Feb 14, 2019

Amazon Cancels New York Expansion Plans

Mercatus Scholars Respond to Amazon's Announcement

Matthew D. Mitchell 

Amazon has decided not to build one-half of its HQ2 in New York after all, teaching Empire State politicians a lesson that economists have known for years: targeted corporate subsidies are not an effective strategy for economic development.

With much fanfare, New York had offered Amazon nearly $3 billion in incentives. The tech giant had chosen New York in spite of much more generous offers from others like Newark, NJ and Montgomery, MD. One reason they may have been willing to spur these more generous offers is that even enormous subsidies pale in comparison to other location factors. It’s been estimated, for example, that locally-supplied labor costs are about 14 times the size of state and local tax costs.

There have now been over 100 peer-reviewed academic studies of targeted subsidies. The overwhelming majority of these fail to find any evidence that subsidies benefit the broader communities that offer them. What does matter is the overall environment. Policymakers who stick to the provision of public goods, keep their taxes low and their regulations reasonable can see their states and cities grow. Those who offer targeted subsidies to high-profile firms like Foxconn and Amazon do nothing to improve the lot of their constituents. The last few weeks suggest these policymakers not only squander taxpayer capital, but they risk squandering their own political capital.

Michael D. Farren 

Amazon’s pullout from New York City is probably evidence of something we should have suspected from the start—HQ2, at least in part, was about escaping from public pressure and overbearing government intervention in Seattle. It’s unlikely that Amazon’s withdrawal from NYC has anything to do with the risk of losing economic development subsidies, because HQ2 could have received much larger subsidies in Newark, NJ ($7 billion) and Montgomery County, MD ($8.5 billion) than it was offered barely 10 miles away in Long Island City and Arlington, VA. And Amazon was eligible for even larger subsidies, worth at least $12 billion, in North Carolina using existing programs.

Instead, Amazon probably had déjà vu as it saw its NYC HQ2 expansion turning into a repetition of the contentious political and cultural atmosphere it has experienced in Seattle. And although Amazon values the talented tech workforce in the Big Apple—which was the primary decision factor of where to locate HQ2 and to split it between Arlington and Queens—it now seems that a primary driver of the HQ2 decision was both access to a talented workforce and local political and community appreciation of their presence. Amazon wants both a productive workforce AND good publicity.

Photo credit: Spencer Platt/Getty Images

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