Nathan Tolib
Prof. Snyder
EC 341
17 December 2018
Amazon Siting
Bluestone gives us three goals for economic development. These goals or objectives are to encourage economic investment in their municipalities from local public officials. The first goal is to produce jobs that provide wages, salaries as well as benefits for citizens. An increase in unemployment happens when the number of jobs decline really fast and cannot keep up with the population growth. If the joblessness is prolonged then this may result to an increase in poverty and out-migration as the unemployed will look for job elsewhere. This could lead to a vicious cycle and also unemployment leads to a loss in prime-age workers. This will also make it less likely to attract new investment and may lead to what we call a poverty trap. It will sink further.
The second goal is to maintain or increase local tax base. This can be done by attracting investments from the private sectors. The city needs to have enough tax revenue in order to maintain its public amenities such as roads, parks, schools and more. Tax revenue generally comes from sales tax such as hotel or meal taxes and the local income tax. Additionally, most municipalities rely on the taxation of industrial and commercial properties to help them pay for the public amenities or local public services. Another example, a suburban strip mall or downtown commercial district with office towers, restaurants and hotels or other service firms usually provide for tax revenues in excess of the expense that was incurred from the municipality’s requirement to supply the business ventures with police men, fire men and also road maintenance. These surpluses are used to improve the public schools, provide subsidies for low income housings and also improve a park’s aesthetics. Similarly, large factories can also generate property tax revenue that can be used for the same purposes. Additionally, building a large non-residential tax base by attracting a business to a community can also solve the revenue problem from municipal leaders.
The third goal is to raise the local economic multiplier. This can be done by substituting local services as well as production for the imported ones. When entrepreneurs are encouraged by municipal leaders to set up local operations, money that would have quickly left the community can be recirculated. This means, it increases the residents’ income and produces a greater local prosperity whether it’d be for jobs, tax revenue and an increased local multiplier. Most local public officials work really hard to attract private-sector investment to their own towns and cities. These strategies have an effect on achieving the goals and have new jobs actually been created and it comes with a cost. If the strategy work, it could mean that there is a net gain of jobs for the nation but it could also mean a reallocation of jobs from more efficient sites to other places that are less efficient. This is all related to agglomeration economies. There are positive externalities in product that can provide an efficient use of its resources. There is a loss to society and when firms are taken away from their most efficient sites because it may outweigh the gain.
Finding a location is very important for businesses. Amazon has chosen New York as one of its locations for its second headquarters. The site met the specifications as a transportation cost minimizing location for Amazon’s national/global market and transportation network. The transportation cost minimizing location works on the basis of considering the relative cost and benefits of inputs raw materials and outputs of finish products the market has for those good. There is the assembly cost, distribution costs, and other costs that needs to be weighed against each other.
Long Island City Queens in New York have buildings that Amazon can occupy quickly and has excellent transit access. It is also proximate to airports from which Amazon employees can access the markets all over the country and travel back and forth to its first headquarter in Seattle. Amazon will bring twenty-five thousand employees and will fill up to 8 million square feet of office space. Queens itself has only made 100,000 jobs in total over the past decade, Amazon is already bringing a big number of new jobs for just one employer. More jobs mean more people and people need homes as well as commute from home to work.
Furthermore, Amazon’s business is not just about selling stuff on the Internet but its more about getting consumers anything they want faster and to do so depends on continuous flow of great new ideas. That is why they prioritize after talent in their location siting. They need talented people who interact with one another continuously and directly. They need to key off one another’s creativity, those to test concepts and build knowledge. Technology is not a thing as it is a process of group learning and happens via geographic clusters. There are so many smart young people from all over America with college degrees stream into talent hubs in America where the sum of their capacities is far greater than they would be separately. In addition, corporate rents and housing costs are increasing as well as the costs of sending kids to school. But the incomes and profits more than make up for it. That is why Amazon chooses New York over metro Washington.
Another reason why Amazon needs a second headquarter is because it needs space, tech talent and had outgrown the area in Seattle. Not everyone wants to live in Seattle and to lure those who do not Amazon needed to find a second home. Having three headquarters is uncommon but it takes care of the problem of overwhelming any one town with 50,000 highly paid employee. The issue in Seattle is that there have been problems of income inequality, gentrification, housing shortages as well as traffic. There has been so much backlash against the company. Also, Location in a particular city or town depends on different factors – some of which are susceptible to influence by state and local public policy because after all the primary objective of making a profit (difference between its total revenue and its total costs).
