When we strongly incentivize anti-social behavior by big corporations, we get more of it

Everyone in the urban space is busy handicapping the Amazon horserace, to see which city will land Amazon’s HQ2, which promises to be the biggest economic development prize of the 21st century. Amazon’s RFP, issued last week, invites metro areas with a million or more population to submit their entries.

Which city will click with Amazon?

Prominent among them:  Show us your incentive packages:

Capital and Operating Costs – A stable and business-friendly environment and tax structure will be high-priority considerations for the Project. Incentives offered by the state/province and local communities to offset initial capital outlay and ongoing operational costs will be significant factors in the decision-making process.

Incentives – Identify incentive programs available for the Project at the state/province and local levels. Outline the type of incentive (i.e. land, site preparation, tax credits/exemptions, relocation grants, workforce grants, utility incentives/grants, permitting, and fee reductions) and the amount. The initial cost and ongoing cost of doing business are critical decision drivers.

There’s actually very little to add to the speculation about which city has the inside edge. Plenty has been written that makes the most obvious points. Brookings’ Joseph Parilla narrows the list to 20 cities that have the size to accomodate the company. Richard Florida makes a strong case for the top half dozen. The New York Times Upshot has gone so far as to pick a winner (Denver); although their article is actually more helpful for thinking about the winnowing process than handicapping the eventual winner.

A common refrain is that this beauty contest is ultimately revealing as to 21st century corporate decision making factors. 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.

If you’ve been around the economic development fraternity for long, you’ll know that this is just the latest in a series of similar high profile corporate gambits to generate state and local subsidies. Back the the 1980s, states and cities were throwing themselves at GM’s newly minted Saturn division (remember them?), offering up subsidies for Microelectronics and ComputerTechnology Corporation (MCC) and submitting bids to be the home of the SuperConducting Super Collider. All three of these supposedly world-changing enterprises have since expired or been absorbed into other organizations.

Amazon–who after all, makes its business knowing the decision preferences of tens or hundreds of millions of customers–is hardly likely to rely on cities for the information to make its decision. In all likelihood, the company already has in mind a preferred site, or perhaps two.  The whole point of this exercise is to improve the company’s bargaining position for the location it wants.

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 is more adept at this game than GE.  Greg LeRoy of Good Jobs First has pointed out that Amazon has 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 is to up this game to a new and more lucrative set of subsidies.

As Richard Shearer of the Brookings Institution points out, the entire RFP exercise is a red herring:  At the end of the day, it’s likely to be reasons largely internal to Amazon’s business plans, corporate structure, and culture that dominate its location choice, not incentives. Amazon will face hard choices about which activities it hives off to headquarters two, and how to clearly demarcate and manage a company with two very large headquarters locations. It’s unlikely to risk the success of its enterprise on the difference between two sets 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 turn out to be a winner, it may come 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.