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Nov 06 2017

Economic Development: A Money Hole

Recently Amazon decided to open a second headquarters away from Seattle and started a bidding war among US and Canadian cities. The company is spending over $5 billion dollars on this campaign which also includes a list of demands. So far their have been 238 cities offering a variety of incentives to entice the retail giant to build there.

The pitch to cities from Amazon is simple: the company will bring highly skilled employment worth billions to the local area. Amazon says the second HQ will include “as many as 50,000 high-paying jobs”, and notes that the construction and economic impact of the building “is expected to create tens of thousands of additional jobs and tens of billions of dollars in additional investment in the surrounding community”. [..]

In exchange for all that economic growth, the company has a long list of requirements for any city which wants to bid for its presence. Amazon lists a number of “core preferences”, including a 45-minute drive to an international airport, mass transit (such as a tram or subway stop) connected directly to the site, and at least 500,000 square feet of office space available by 2019. [..]

In a seven-page document provided to cities interested in bidding, Amazon also lists a number of “decision drivers”, including “the presence and support of a diverse population”, “a strong university system” and “an overall high quality of life”.

But simply being a nice place to live is unlikely to be enough to win the company over. Amazon also lists financial incentives to “offset [its] initial capital outlay and ongoing operational costs” as a “key preference”.

For years now, cities and states have been offering companies tax breaks and relaxed regulation to bring in business and create jobs for the regions. As was realized in the nineteenth century, these incentives rarely worked. Noam Maggor, who teaches the history of capitalism at Cornell University, explains why in his article for The Guardian

In the past, these pressure tactics often failed to accomplish their desired results. Geared to exact valuable concessions and pit one city against another, they instead inspired fierce and widespread opposition.

Like today, urban boosters in the 19th century dazzled ordinary Americans with grand visions of economic growth. In the fast-paced age of the railroad and the telegraph, they explained, corporate capital had become more mobile than ever before and much better able to choose between contending sites for investment. Cities that garnered favor with investors would win a prosperous future, securing an abundance of financial resources, thriving industries, and thousands of high-paying jobs.

The policy prescriptions for cities were clear: eliminate corporate taxes, provide public subsidies, and avoid heavy-handed government regulation. “What we want is capital,” one member of the chamber of commerce in Laramie, Wyoming, advised. “Is it not rather to throw open the gates wide and welcome capital with outstretched arms?”

Any departure from these tenets, a prominent lawyer from Olympia, Washington, warned, would “paralyze the great enterprises of improvement which have already been commenced, and … prevent the inauguration of others now in contemplation”. In the context of competition for investment among cities, the disastrous results would be a languishing economy, unrealized development potential, and lackluster job creation.
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Fortunately, urban leaders stood up against the race to the bottom that these methods aimed to generate. Many lawmakers remained skeptical about doomsday scenarios painted by investors and refused to cater to corporate demands. They mocked the notion that they had “to coddle and fondle and caress these great capitalists in order to get them to … invest their money”, as Charles Hartman of Bozeman, Montana put it.

The pushback against concessions produced legal prohibitions, often inscribed in state constitutions, that explicitly barred politicians from succumbing to pressure from investors. Lawmakers in Colorado, for example, explained that cities had at times been overeager in their dealings with business interests. These municipalities had struggled to protect the people “from the grasping and monopolizing tendencies of railroads and other corporations”.

The Colorado constitution, written in 1876, thus placed such legislative initiatives beyond reach. It included an explicit injunction against any legislation offering special tax exemptions to corporations. It likewise prohibited cities from using public borrowing to subsidize corporate ventures.

Determined to advance public priorities over corporate profits, many state constitutions sanctioned broad government authority to regulate corporations. These provisions, and many others, did not entirely eliminate special corporate incentives, but they made such policies much more difficult to enact.

Tax breaks and government subsidies have of late become synonymous with development strategy – something Amazon is now skillfully taking advantage of. An influx of unregulated private investment, however, has never in itself been enough to nurture urban prosperity and well-being.

In the heyday of American urban growth, cities expanded and proliferated and did not do so in an environment of submissiveness to corporate ultimatums. They instead benefited from political institutions that carefully guarded their tax revenues and were therefore able to invest in long-term foundations for development.

As. HBO’s “Last Week Tonight” host John Oliver explains these economic incentives that these cites are offering corporations is like throwing money down a hole.

“We’re basically throwing money down a hole and hoping it brings us prosperity, which is the exact business model of a fucking wishing well.”

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