you recognize the literary allusion.
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