Executive MBA Program Blog

Amazon’s Gone—Who’s to Blame?

Posted by Marty Lawlor on Mar 11, 2019 12:20:12 PM

“Anything is possible: today was the day a group of dedicated, everyday New Yorkers & their neighbors defeated Amazon’s corporate greed.”  Alexandria Ocasio-Cortez (AOC)

“This is not just ‘a loss,’ it is a whole lost world… After Amazon’s withdrawal no major American company will open a new headquarters here for at least a generation.” Peggy Noonan, WSJ

In the unlikely event that you missed this major earthquake, Amazon reversed its decision to build a second headquarters in Queens, NY after encountering stronger than expected resistance from community activists and a small but vocal group of State politicians. 

The speed of the decision, no less than the decision itself, took those on both sides of the argument by surprise.  After all, New York was selected only after a year-long competition with other states and municipalities, non-stop media speculation, and the promise of 25,000 high-paying jobs and billions in future tax revenues. 

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Amazon was not all that forthcoming in their explanations, but it’s fairly clear that, despite the fact that 70% of New Yorkers favored the deal, the adversarial tone of the reception promised a long slog to get all the approvals needed to launch the project. Not coincidentally, Amazon announced its withdrawal one day after meeting with labor leaders looking for assurances that the firm would not be overly aggressive in their anti-union activities with employees. 

What are the arguments for and against? Those in favor of the deal cited future tax revenues, 25,000 high-wage jobs (averaging $150,000), the opportunity to diversify the New York metro area economy, and the general cachet that comes from having a major technology firm of Amazon’s stature headquartered in Gotham.

Among the list of arguments against the deal, the $3B in incentives promised to Amazon to locate in New York is the biggest one. This argument rests on the notion that cities shouldn’t have to pay subsidies to corporate giants, while local communities are struggling to get by and local infrastructure is crumbling. Other concerns include the potential rise in factor prices (rents), the stressing of local facilities to accommodate the growth, competition for local merchants, and Amazon’s reputation among the progressive left for being an uncaring employer and anti-union in general. It didn’t help Amazon that Jeff Bezos, its CEO, is the wealthiest person on the planet and, that to an increasingly vocal progressive minority, billionaires are evil by their very nature.

The aftershocks have been seismic and have only just barely subsided. Accusations have been flying and, with few exceptions, where people happen to come down on this decision seems to depend on their political orientation. In its simplest form, if you lean left, big business represents a value system that is antithetical to the progressive agenda: it is anti-union, beholden only to its shareholders, and opportunistic at the expense of the common worker. To cite AOC, above, this is all about corporate greed. In this view, granting even $1 to one of the world’s largest companies is corporate welfare, plain and simple.amazon-in-nyc

To those with more moderate political inclinations, capitalism is generally viewed favorably, and most of this group would agree that some regulatory oversight is warranted, but not so much as to risk the loss of thousands of potential jobs, major capital investment, years of significant tax revenues, and the risk that New York becomes known as a difficult place to do business.

The argument for incentives is that they make the state more attractive for investment.  And despite a rather overwrought New Yorker article title that wonders whether Amazon’s departure may sound the beginning of a new trend, tax incentives of one sort or another are pervasive, and states use them strategically to develop specific industries, diversify economies, and create jobs. 

Some argue that simply counting jobs is an overly narrow lens through which to view incentives.  One highly cited study suggests, for example, that new large (million dollar plus) manufacturing plants generate significant productivity spillover effects, and that incumbent manufacturing plants in “winning counties” report double-digit productivity gains over time after one of these million dollar plants relocates to the area.  In addition, these types of projects tend to attract capital investment and bring other benefits such as greater than average wage scales and better health plan coverage for employees.

For every study in support of incentives, however, there appears to be one that argues against them. Among those arguments is the not infrequent example of municipalities over bidding to entice the Amazons of the world to their city or state. This was the case of South Carolina winning the bid for BMW’s first manufacturing plant in the early ‘90s.  Their initial bid went from $35 million to $150 million after Nebraska joined the competition. So how much is too much?  Is New York’s bid of $3B in incentives too high? 

Good Jobs First, a public policy agency that closely tracks these types of subsidies, would most emphatically agree.  In their Megadeals report they cite cost-per-job figures well north of $2M per job to bring the likes of Apple to North Carolina ($6,414,000 per job) or to keep Nike in Oregon ($4,042,000 per job).  The estimate for Amazon jobs in the aborted HQ2 project, on the other hand, was under $50,000 per job, which would have paled in comparison with the $28 billion in state and city revenue that was projected over 25 years. 

Despite all the heat this announcement generated, there’s been scant reference to any real data by either side to support or discount tax incentives and subsidies of this sort. There’s good reason for this: There is little consensus in the literature on whether or not tax abatements, grants, and other incentives used to entice the Amazons of the world to set up shop actually create jobs or at least jobs that wouldn’t have been created without the subsidies in the first place.

And, sadly, even were there an overwhelming case to be made one way or the other based on reliable numbers, we seem to have moved to a new place where feelings trump data. Or, perhaps, as NY Times financial columnist Andrew Ross Sorkin tweeted in response to AOC’s victory gloat: “There is a financial literacy epidemic in America… There isn’t a $3 billion pile of money that can now be spent on subways or education.” Though I share his frustration, the political and emotional freight attending Amazon’s HQ2 decision simply overwhelms any opportunity to rationally debate this move on its merits.

Topics: strategy, Management