【Dear Utol: Week 1 Highlights Episode 7】

Welcome to The Dear Utol: Week 1 Highlights Episode 7Hunger Games, Amazon HQ edition.

Almost every major city in North America has publicly stated that it will submit a proposal to become the home of Amazon's second headquarters, which the company claims will include 50,000 high-quality jobs. Toronto Mayor John Tory has already called it "the Olympics of bidding," a fun comparison since cities also tend to bid aggressively for the Olympics—only to end up regretting it years later.

Like an Olympics bidding, cities will be putting together proposals that show why they're best suited for job—and why they'll help Amazon make a boatload of cash. That means elements like a young, educated workforce and an international airport, but also juicy incentives like tax breaks, regulatory exemptions and maybe even some changes to local laws that will make it easy for the company to operate.

The payoff is big. Amazon has said it expects to invest $5 billion. But this isn't an arms race between cities. It's a race to the bottom, where Amazon—already adept at negotiating with local governments—holds all the cards.

Money, Amazon states explicitly, talks.

"The initial cost and ongoing cost of doing business are critical decision drivers," Amazon stated in its request for proposals.

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Arrested economic development

Massive business investments like this are the kind of thing that local politicians dream about. They mean jobs, development, ribbon cuttings, and bragging rights. At least until they turn into boondoggles, which tend to be felt years later.

Cities have spent decades competing for major investments and projects that have dubious economic benefits. Sports stadiums stand out as one of the most prolific examples of in which cities have offered massive tax breaks and funding in order to attract or retain a private enterprise.

The promise of those stadiums tends to be similar to that of business investments, including an increase in jobs and improved quality of life. Stadiums have been proposed as a way to reinvigorate bad areas or help build new ones.

Those stadiums are now the source of growing scrutiny over whether the investments pay off. Cities are now starting to realize that the jobs just don't materialize, and the ancillary benefits are inconsistent. Seattle—which is also dealing with Amazon's extreme growth—is among the cities that have pushed back against pumping public money into stadiums.

Private business investments don't tend to attract the kind of attention that the Olympics do, but they have been the source of similar scrutiny. Tech manufacturing company Foxconn recently struck a deal with with state of Wisconsin that included $3 billion in tax subsidies and exemptions from environmental regulations.

Workers surround the signature glass spheres under construction at the Amazon corporate headquarters on June 16, 2017 in Seattle, Washington. Credit: Getty Images

The incentives have led to serious questions over whether that deal will end up having a net benefit for the area. Tim Bartik, senior economist at the W.E. Upjohn Institute for Employment Research, studies local economic development and labor markets, and pointed to Foxconn as an example of the risks of offering aggressive incentives.

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Put simply, growth isn't free.

"Growth costs you money in the form of additional public services you have to pay for," Bartik said.

It's a classic SimCityproblem. Big business investments mean jobs, which attract people to the area. Those new people put a strain on public services—more police are needed, new roads are required, housing supply is hit, schools need teachers.

"Growth costs you money"

Those services are paid for with public funds collected through taxes. When there's enough taxes, things tend to work relatively smoothly (though housing supply tends to be the main area that the governments don't have as much control over). The investment leads to growth that can be adequately responded to by public works.

When a local government gives too many tax breaks, there's no money for those services and quality begins to suffer, Bartik said. Without proper analysis, public services can suffer from an influx of jobs.

One bad deal might not be a problem, but incentive programs also tend to attract new businesses that expect similar deals. Offer one that's too rich to one company, and another is going to want the same, compounding the problem.

"There's an old cliche in economic circles that comes from an old Lay's potato chips ad... you can't give out just one," Bartik said.

The Amazon effect

There's plenty of big companies that have signed deals with cities and states. Boeing received a $305 million tax break in 2015 alone from the state of Washington. Boston doubled the tax break on its initial proposal to attract General Electric.

Amazon, however, isn't just any investment. It's arguably the crown jewel of development projects for one reason: the multiplier effect.

The multiplier effect has to do with how many additional jobs are created by the company's investment. This tends to be a relatively controversial piece of economic analysis as it is hard to measure. There are some claims that tech jobs, like those of Amazon, have huge multiplier effects, making them extremely beneficial to their local areas.

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Amazon knows this, and knows how to play the game. The company already has hundreds of properties and fulfillment centers dotting the U.S., for which it has already received $1.1 billion in subsidies, according to analysis from economic development policy nonprofit Good Jobs First.

Good Jobs First has been among the few organizations to go after Amazon for its efforts to capture tax incentives from local areas. The organization released a study in December 2016 tracking how Amazon had moved from avoiding taxes by not building fulfillment centers in high-tax areas to negotiating aggressively for tax breaks—and building up a team of experts in the field.

"Public officials must recognize their communities’ value."

"Public officials must recognize their communities’ value. They need to recognize that the prize on the bargaining table isn’t an Amazon facility: It’s more access to the local market for another aggressive retailer growing at the expense of existing retailers," Good Jobs First wrote in its study.

Amazon's experts will now be tasked with figuring out how to get the best deal possible from whichever locations appeal to Amazon.

Bartik said that he doubted that any city would go too far in giving Amazon incentives, but noted that deals like Foxconn had been setting bad precedents.

"This whole political economy of throwing out the rules... does not make for good policy," Bartik said.

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Topics Amazon