The Amazon Deal Was an Outrage from the Beginning

Amazon just announced that it is abandoning its plans to build a new headquarters in New York City after the company faced stiff resistance from some local politicians led by the vocal new star of the Democratic Party, Alexandra Ocasio-Cortez (AOC). Their objection: giving one of the world’s most valuable companies billions of dollars in tax incentives.

You won’t hear me say this often, but in this case AOC got it right. It was indeed an outrage for the city to extend to Amazon over $3 billion in subsidies. In fact, there is never any good reason for government to subsidize a private company. Such handouts are appalling in their cronyism, in addition to being a sign of economic ignorance.

In this case, the justification for the subsidies to Amazon is that NYC officials believed them to be the surest way to convince its owner, Jeff Bezos, to choose the city for a new headquarters. Amazon moving to NYC, they believed, would create jobs, and subsidies were not only justified but necessary to make this job-creation happen. That belief was shared by many bureaucrats from dozens of cities around the nation. As a result, lavish offers were extended in attempts by many local governments to convince Amazon to move to their necks of the woods.

In the end, Amazon did what Amazon was probably going to do all along. It announced that it would open a headquarters in NYC and Crystal City in Arlington, Virginia, in large part to benefit from the skilled workforce, the adequate infrastructure and transportation options (airports and a vast subway network), as well as the synergies with other companies for the purpose of enhancing production supply chains and access to professional services available in both regions. The hard truth is that no amount of subsidies could have dragged a company to a place that wasn’t economically vibrant or that was in the middle of nowhere.

In other words, it was silly for many to believe that they had shots at attracting Amazon. Worse, it was a waste of their taxpayers’ money to hire consultants and run up expenses in producing bids. As for those of us living in NYC or Crystal City (I live in Arlington, VA) there could be a real cost. Yes, Amazon will bring growth and jobs.

But it has nothing to do with those targeted subsidies.  The economic literature is pretty clear about these costs. As I wrote a few months ago:

"There is a broad body of economic research that shows that targeted state subsidies to private businesses — while often promoted as a “market-friendly” means to boost growth, jobs, and development — have little to no net positive effects. George Mason University’s Christopher Coyne and Lotta Moberg wrote a review of the research and concluded that such subsidies are in fact often damaging because they misallocate scarce public resources while encouraging rent seeking, regulatory capture, and cronyism."

"[My colleagues Michael] Farren and Anne Philpot have an entire section reviewing the literature and the distortions such incentives create. Here is one small tidbit:"

“This parallels research by University of Maryland professor Dennis Coates, who found negligible and even negative effects of professional sports stadium construction—which is nearly always subsidized by public funding—on local economic outcomes, like per capita personal wages, wages per job, and total wage and salary disbursements.”

In addition, these subsidies are unfair to local companies that face heavier tax burdens than does Amazon. They are also unfair to all of us taxpayers who are saddled with heavier future tax burdens.

But what does Amazon picking up and leaving NY before it even moved there mean?

My colleague Matt Mitchell, who a few years ago wrote a great article about government-granted privileges and their consequences, shared with me by email his thoughts on this matter: “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.”

Another colleague, Michael Farren, added this:

"Amazon’s pull out 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."

They are right.

What a missed opportunity for NYC, though. While AOC is cheering the news by saying that "Anything is possible: today was the day a group of dedicated, everyday New Yorkers & their neighbors defeated Amazon’s corporate greed, its worker exploitation, and the power of the richest man in the world," it should never have come to this outcome in the first place.

From the start, NYC should have refused to extend subsidies to Amazon. It’s likely that the company would have moved here anyway. There would have been no complaints worth paying attention to from the left. And Amazon would almost certainly have enhanced the area with better jobs and economic growth. Such an outcome would have been a win-win. Instead, New Yorkers got cronyism that, ironically, probably lost them Amazon.   

What about lower taxes for everyone? Lower burdens for all business? NYC has suffered in every area for so long because of excessive control and taxes. Let now be the time: attract business, yes, but not with cronyism but a genuine welcome to all enterprise.  

Photo credit: Drew Angerer/Getty Images