Ocasio-Cortez, Amazon, and the Real Winners in the HQ2 Lottery

November 14, 2018

Is handing over billions of taxpayer dollars to the most valuable company in the world a good way to create jobs?

When it comes to New York giving Amazon $3 billion in state and city grants and tax breaks to lure the tech company’s HQ2 facility to Queens, Congresswoman-elect Alexandria Ocasio-Cortez (D-NY) sure doesn’t think so. In a series of tweets this week, the socialist from the Bronx voiced her outrage:

“Amazon is a billion-dollar company. The idea that it will receive hundreds of millions of dollars in tax breaks at a time when our subway is crumbling and our communities need MORE investment, not less, is extremely concerning to residents here,” she wrote.

Ocasio-Cortez didn’t exactly make her name by calling for fiscal restraint and good stewardship of taxpayer dollars — quite the opposite. In her long-shot primary campaign that upset a powerful incumbent, she advocated costly policies such as universal healthcare, tuition-free public college, and a “jobs guarantee” whereby the federal government would supply jobs to every American who can’t find employment. But nevertheless, she has stumbled upon an important point when it comes to taxpayer giveaways to corporations: there’s a better use for public dollars.

Local and state governments offer tax credits, grants, and loans to companies in the hopes of convincing them to choose their jurisdiction for a corporate expansion, all in the name of job creation. The trouble is, citizens are rarely the winners in the corporate welfare game, as economics professor Shirley Svorny wrote in a Goldwater Institute report:

“When it comes to picking firms to subsidize, it is unlikely that political decisionmakers will be able to identify firms that will survive in a competitive environment. Because so many firms fail in the initial stages, it is difficult for even the most sophisticated investors to predict which firms will do well. 

“Private banks, venture capitalists, and angel investors, acting in their own interest, specialize in identifying individuals and projects most likely to succeed. Even so, venture capitalists, who put their own wealth at risk, fail more often than they succeed.”

OK, but what about in a case like Amazon — one of the most successful companies in the world? Is it a bad bet when you can convince a known winner to come to town? Not so fast. Svorny calls that the “Winner’s Curse.” Governments “never know if competing bids would actually have been forthcoming absent subsidies,” she writes. On top of that, they have to compete with rival cities or states to win the economic incentive competition, and that can carry a steep price for the winner.

You don’t have to tell that to the people of New York. They will pay a whopping $48,000 for every Amazon job that’s coming to town. Meanwhile, the cost-per-job for Amazon’s other two HQ2 locations will be $22,000 in Virginia and $13,000 in Tennessee. That’s not to mention the forgone costs to citizens who reside in those states. Ocasio-Cortez is correct: those dollars could have been used to benefit citizens already living in the community that Amazon will now call “home.”

There’s a better way for government to encourage economic development that doesn’t involve corporate handouts. “Policies that reduce a firm’s costs of production and make the region attractive to potential employees should be the focus of development efforts,” Svorny explains. That includes limiting unnecessary regulations that raise the cost of doing business, revising zoning laws and reducing the costs of the permitting process, lowering business and individual tax rates, and prioritizing the provision of core services like road maintenance, public safety, and maintaining open spaces for recreation — all of which make a community more attractive for a company and the employees they will hope to hire.

The people of New York, Virginia, and Tennessee won the Amazon lottery, and now they’re stuck with their expensive prize. But for the more than 200 cities that lost out on their bid for Amazon’s business, their taxpayers are the real winners. And maybe their government leaders can learn a lesson about the high cost of pay-for-play economic development.