Reducing capital costs and labor costs are two of the strategies that the City of New York will be assisting Amazon with. Amazon is given a big subsidy from the government of $4.6 billion because of the jobs it will create in the area. Also as for labor costs, by providing training for workers and also schooling the children of Amazon workers.
Cities pursue economic development strategies with such low payoffs due to many reasons. The first reason is because governments are run by politicians. Governments need to show to their constituencies and show that they are working hard to rectify the problems of unemployment and poverty. Bluestone mentioned, “If issuing a tax-exempt industrial revenue bond, subsidizing a training program, building a new on-off ramp to a freeway, providing a business property tax abatement, creating an enterprise zone or subsidizing the construction of a convention center provides some jobs or targets some of those jobs for disadvantaged workers, the subtleties of a poor cost-benefit ratio will often be overlooked. This is true in communities that have long suffered deindustrialization.” Just because something needs to be done, government officials will do anything to assuage the constituencies. While, the second reason is found in the literature on stakeholders. Even when the real cost and benefit ratio associated with a particular incentive is larger than one, and when majority of constitutes, if they are mobilized, it would still urge denial of the development scheme. Essentially, a small group of stakeholders can carry the day because of the real gain accruing to them and others can still put so much pressure on local political leaders. People like the mayor and city councilors will find it hard not to support an exorbitant demand for let’s say a publicly subsidized stadium.
Furthermore, the third reason is the prisoner’s dilemma. Cities are isolated when they are urged to consider stakeholder requests for location subsidies. For example, a firm will play off one city against another in an attempt to win the best set of incentives it can gather.
Lastly, the fourth reason is the question of how to measure the opportunity costs of any given location incentive. A city needs to constantly face many economic development policy options and then needs to make a careful assessment of the costs and benefits. But this is rarely the case. Usually, individual firms approach a municipality and forces the leaders to make choices without having that many option. Bluestone also mentioned, “If you pass up pursuing a given firm that is considering the possibility of locating in your community, you have no idea when the next opportunity will arise and whether this opportunity is better or worse than what the first firm offered in terms of investment and jobs. Essentially, firms contemplating a location decision benefit from being in a monopoly position vis-à-vis cities and towns. Monopolists win when they can play one customer off against another.”
The New York state predicted there will be a 9-1 return on its investment that was based on an economic model that compared the costs of tax incentives with expected tax gains but did not factor the substantial costs of accommodating Amazon’s growth in the city and economic development. The city did not consider that they must allocate its money to educate the children of Amazon workers, improve its public amenities like public transports, garbage disposal and even adjust the police and fire coverage. Claiming 9-1 is implausible and present a dishonest way the return on these incentives. Some people also say the New York and Amazon deal is a bad bargain because it rises concerns if the company was going to hire the existing community in New York or really just hire talented individuals and relocate them. This is like economic goal number two. The Amazon location is also situated in a federal opportunity zone, which essentially means it is supposed to bring money to poverty-stricken areas. Under the tax overhaul law that was signed by Trump last year, investors in opportunity zones may defer their payments of capital gains taxes until 2026. They can also exclude 15% if they hold onto it for seven years, and if they hold it for 10 years then they will eliminate taxes entirely. Many people are taking this advantage of opportunity zones. Even special funds are built so it can cater people holding unrealized capital gains. This means, some Amazon employees are holding a big chunk of the company stock. Other than Amazon benefiting from the opportunity zone in Long Island City, they also divert investment from one part of the city from another. This will result in no net gain for the city as a whole. Amazon may get $4.6 billion in state and local subsidies for its new headquarters and this is not yet counting the money from the opportunity zone. Essentially, the location of Long Island City New York is a designated opportunity zone Amazon could exploit. The fast-gentrifying area has no problem at all attracting new investment and has 10% poverty rate and also a median income of $130,000 a year.
At the end of the chapter, Bluestone mentions about playing the economic development game better and gave us ten suggestions. The first principle that he mentions is that cities require cost benefit studies prior to making large incentive awards to individual firms or inaugurating new or revised tax incentive programs. As mentioned earlier, Amazon did
Its research and also weighed its cost and benefit. Secondly, it also encourages public participation in debates over the issue of location incentives. Amazon surveyed a lot of people and it was a hot topic in the news. Some people were even writing essays about it and also doing economic analysis of where should be the ideal place is. Thirdly, what Amazon is lacking is requiring legally binding performance contracts and penalizing them if they do not meet the goals established in exchange for incentives. As mentioned earlier, same issue with the federal opportunity zone.