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Why Amazon Won’t Save Your Struggling Town

When e-commerce giant Amazon announced that it would be searching for a location for a second headquarters—and bringing as many as 50,000 jobs and $5 billion in investment [1] to a lucky city—it set off a stunning chain of events. The scene was not unlike that of the classic film It’s a Mad, Mad, Mad, Mad World, where a group of ordinary people lose all their moral sense as they race for a hidden fortune buried under a big “W.”

It’s the stuff of dreams for economic development agencies, so it’s not surprising that, according to Reuters, Amazon received 238 proposals from across the United States, Canada and Mexico. According to Amazon, they intend their second headquarters to be similar to their main offices in Seattle: around eight million square feet, 33 buildings, $25 billion in wages paid to employees and $43 million for the public-transportation system.

These are big numbers and if it were just Amazon or a few cities looking to use these kinds of incentive policies, it would be no big deal. But it isn’t: Every city and state in the country seeks to attract established businesses to relocate with a variety of incentives, normally without any regard for the cost. Some of these packages result in such eye-popping numbers that one is forced to question if anyone in municipal government can do math at all.

Over the summer, Apple, which is not only the most highly valued company at the moment, but of all time—and is sitting on another record $200 billion in cash reserves—announced plans to build a $1.3 billion data center in Iowa. Reuters reports that a combination of state and municipal incentives there is worth about $208 million. According to CNBC, 50 permanent jobs will be created. Do the math. $208 million divided by 50 positions results in a cost of $4.2 million per job. If you have a job making the GDP per capita every year, about $56,000, $4.2 million is what you would make after 74 years. There’s no way so few jobs will ever justify that much foregone tax revenue, especially if the new facility is a greenfield project that will need new infrastructure and other services.

Similarly, the Chinese company Foxconn got a $3 billion incentive package from Wisconsin for promising to create between 3,000 and 13,000 manufacturing jobs. That’s a cost per job of between $1 million and $230,769. According to CNN, Wisconsin won’t break even on the deal for 25 years.

All of these incentive deals—and most economic development agencies around the country—operate under the fallacy that growth can be bought. There’s this idea that it’s all a matter of building factories, widening roads, lowering taxes, and suppressing unions. But if that was the case, more economically stagnant places would be reaping the rewards of public spending.

Writing in City Lab a few years ago, Richard Florida and Charlotta Mellander looked at how economic incentives related to state performance and found no relationship [2]. “Our biggest takeaway: there is virtually no association between economic development incentives and any measure of economic performance,” Florida wrote.

They reviewed other studies that found that companies that received incentives grew more slowly and tended to overestimate employment growth by almost 30 jobs. In a post on the topic from this year, Florida reported on the research [3] of Timothy Bartik, who found further evidence that such public spending is ineffective and wasteful. According to Florida, Bartik found that states don’t target their incentives well, passing over industries that would produce local benefits and giving away too much upfront, instead of tying them to performance.

As Joe Cortwright of City Observatory points out [4], the sense of competition between localities is a facade. When big corporations move or set up branches, they make those decisions based on their needs and plans, but they use the idea that they’re considering multiple places to squeeze out the most subsidies. For example, the subsidy-tracking website Good Jobs First found that Amazon has received about $250 million [5] in breaks and handouts to build the warehouses it needs to make rapid deliveries.

Ultimately, true economic development cannot be bought. As Judith Schwartz [6] explained in Pacific Standard, studies have found [6] that when businesses are brought in with incentives, 90 percent of corporate spending still happens out of state. This attenuates local economic development by reducing the opportunity for the people supposedly benefitting from development to learn the skills of running the larger enterprise. In some cases, companies have received tens of millions in tax abatements or subsidies without providing anything more than a few part-time retail jobs.

For example, over a 15-year period, Bass Pro Shops received over $1 billion in subsidies from state and local governments while its competitor Cabela’s took in about $551 million, according to CityLab [7]. One study found that they produced no net increase in jobs, while several stores fell below sales projections, defaulting on their bonds and forcing the cities to pay.

Moreover, as Charles Marohn of Strong Towns has shown [8], cities that buy jobs (whether they’re high-paying ones like Amazon engineers or low paying ones in a WalMart) are forgoing the property taxes they need to keep schools open and pipes and roads in good repair. Meanwhile the income taxes paid by the employees or sales taxes generated by retail stores normally go to the state or county.

The sad truth is that the money being given to these wealthy corporations is not money in the bank, but money towns have borrowed or will do without in taxes, so it’s not a question of what they could otherwise spend it on. The only way to turn things around is by the trial and error, with small proprietors using existing resources to their utmost.

In our small towns and less regarded cities, we have to solve our problems ourselves, instead of fooling ourselves that Amazon, Tesla [9], or President Trump will solve them for us.

Matthew M. Robare is a freelance journalist based in Boston.

This article was supported by a grant from the Richard H. Driehaus Foundation.

5 Comments (Open | Close)

5 Comments To "Why Amazon Won’t Save Your Struggling Town"

#1 Comment By Thaomas On November 24, 2017 @ 8:58 am

Foxconn is a bigger deal. We need changes in federal tax laws to discourage interstate/municipal bidding wars. Economists have long know that these “public private partnerships” are generally disadvantageous to taxpayers.

#2 Comment By Slugger On November 24, 2017 @ 10:16 am

While the subsidies won’t help the town as a whole, I bet they help some in those towns. They are a method by which some enrich themselves at the expense of the community under the banner of job creation. Kind of like our current proposals for tax law changes. The politicians get to pick winners and losers with the inevitable syphoning off of some gravy for themselves.

#3 Comment By EngineerScotty On November 24, 2017 @ 5:26 pm

Any such tax break granted by a local government, ought to be treated as taxable income by the Feds.

#4 Comment By Steve On November 26, 2017 @ 1:15 am

“In our small towns and less regarded cities, we have to solve our problems ourselves, instead of…”

What are your proposed solutions? Perhaps some cities and towns simply need to disappear and people move elsewhere?

#5 Comment By grumpy realist On November 26, 2017 @ 12:12 pm

Actually, Amazon is starting to have quite a problem with fake bots and fake reviews from companies trying to game the system against competitors. Amazon shrugs, because they get their cut of the deal no matter who ends up selling.

Problem is, if Amazon continues to be dilatory on policing their Wild West cyberspace, people will start looking for alternative platforms. They’re going to put up with Amazon’s egregious charges only as long as Amazon continues to be a useful interface to find customers. No customers, poof, will go elsewhere.

Amazon seems to forget that in order to act as a market generator, they have to be attractive to both sides–both the seller and the buyer.