The Undignified Auction

Paul Roberts thinks that cities should think twice before pitching Amazon for HQ2:

[C]ities hoping for their own transformational event should keep several caveats in mind. Most obviously, Amazon isn’t the only reason Seattle has been attracting all the firms, talent and capital. The area’s “other” tech icon, Microsoft, headquartered since 1986 in nearby Redmond, is still spinning out its own considerable agglomerative powers. It boasts the world’s second-largest cloud operation, a huge workforce and a famously productive web of spinoffs and startups, many of which now exert their own Seattle gravitational pull. The Seattle-based travel company Expedia, to take one example, is a Microsoft spinoff, whose creator (and eventual CEO), Richard Barton, went on to launch Seattle-based real estate website Zillow. Microsoft co-founder Paul Allen, a prodigious startup launcher in his own right, also developed the vast business park downtown that became Amazon’s campus. Other gravitational centers abound. AT&T Cellular and Nintendo are here. The very tech-focused University of Washington has launched scores of ventures and technology transfers. And for all the talk of the “new” economy, one of Seattle’s biggest tech firms is also one of its oldest—aerospace giant Boeing, which has been attracting engineers and computer scientists, and launching spinoffs, for decades. […]

Seattle has indeed tilted decidedly and often absurdly to the left in recent years. (Socialist Seattle City Council member Kshama Sawant once proposed nationalizing Boeing.) But even a more conservative Seattle couldn’t have come close to absorbing the 40,000 additional workers Amazon is going to hire for HQ2. More fundamentally—and more relevant for would-be host cities—these “anti-business” complaints ignore the way Amazon and other tech firms themselves have helped foster Seattle’s disloyalty. Even residents here who are thankful for Amazon’s presence recognize how the company’s rapid growth has added to affordability and inequality problems—and as a result have been more willing to support worker-friendly policies, such as the $15 minimum wage.

Roberts sets up what is almost a lose-lose situation here. Either a city is “already there” like Seattle is, in which case such an influx of people is going to cause headaches. Or it isn’t, and it can’t expect to succeed as Seattle does (and, mentioned elsewhere, probably won’t get it anyway).

He may well be right. Either way, the tax breaks and tax incentives are a real collective action problem. One of the problems with a federalist system with a fair amount of local control is the ability of places like Amazon to play one city off another. They’re going to bring in jobs and tax revenue by cutting into the money it’s supposed to bring in. But as long as that money is more than zero, it’s a win for whichever city wins the sweepstakes.

It’s an ugly process, and there is no solution to it that isn’t very centralized (and that is constitutional).

What Roberts gets especially right, though, is that the cost/benefit ratio is going to be very different from city to city. Maybe it’s not a case where everybody loses, but his arguments for why Seattle hasn’t won aren’t entirely wrong. It’s easy to mock their complaints, but it makes more sense when you realize Seattle didn’t need this the way other cities might.

Further, due to geographic constraints, Seattle couldn’t properly reap all the benefits. One of the benefits would be growth and Seattle has real difficulty with growth. Like, there’s not enough room to build. There aren’t enough places to put roads. They feel the pain more than other cities might.

He is right that Seattle can’t absorb another 40,000 workers. Houston, on the other hand, has absorbed 30,000 people on average every year since 2010, and has averaged near or over 30,000 per year for five of the last seven decades. And that’s the City of Houston, whereas Harris County is double that.

It’s a lot easier when you’re not surrounded by mountains and water.

So one of the things a city or county or state might consider is precisely how much room it has for expansion. That’s part of why I look askance at candidates like Boston, DC, or Chicago. They don’t need it and their presence there is more likely than not going to chase out or price out other opportunities.

So where, then? How about Birmingham? Kyle Whitmire makes his populist case for the big city of the Yellowhammer state, or at least somewhere similar:

What should be clear to everybody by now is the only sector of our economy that seems to be growing at all is that thing we’ve decided to call the knowledge economy.

I don’t need to explain to you what the knowledge economy is, because you’re right in the middle of it.

The knowledge economy is strong in Seattle and San Francisco and New York and maybe a half dozen to a dozen other cities in this country where it’s now too expensive for anybody to move.

