The contest to win Amazon’s second headquarters is beginning to look uncannily like an episode of “The Bachelor.” As the Oct. 19 deadline to submit proposals nears, mayors across North America are ardently wooing the retail and tech giant, with offerings ranging from video love notes to a giant saguaro cactus (one assumes that the traditional bouquet of roses would not have sufficed). Stonecrest, Georgia, has even offered Amazon its very own town.
Tulsa, Oklahoma’s, offer is in keeping with what many cities appear to be saying: “Whatever it takes.” By dangling 50,000 new jobs and $5 billion in economic investment, Amazon’s “HQ2” is expected to draw over a hundred proposals, despite a price tag likely to exceed $3 billion.
Are giant subsidies the best and highest use of economic development dollars?
However, several cities are opting out. In a Wall Street Journal editorial, San Jose, California, Mayor Sam Liccardo calls incentives a “bad deal for taxpayers,” noting that often their expense is not recouped by the revenues they generate. The state of Minnesota plans to bid, but Governor Mark Dayton is reluctant to offer up much more than the Twin Cities’ strong local workforce. Officials in Toronto also plan to promote the city’s existing assets rather than giving cash, noting that subsidizing Amazon would be unfair to businesses that have set up shop without incentives.
For cities doing their homework, this question is at the forefront: Are giant subsidies the best and highest use of economic development dollars?
Good Jobs First, the nation’s leading watchdog on corporate subsidies, estimates that state and local governments spend $70 billion a year on cash handouts and tax abatements, mostly to big businesses. It’s an inefficient investment. Their report Smart Skills versus Mindless Megadeals finds that small business cluster development initiatives, workforce development programs, and entrepreneurial assistance create jobs at a fraction of the cost of giant subsidies, and that the economic returns of those initiatives remain in communities even if one company departs.
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Multiple studies have shown that economic growth and stability are highly correlated with the presence of many small, entrepreneurial employers, not a few big ones, and one study from Economic Development Quarterly said the presence of large nonlocal businesses had a negative effect on incomes.
Job growth comes primarily from start-up and small businesses. Areas that have more small, locally owned businesses see greater per-capita income growth than those with a few large entities, and locally owned, privately held firms recirculate two to three times more money back into local economies and contribute more taxes than non-locals.
Amazon’s presence in Seattle has spurred some of the highest housing costs in the world.
Chicago is considered to be one of the top contenders for Amazon, and Mayor Rahm Emanuel has gathered a committee of 600 business and civic leaders to assemble the incentive package. But we know that these deals are inefficient. A 2017 Illinois Economic Policy Institute study found that if the state and its cities had directed their $288.5 million in average annual business subsidies to local initiatives such as infrastructure and education, Illinois would have created or saved more than nine times as many jobs.
Those jobs would also have been more secure. Having lured Boeing’s headquarters with a $60 million relocation package, Chicago is well aware that businesses that chase incentives are not stable tenants. Washington state had previously given Boeing nearly $12 billion in subsidies, but that didn’t stop the company from moving away and pulling 1,000 jobs from Seattle.
Perhaps the most important consideration is who benefits from economic development. Amazon’s presence in Seattle has spurred some of the highest housing costs in the world. Rather than getting dazzled by the prospect of a “win,” cities would do well do ask “for whom?” Will the investment improve the lives of people who live there now? In Chicago, the highest need isn’t high-paying tech jobs, it’s economic opportunities for the 27 percent of residents living in poverty, and serious investment in public schools to retain residents across all economic strata.
We know how to do economic development well. Let’s hope that cities run the numbers before committing billions of dollars to a deal that may offer high-publicity bragging rights but little else.