The wooing of Amazon HQ2: Taxpayers, watch out for your wallets

The wooing of Amazon HQ2: Taxpayers, watch out for your wallets
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Congratulations! Amazon is offering your metropolitan area the chance to bid to be the location of its new second headquarters. This is an opportunity to bring 50,000 high-paying jobs to your town. It’s also an opportunity to waste several billion dollars, as well as much time and effort.

Elected city officials (who at the highest levels generally make less than $250,000 a year) are about to negotiate with Amazon founder Jeff Bezos (net worth of about $80 billion). Amazon’s team will be more experienced, better paid and have better resources than the government teams. More important, the Amazon team will focus keenly on what’s best for Amazon. The government teams, however, won’t necessarily be focused on what’s best for taxpayers.

They might be more interested in what’s best for the careers of elected officials (who will want a photo op with Bezos as they announce 50,000 jobs). If the deal they make turns out badly — the jobs don’t happen — those officials will likely have already moved on to something else. But the taxpayers will be stuck paying the bill.

Governments are badly suited to picking winners or losers, so they should generally focus on providing a level playing field for everyone. A big subsidy for Amazon HQ2, as Amazon calls its new headquarters project, might make sense if Amazon is one of the long-term winners in the ever changing American economy. The technology sector has many examples, however, of great companies that failed (Digital Equipment Corp., Wang Laboratories, Prime Computer) or stopped growing and/or shrank (AOL, Yahoo). If Amazon fails, stops growing or simply changes its strategic direction, it may not need HQ2 (the initial build out for this project is supposed to take at least 15 years — a lot of things can happen).

If this sounds far-fetched, consider New London, Conn., which showered pharmaceutical giant Pfizer with incentives and started to rebuild part of the city to accommodate the company’s research and development headquarters. In 2009 (eight years after arriving), Pfizer changed its strategic direction and moved out. New London was devastated.

Any government-provided incentives for Amazon should be paid out over time, as it delivers jobs to the local economy. There should also be strong “clawback” provisions. If Amazon fails to deliver jobs or closes its HQ2 prematurely, it should have to return the money.

Better yet, if your city is providing incentives, try to make them general purpose — not company specific. Government money spent on improving infrastructure, road improvements and mass transit to facilitate HQ2 is likely to help the area even if Amazon leaves or goes bankrupt. In the cost-benefit analysis, these types of incentives should be evaluated at a different risk level than (for example) tax rebates to Amazon, which might be difficult to recover if things don’t work out.

Transparency is another important factor. Amazon wants each government it negotiates with to sign a non-disclosure agreement. At this stage, any NDA should be mutual. Amazon is asking each urban area for a lot of information that Amazon should treat as confidential and not share with other potential bidders (Hey Toronto, Boston is offering X — this is their entire proposal, would be great if Toronto could do something better). Amazon is providing minimal information; governments should be judicious about what they reveal in return.

Finally, in the end this is the taxpayers’ money. Any non-disclosure agreement must require that before the final paperwork is signed, the public will have the information needed to evaluate the cost of the incentive package. The cost-benefit analysis should be a public document, so outside third parties can replicate its results and test its conclusions. Elected officials have lots of reasons, however, to want to keep this analysis as non-transparent as possible (for instance, to avoid accountability).

If Amazon won’t commit to commonsense provisions on its non-disclosure, transparency and clawback, then government negotiators should be prepared to say no. They should also consider some outside-the-box ideas.

If your local government is willing to provide a generous incentive package, it should send out its own request for proposal to the world’s major companies giving them the parameters for incentives it might offer. Alphabet, Facebook, Apple or another company could be considering a major corporate move. Amazon isn’t the only company with growth prospects. Examine the market thoroughly to make sure your community is getting the best value for the incentives offered.

Or, perhaps approach this on a regional level. For example, the governors of New York, New Jersey and Connecticut could publicly pledge (and back up with agreements) that no matter which state Amazon chooses in the tri-state region, all three will work to make the project a success. The governors could provide Amazon with a list of favorable tri-state location options and offer collective support for the mass transit and infrastructure improvements needed for any of those options to succeed. The same case could be made by governors in regions surrounding Boston, Washington and other cities that draw commuters from multiple states.

Finally, keep in mind that incentives are a small part of Amazon’s decision process. Moving to the wrong location for a short-term tax break would be foolish — and Amazon isn’t foolish. When you allow for all of Amazon’s constraints, its short list might have, at most, a handful of contenders. Incentives will matter only if at least two regions are comparable and willing to bid, and Amazon has no reason (or obligation) to point this out. Even if one metropolitan region is the clear best choice, Amazon’s optimal strategy would be to make that region believe it faces competition. That region’s negotiators would, consequently, be motivated to offer Amazon incentives they otherwise wouldn’t have had to provide.

Steve Jobs said strategy is as much about saying no as it is about saying yes. If your government is not willing to signal a serious willingness to say no, it could end up overpaying and losing by winning (the winner’s curse).

If your city or region isn’t competitive, or the deal Amazon wants doesn’t make sense, walk away. Invest the taxpayers’ money — as well as your time and effort — in some other opportunity.

A version of this column originally appeared in USA Today and is cross posted here with permission.

Steven Strauss, is a visiting professor of public policy at Princeton University’s Woodrow Wilson School, where he teaches a course on urban economic development. Follow him on Twitter:@Steven_Strauss

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