The Package That Amazon Returned

On September 7, 2017, Amazon announced the search had begun. A new HQ2 would be as massive as its Seattle headquarters. It would employ 50,000 and invest billions.

Interested cities were to submit their proposals and then Amazon would decide. It all was supposed to have ended when they announced the winners. In a November 2018 surprise, Amazon said HQ2 would be split.  The winners were Virginia’s Crystal City and New York’s Long Island City.

But as Yankee star Yogi Berra said, “It ain’t over till it’s over.”

The Long Island City Package

Amazon had said it would build a four million square foot campus and create 25,000 jobs. In return, they would get a $3 billion package of grants, tax cuts, and regulatory favors. There is more but those are the basics.

The Support

The project’s advocates called it an economic growth engine. They expected a 9:1 ratio of revenue to subsidies. New York City’s Mayor de Blasio looked forward to Queens offsetting Manhattan’s financial clout. Starting with Amazon and then rippling far beyond, jobs would multiply.

The Opposition

HQ2’s opponents were concerned about the local community. They believed the residents of Queensbridge, the country’s largest low income housing project, would become the victims of gentrification. Pricey boutiques and and yoga studios would open. Local rents would soar. They worried that bodegas would be replaced by impersonal food outlets. Most crucially, those Amazon jobs required a skill set that did not locally exist.

Returning the Package

It turns out that local opposition was more vocal than Amazon’s advocates had expected. Led by a New York City councilman, the concerns have hit the headlines. Responding, Amazon backed out.

Our Bottom Line: The Subsidy Debate

The Amazon decision is about a bigger debate. It takes us to whether our cities and states should attract businesses with subsidies.

Enticing businesses with subsidies is nothing new. Whether it’s domestic or foreign investment, communities use grants, tax cuts, and regulatory incentives to lure business activity. For the Amazon decision, Long Island City’s package was typical. Nearby Newark offered $7 billion. A state-by-state list of the perks given to film makers was 21 pages long at one website.

The key question though is whether the money is worth it.

In a study from the Mercatus Institute, the answer was “No.” They said subsidies constrained economic growth by distorting resource allocation. They took money away from alternatives. A $6 billion subsidy could instead fund three years of statewide road maintenance or 44,145 full tuition scholarships each year at a top state university.

Mercatus also pointed out that for firms like Amazon, the subsidy wasn’t even a top priority. More importantly, they cared about a skilled work force and minimal regulatory hurdles. They wanted to be sure there were supply chain synergies and a transportation network.

So is the money worth it? As economists, we can return to tradeoffs. While our opinion of the Amazon subsidies will differ, we can all agree that we need to identify its cost. We should know the money and non-money sacrifices that our decision creates.

My sources and more: Prime’d is my recent discovery. An unusually targeted podcast, it just focuses on Amazon. So, from the Prime’d Long Island City story, I went to the NY Times and then Curbed for the Amazon deal, and its cancellation. Then finally, completing the picture, the Mercatus Institute condemned subsidies and this Washington Post video had more of the plusses.