India’s path to prosperity: Book talk with Raghuram Rajan on ‘Breaking the Mold’


India’s path to prosperity: Book talk with Raghuram Rajan on ‘Breaking the Mold’


Amazon’s red herring

Employees sort packages at the Amazon distribution center

As many others have already pointed out, Amazon’s recent announcement that it will build a second headquarters in North America has set in motion what will become one of the biggest competitions in history among state and local governments for a corporate expansion project. In the world of state and local economic development, Amazon is a whale. The possibility of 50,000 highly-paid jobs for professionals at a new $5 billion development is too tempting to pass up for any metro area with even the slimmest hope of courting one of the largest and most profitable companies in the world. Amazon’s unsubtle hint that tax incentives will play a big role in its decision helps ensure it will receive one of the biggest packages in history. Already, cities and states have rushed to announce their hope to entice Amazon with their distinct value proposition, and—in all likelihood—breathtaking handouts.

This begs important questions about the wisdom of state and local economic development strategies and their ability to remain focused on addressing the real challenges American communities face today.

Before communities go all in, they should think about who will ultimately win. Amazon has set the table in a way that ensures that just about every community that plays this game will lose, and not just because all but one place will come away without the grand prize. Many elected officials and economic development professionals will work tirelessly over the upcoming weeks and months to put together the most competitive bids their public coffers will permit. They will do this at a time when the country and many of these places face very real economic and social challenges that will not change that much from Amazon’s expansion, all on the hope for growth that is destined to happen somewhere, but probably not there. Meanwhile, one very unlucky place that ultimately ties the knot with Amazon will pay dearly for something it probably could have gotten for free.

Amazon’s announcement creates the expectation of a bake off—that places that can tick the boxes in Amazon’s request for proposals all have a chance. That is far from true. Amazon has become the world’s largest online retailer through ruthless cunning. The company’s success is built on a bet that it could win market share at the cost of its competitors by remaining unprofitable for many years. Amazon will have applied the same sort of cunning and long-range thinking to its expansion planning. As is often the case with corporate expansions and relocations like this one, there’s a very good chance Amazon already knows exactly where it would like to open its second headquarters, which would mean its request for proposals is a way of inviting the place it has already chosen to foot the bill for Amazon’s new digs. But even if the field is still open, most of the places that hope to compete really won’t.

Amazon’s RFP already winnows the list of potential contenders to only a couple dozen metro areas, at most. In addition to what’s in the RFP, it is probably safe to assume there are other factors the company has already considered, which would shorten its list to only a few places.

Employees work at the Amazon distribution center warehouse in Saran, near Orleans, France, November 22, 2016. REUTERS/Philippe Wojazer - RC14E99D05A0

First, it seems safe to assume Amazon will locate in the eastern United States. Inverting to Canada would send a strong message about the company’s attitudes about the U.S. political environment right now. But, again, Amazon does not think short term. Moving to Canada would send the wrong message at the wrong time. It would invite a costly and ongoing rebuke from President Trump and his supporters. It would also play into President Trump’s arguments about U.S. corporate tax policy—a debate Amazon probably wants to avoid. And if the president’s tax reform proposals do become law, the move to Canada could prove shortsighted. Within the United States, Amazon may prefer locations in the Eastern or Central time zones, which would extend the company’s capability to manage its business in Europe and other parts of the world.

Second, Amazon needs a metro area large and diversified enough to house it. That metro area must be large enough to supply up to 50,000 professionals and/or house a large influx of these workers and their families over the course of the next few years. That narrows the list to only the nation’s 10 or 12 largest metropolitan areas. Among those, most boast the assets Amazon is looking for in its RFP: most large metro areas have international airports that are well connected to other large metro areas, though not all have reliable public transit to their airports from other job centers in their region. Most large metro areas have more than one research university, but not all claim highly ranked engineering or management schools.

Third, Amazon is probably looking for business-friendly environs where it will hold sway. Costs of doing business isn’t the only factor that matters, or maybe even the biggest factor. Although Amazon will need a very large metro area, it probably wants a place with a navigable public sector. That means a highly business-centric civic environment, attractive cost structure, and accessible state and municipal leaders who will always take Amazon’s calls—places where the company will be a very big fish. This probably rules out several of the country’s largest metro areas or those that are politically fragmented. Amazon may also like a location in a state where its presence could bend the political winds to its liking at the right moments.

Even if only a few of these assumptions about Amazon’s interests were correct, they would limit Amazon to only one to three places. Amazon already knows that, and given what we know about the company and the site selection industry, it most likely has a favorite.

If one assumes that Amazon has already made a choice about the location of its second headquarters, this game looks rather grim for any place that chooses play. Instead of simply announcing the decision it has most likely already made, Amazon has opted to create the illusion of a competition. It is hard to fault Amazon for that. It is a highly competitive, publically traded company with a fiduciary responsibility to get the best deal for its shareholders. Amazon’s faux competition will lure one otherwise enviable place into handing over a huge amount of its taxpayers’ money to a fabulously wealthy corporation for something that place could have gotten for free.

However, whether or not Amazon already knows where it would like its second headquarters to be, its competition will create a net loss nonetheless. The competition will create more costs for the communities that make bids for its headquarters than Amazon can ever hope to recoup through the tax incentives it ultimately receives. It will lure many places into spinning their wheels to propose a deal they never had any real chance of closing. These places will waste valuable staff time, including that of elected officials, organizing themselves and their pitch for naught. This is an opportunity cost—time and effort that could have gone into solving other problems. What is worse, this game will create hope that is destined to be dashed. Smaller big cities do have a lot to offer and they tend to be rather proud of that. But many of them have seen company after company pull out of their place over the last thirty years, creating a nagging sense of loss. Because of the number of these places, they are destined to lose in these competitions more often than they win. Though they may not have wagered anything all that tangible, those losses can be devastating all the same. They lead to a lot of consternation, antipathy, and finger pointing after the fact.

This game reveals a lot about the power of large companies and their distorting influence on places today, especially in local economic development. It is not Amazon’s game. Like many companies before it, Amazon is playing a game that states and local governments have designed themselves and that only they can lose. State and local governments happily accept this. They have proven over and over that they are all too willing to give up their tax base for growth that would have occurred somewhere anyway. And while that growth, if it arrives, may benefit some of that state or metro area’s residents, the competition itself isn’t going to fix any one of the many, many economic and social challenges American communities face today.