Cash prizes for bad corporate citizenship: When we  incentivize anti-social behavior by big corporations, we get more of it

Bloomberg Business has a behind-the-scenes post-mortem of the Great Amazon HQ2 sweepstakes, “Behind Amazon’s HQ2 Fiasco: Jeff Bezos Was Jealous of Elon Musk.” In the Fall of 2017, Amazon announced a high stakes competition for cities across North America to become the site of the company’s second headquarters location.  As Spencer Soper, Matt Day and Henry Goldman chronicle, the competition was kicked off by Jeff Bezos growing jealousy over rival billionaire Elon Musk’s $1.3 billion subsidy deal for Tesla’s electric battery plant in Nevada.

When Elon Musk secured $1.3 billion from Nevada in 2014 to open a gigantic battery plant, Jeff Bezos noticed. In meetings, the Inc. chief expressed envy for how Musk had pitted five Western states against one another in a bidding war for thousands of manufacturing jobs; he wondered why Amazon was okay with accepting comparatively trifling incentives. It was a theme Bezos returned to often, according to four people privy to his thinking. Then in 2017, an Amazon executive sent around a congratulatory email lauding his team for landing $40 million in government incentives to build a $1.5 billion air hub near Cincinnati. The paltry sum irked Bezos, the people say, and made him even more determined to try something new.

And so, when Amazon launched a bakeoff for a second headquarters in September 2017, the company made plain that it was looking for government handouts in exchange for a pledge to invest $5 billion and hire 50,000 people.

We don’t find this story surprising in the least.  When the competition was announced in September of 2017, we called it the inevitable result of a system of cash prizes for bad corporate citizenship. When companies see their rivals getting something for nothing, they feel like suckers if they, too don’t ask for as much as they can get.

And that is truly the perverse effect of economic incentives:  Cities and states feel like they have to have incentives to be competitive; and once incentives are in place, corporations have every interest in asking for them. And its hard to say no:  When a Governor or Mayor is courting a company, she or he wants to show evidence of a strong commitment to the company; given that most investments are for decades, a location decision is less about today’s policy environment than it is having a sense that a company will be treated well over a longer period of time. If a Governor or Mayor declines to provide a tax break or write a subsidy check that is within their power to offer, its a pretty good indication that they’re not committed. So once the incentives are on the books, they tend to get asked for, and given. Even though incentives don’t work most of the time as Tim Bartik has shown, the political dynamic (where leaders want to posture as pro-jobs, and can shift costs off to their successors) leads to their perpetuation and growth.

And when a prize as large and public as Amazon becomes available, cities and states around the country feel compelled to compete, even if they have no reasonable chance of winning.  Just to be seen as playing is important politically.  But this leads to a prodigious waste of time for nearly all of the “competitors.” Again, Bloomberg Business:

City and state officials privately complained to their Amazon contacts that the exercise was a tremendous waste of public resources, according to a person who received the complaints. Mayors and governors said they had other businesses genuinely interested in their cities and states and lamented that Amazon was stringing the entire continent along, the person said.

In reality, nearly 90 percent of the 238 cities that submitted bids had no chance.  According to Bloomberg Business, 20 of the 25 cities that made the list of finalists in September 2018 were the cities Amazon had identified as priority candidates prior to launching the competition. And ultimately, the decision boiled down to the availability of talent, just as outside observers (including City Observatory) said all along.  In September 2017, we wrote:

While there’s a lot of detail here, the factor that’s going to make the most difference is the availability of talent.  When you’re hiring upwards of 50,000 highly trained workers, as we’ve said before, the location decision is going to be made by the HR department. A city has to have a substantial base of talent–especially software engineers–and be a place that can easily attract and accomodate more.  Beyond these the availability of talent, it’s likely that analysts are reading too much into the criteria laid out in the RfP. The request for proposals was not drawn up to reveal Amazon’s decision criteria. It was drawn up to solicit the maximum number of credible incentive packages.

Ultimately, it wasn’t a surprise when Amazon selected New York and Washington DC as its two preferred locations (for the record, we also predicted that Amazon would choose multiple locations).  These two cities offered the deepest and richest talent pools.  As the Bloomberg article chronicles, Amazon’s cynical and ham-handed approach to seeking tax breaks in New York backfired, generating local opposition that eventually sank the deal for that location.  But the critical takeaway of its long drawn-out contest is that it chose two cities with vital centers and a strong talent base.  Those features, and not tax breaks, are what drives location decisions.

This isn’t a new story: Talent & urban amenities trump tax breaks

Consider, for example, the recent case of General Electric’s relocation to Boston. The after the fact statements of the company’s CFO make it abundantly clear that GE was strongly attracted to Boston by the region’s urban amenities and the culture of innovation–attributes that could hardly be replicated at any price in most alternative locations.  Asked by the Wall Street Journal why GE chose an urban location (Boston’s Seaport District), CFO Jeffrey Bornstein emphasized these characteristics.

Yes. From the get-go we knew we wanted to be in a place that was vibrant and entrepreneurial, where you could walk out your door enriched by your environment and your ecosystem. I can walk out my door and visit four startups. In Fairfield, I couldn’t even walk out my door and get a sandwich.

We knew we wanted to be in a more urban environment where we could actually participate in the ecosystem and be smarter and more aware as a result.

Even though the chief financial officer acknowledges that talent and an entrepreneurial environment were critical, GE was handsomely rewarded with $145 million in incentives by going the Kabuki theatre route of pretending to be weighing lots of competing offers.  If anything, Amazon was more audacious at this game than GE.  Greg LeRoy of Good Jobs First has pointed out that Amazon had managed to extract a quarter of a billion dollars incentives to support the construction of distribution centers around the country. The whole point of the HQ2 exercise was to up this game to a new and more lucrative set of subsidies.

Corporations have choices. They could go about their business, and simply choose the best location, the one that makes the greatest business sense, and invest accordingly. Or they can as Amazon, GE, and dozens of others, go through the ritual of pretending to entertain a wide range of proposals, and use the leverage of competing bids to sweat the best possible deal out of their preferred location. The net result of our current approach is to provide giant cash rewards to those who engage in the most cynical behavior. As a result, while Amazon may reap some short term financial benefits, it may come at the cost of considerable corporate goodwill and also at the cost of fiscally impoverishing the city that it chooses to locate in.  The other losers will be all the businesses against which Amazon competes, who are too small to have the leverage to insist on a comparable level of public subsidy for their similar operations.