And in between? It’s a damn desert. And by desert, I mean the place where most of the people in this country live.

That’s creating problems. The disparity of opportunity and hope is ripe for exploitation. Just look at the current occupant at the White House. That chucklehead had the temerity to go into Appalachia and tell the people there he’d bring coal jobs back. Then he went to the Rust Belt and told the people there he’d bring their manufacturing jobs back. And when those folks wake up and realize that they’ve been lied to — again — they’re going to be even madder than they are right now.

Image by argusfoto

Now, of course it isn’t Amazon’s job to provide regional balance of any sort. The question really isn’t what Amazon can do for Birmingham, but what Birmingham can do for Amazon. Birmingham’s second-tierness is exemplified by the fact that they have had a team in every failed football league in history. It seems more likely to come up short. First-tier contender cities in blue states and red will have, or be able to recruit, the potential workforce and stand a decent chance of meeting the other criteria; Birmingham’s peer isn’t Atlanta so much as New Orleans or Memphis.

Now, before I continue, let me get something out of the way: This is not a Red vs Blue thing. Not the least of which because all of the cities are varying shades of blue. Nor is a low tax versus high tax question. Taxes and regulation are two sources of expense and far from the most significant. When I talk about low cost and high cost, I mean total cost. The main driver not being (directly) public policy, but real estate.

If real estate costs aren’t an issue, though, they aren’t an issue. The Twin Cities, for example, are an example of an affordable city in a (presently) blue state. Denver is becoming more expensive, but there is plenty of room for expansion to the east.

One thing Eastern Colorado and the Twin Cities have in common is that they have unpleasant weather. This is also a “feature” of relatively affordable cities like San Antonio. Some are cold, some are hot, but a little unpleasantness isn’t such a bad thing. People move there for economy and prices are not driven up further by those who want “pleasant weather” or “a livable climate” or to be “not miserable outside.”

So flat, ugly, and/or unpleasant has its own charm in that regard.

But seriously, Whitmire is right that we are too large a country to have so much of our human capital bidding against one another to live in one of a few places. It may not be their responsibility, but it would be genuinely preferable if Amazon did manage to avoid putting something in Boston. Even Philadelphia, which is there on the coast and is blue as blue can be, would stand to provide our country with another tech location.

If cities can’t or won’t keep building up – and it doesn’t matter which – something has to give. Perhaps Amazon will help shape precisely what that will be. Amazon may not want or need the jobs, but somebody else might. Hopefully, there is a win-win opportunity here.

Meanwhile, back in the real world, it won’t be about what’s best for anybody but Amazon. And it’s guaranteed to be an undignified process:

Part of trying to lure Amazon, of course, involves bribery: cities are trying to put together a favorable package of financial inducements that will make them appear sufficiently “business-friendly.” As Slate’s Henry Grabar explained, “virtually every city and state will roll out a carpet of tax breaks, plum real estate, and other local incentives. (All for a company dedicated to undermining the local businesses that will pay taxes to support the services Amazon uses.)” It’s a common pattern among municipalities trying to convince large companies to move there. And as Grabar points out, even when a company accepts an offer, they also have a powerful means of extorting the city in the future, by constantly threatening to take their business elsewhere. The whole system “rewards corporations for being flighty, faithless partners to cities and punishes small and local businesses that cannot make credible threats to secure their own incentive packages.”

This dynamic is commonly called the “race to the bottom”: cities and states must compete with each other to give corporations the lowest taxes, the fewest labor regulations, the largest giveaways of property. The more a place is struggling, the more they need outside investment, and the more they’ll be willing to do in order to bring in new firms. This gives people like Jeff Bezos phenomenal leverage over the weak. If Bezos told the mayor of Detroit that his city would be a top-3 contender if and only if the mayor recorded a promo ad for Amazon in which he stood nude singing a song called “Hail To Thee, Amazon” while saluting the company logo, the mayor would have to consider the offer carefully. (A mayor who cared about the economic well-being of his residence probably ought to agree.) Honestly, that’s really not far off from what is happening: mayors are recording ads for Amazon, and the only thing that has kept them from fully debasing themselves is that Bezos hasn’t yet requested it.

Place your bets now.