The Amazon HQ announcement is coming to your headlines soon. CEO Jeff Bezos said by the end of the year, even though others believe they’re going to Northern Virginia. I’m thankful neither Houston nor San Antonio played that game, although Austin was named a top-20 finalist.
The game, if you need a refresher, is that Amazon intends to build a new 50,000-employee second headquarters, and invited city and county leaders last year to inundate the company with slavish economic incentives to woo Amazon and those sweet, sweet, jobs.
Economic Development: Left and Right
One of the things I think about economic development incentives, which is clearly quite naive of me, is that partisans on the Left and Right should always, for ideological reasons, oppose targeted tax breaks for specific companies.
On the Right, a targeted tax break incentive seems the very antithesis of free-market capitalism. This involves a government, usually a state or city or county, putting its thumb on the scale to pick winners and losers. Pro-market folks should see this as a clear disruption of the way markets are supposed work. Worse, the incentives usually come with intrusive requirements like minimum numbers of jobs created, minimum salaries, and further government interference. From a free-market perspective, when the government picks winners and losers we get a bad mixture of misallocated resources and opportunities for corruption.
To the Left, a targeted tax break for a specific company should appear as clear corporate welfare. When a government cuts property taxes or other fees for a specific business, the small number of capitalist owners of that specific company get a direct benefit to their bottom line, while the general population bears a greater burden for all the rest of the taxes. That’s the very definition of benefitting the few on the backs of the many, and should present clear problem for ideologues on the Left.
Setting aside my naïve brain, however, it seems like both the givers of government largesse and the recipients of the largesse believe in tremendous personal benefits from economic incentives. Meanwhile PR announcements inevitably focus on some amount of “good paying jobs,” or praise the “job-creating government.”
Again, this is just one man’s dumb opinion, but when you incentivize companies to move to your city because of a supposed tax break, and that company is willing to submit itself to a specific requirement for creating a certain number of jobs at a certain salary, there are two highly likely scenarios.
The optimistic scenario is that the company is well-run, planned the expansion anyway with or without government incentives, and is cynically happy to receive government freebies because, hey, free money. That’s at least a clever, but cynical, company.
The pessimistic scenario is that the company makes important executive decisions based on tax incentives. That kind of company will be gone in five years, either because their executives have their priorities wrong and the company is badly run, or because another city or county has another better set of incentives to offer five years from now.
To be clear, I’m confident Amazon is extremely well-run, will extract maximum value from its already preferred and chosen location, and they’re interested in incentives because, hey, free money.
The Academics’ View on Economic Development Incentives
UT Austin Professor Nathan M. Jensen and Duke University professor Edmund J. Malesky recently published a book Incentives To Pander: How Politicians Use Corporate Welfare For Political Gain addressing these problems. They review what economists already know, which is that there’s scant evidence that economic incentives work. Or if they work, the public benefit cannot be justified by the public cost.
Their study focuses less on the economic case for incentives and more on the political advantage city and county leaders get by offering these corporate goodies. It doesn’t matter so much that incentives don’t work, but rather it matters that voters think they work. And voters have far less information than leaders, so generally can’t prove that incentives don’t work. Jensen and Malesky further argue that even an unsuccessful attempt to woo a company with tax breaks, for example, helps a political leader, because they can at least claim to have “tried their best.”
One Mayor’s View on Amazon
In the light of Jensen and Malesky’s book, and leaders’ incentives to pander, San Antonio Mayor Ron Nirenberg and Bexar County Judge Nelson Wolff’s early and decisive NO to Amazon HQ in October 2017 stands out as particularly courageous.
His longer answer is that they didn’t so much say no to Amazon as they started a different economic opportunity conversation about what San Antonio has to offer.
“With respect to HQ2 and the sweepstakes, that narrative of San Antonio’s bright future is weaved right into it. When the stories are written about the Amazon RFP, there is a subplot, which is San Antonio’s response,” Nirenberg said.
I have to say, because I hate incentives so much, that it’s refreshing to see an earnest refocus on the economic advantages of a place rather than dangling public goodies to a private company.
Nirenberg continued, “We are investing in the fundamentals in terms of housing, water supply, a reliable energy grid. And we have a workforce that mirrors what the rest of the country will look like 20 years from now. We are making investments in that workforce before most cities have even woken up to that reality.”
Says Nirenberg, “if a company is interested in a 5-year return, and cashing out, there are many other cities. But if companies are interested in the 30-year return, I feel the fundamentals of our city are extremely competitive.”
Brother, can I get an Amen? This is the kind of talk professors Jensen and Malesky would welcome.
Northern Virginia, early congrats on your future “win.”
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