The Ugly Truth About Amazon’s HQ2 Beauty Contest

A year-long drama came to an end last week when Amazon announced that it would split its second corporate headquarters, dubbed HQ2, between Long Island City, Queens and Northern Virginia. The year-long competition, involving hundreds of cities, combined the drama of The Bachelor with the shameless bribery of the FIFA World Cup selection process.

Amazon did just about everything short of televising America’s mayors and governors in an ordeal reminiscent of a Japanese game show. One gets the feeling that New York governor Andrew Cuomo, who offered to change both his own name and that of state landmarks to Amazon, would have gladly participated.

The winners get a staggering number of relatively high-paying jobs, as well as investment in their communities and the prestige of hosting one of a handful of high-profile tech giants. It’s probably a good deal for company and cities alike, but for the rest of us, it’s just another frustrating example of what happens when big business and big government join hands.

FInd Yourself a City

Let’s take a closer look at New York. All joking aside, it’s a net financial win for the city and state. Amazon has promised 25,000 jobs over ten years with an average salary of $150,000. New York City and state have in return promised $1.2 billion in tax breaks should those “job creation” goals be met. And that’s less than half of the likely tax incentives the city and state dished out.

Cuomo’s characteristic political hackery and mayor Bill De Blasio’s sudden conversion to corporate evangelist are easy targets for a few laughs, but much of the criticism levied at them for the sweet deal they gave Amazon is unfair.

The idea that Amazon’s arrival will “cost taxpayers” billions is misleading, based on a nonexistent counterfactual where Amazon and its jobs were already in New York. Without the breaks, Jeff Bezos would be eating barbecue in Austin, and New York wouldn’t see any benefits at all. And at least for New York and Northern Virginia, the benefits appear to outweigh the costs.

Systemic Bribery

So if these deals are mutually beneficial to Amazon and their new corporate homes, why does the whole process leave a bad taste in my mouth? When we zoom out a bit, we see that Amazon’s beauty contest was a wash for the American economy as a whole, and a blow to competition in the retail sector.

Amazon clearly wanted to expand, including a significant amount of new white collar jobs. If it was going to build HQ2 somewhere, and employ about the same number of people no matter its location, then America’s cities were playing a zero-sum game. New York and Northern Virginia’s gains were other cities’ losses. “You either create jobs, or you lose jobs,” said Cuomo at his victory press conference. But Cuomo did neither. Amazon created these jobs with its decision to expand, Cuomo and De Blasio merely bribed them into New York.

I don’t use the term bribery lightly. Peel away the pomp and circumstance and the Amazon HQ2 race was really about who would dole out the biggest competitive advantage to the already-gargantuan retailer. Every time Amazon wants to hire another worker in New York, a significant amount of the cost is offset by a tax break. Amazon’s competitors do not get such a break. The big get bigger.

One can quibble about whether the HQ2 extravaganza fits the technical definition of rent-seeking, but in practical terms, Amazon used its size to pit American localities against each other and see who would provide the biggest government-sponsored advantage over its rivals.

Good Governance Gone Bad

Amazon of late has become the political chattering class’ favorite example of “unfettered capitalism.” Some of the scrutiny it has received has been warranted. The company’s new $15 “minimum wage” turned out to be a crass PR stunt meant to both cover up the elimination of low-wage workers’ stock and incentive pay and raise rivals’ costs through lobbying for a federal minimum wage increase.

But “unfettered capitalism” implies an absentee state whose imagined role is somehow keeping the online behemoth in check. Instead, government is an indispensable accomplice to Amazon throwing its weight around. If you need proof of government’s systemic role in keeping big companies big, take note that New York and Northern Virginia’s bribes, far from corrupt or cynical, were actually good governance from the perspective of the areas’ constituents.

Libertarians often emphasize the central role that rent-seeking plays in incentivizing companies to grow larger. Big companies will manipulate the government’s regulatory apparatus more successfully. This makes a lot of sense for financial firms, defense contractors, and even big pharma. I’m less convinced it’s why Amazon got big in the first place--I suspect that has more to do with economies of scale and consumers valuing one-stop shops.

But the ability to manipulate government helps Amazon stay large and perhaps grow even larger. This isn’t the result of electing the wrong people or making the wrong rules. New York and Northern Virginia’s elected officials probably did right by their constituents, but working within our system as it is, they did the rest of us no favors.

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Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research often focuses on free markets and technology, including blockchain and cryptocurrencies, the sharing economy, and internet commerce. He is a frequent speaker at industry conferences, especially on blockchain technology. Max’s research and writing also touch on other economic topics, including governance, competition, and small businesses.
 
Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.