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HQ2 = PU.E 2: Something Is Rotten in Amazon’s Request for Proposals

If you have been following the business news over the past couple of weeks, you know about “HQ2.” It is the most sought-after prize — the biggest pot of gold, if you will, at the end of a shimmering rainbow — in the entire history of economic development projects underwritten by tax breaks and subsidies to big corporations.

HQ2 is the name given by Amazon.com to its proposed second headquarters — in encouraging big cities across North America to engage in a bidding war to decide which one would be selected. And what makes this such a coveted prize?

Lots and lots of high-paying jobs — up to 50,000 of them, by Amazon’s estimate, with an average annual compensation of more than $100,000 per employee, plus all kinds of other goodies. In its request for proposals from 50 metro areas of more than 1 million people, Amazon boasts that out of its worldwide workforce of 380,000, “all of them — from hourly associates to our most senior executives — have access to the same generous benefits and parental leave.”

Amazon says that HQ2 will be the equal of HQ1, its current headquarters in downtown Seattle, which consists of 33 buildings and 8.1 million square feet of prime office space.

If you were mayor of Atlanta, Boston, Chicago, Dallas, Detroit, St. Louis, or any other big city you care to name, wouldn’t you want to land a prize like that? Wouldn’t you like to own what could be seen as a 50 percent share in the future growth of one of the greatest companies ever to spring forth out of the entrepreneurial dust?

Does no one smell a rat here?

No one does, as far as I can tell from my reading of press accounts — all of which seem to agree that there will be 49 “losers” and one big “winner” to come out of the Great Job Auction orchestrated by Jeff Bezos, Amazon’s legendary founder and CEO.

Allow me to register my disagreement with this line of reasoning. I predict that there will be 49 winners and one big loser — that being the city and state that land Amazon’s second headquarters.

How can that be?

In any auction, the winning bidder may pay more for something than it is worth. That is especially the case in this kind of auction — in which government entities compete with one another in offering tax breaks to a rent-seeking corporation (i.e., one looking for public assistance for private gain) that is trying to get as much as it possibly can from government.

The fatal flaw here is the deeply ingrained habit of regional economic development agencies and other government entities of assuming (falsely) that a public investment of X dollars will yield about 2X in indirect benefits — in addition to the job creation and economic growth that come from the investment made by the rent-seeking company.

That is the so-called “multiplier effect.” Typically, local development agencies assume a multiplier effect of 1.8 to 2.2 in topping up the politically favored company’s investment with public money. But as Joseph Haslag, chief economist at the Show-Me Institute, points out, such an assumption is “ephemeral, vaporous, an apparition.” There is no economic evidence to support a multiplier of more than 1.0 ($1 of benefit for one dollar spent). In fact, there is considerable evidence that government investments earn well below-average returns. Rather than add to economic growth, government investment all too often subtracts from it — in directing scare resources to sub-optimal uses. The better bet is to leave more money in taxpayers’ pockets — relying on the marketplace to decide (in the words of Ludwig von Mises) “what is to be produced and who is to produce it.”

Amazon plainly wants a lot of taxpayers’ money — almost certainly in the many billions of dollars. In 2013, Boeing initiated a similar bidding war when it put production of a new airliner, the 777X, in play — inviting proposals from other cities and states. In the end, Boeing decided to keep 777X production at its massive plant in Everett, Washington — but only following the Washington Legislature’s approval of tax breaks and other benefits valued at $8.5 billion over 16 years (the Seattle Times called it “the largest state-tax subsidy to one company in American history”). Boeing was promising 8,500 high-paying jobs — or only about a fifth as many as Amazon.

Amazon’s request for proposals piggishly states:

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 the initial capital outlay and ongoing operational cost will be significant factors in the decision-making process.… Outline the type of incentive (i.e., land, site preparation, tax credits/exemptions, relocation grants, utility incentives/grants, permitting, and fee reductions) and the amount. The initial cost and ongoing cost of doing business are critical decision drivers.

Somehow Amazon stopped short of asking cities and states to pick up a quarter of the annual payroll at its second headquarters.

I must admit that I laughed out loud when I first saw the stories about Amazon’s “HQ2.” This happened when I was on a sailing trip with three friends off the coast of Massachusetts. We spotted an idle “pump-out boat” that might have helped us with the problem we then had on our own boat — a clogged toilet, or “head.” Unfortunately, the would-be rescue boat had stopped operating on Labor Day — the day before we arrived in Vineyard Haven Harbor in Martha’s Vineyard. But she (the humble little boat with the task of pumping out clogged sewage lines and tanks on other vessels) did have a humorous name, recalling the magnificent “QE2.” She was named the “PU.E 2.”

To me as a policy analyst, corporate welfare has a bad odor — regardless of the reputation of the company seeking public assistance. It represents a blatant misuse of public funds — unfairly lightening the tax burden on one company while implicitly raising it on everyone else, whether individuals or businesses. That is why I say, “HQ2 equals PU.E 2.”

Andrew B. Wilson is a resident fellow and senior writer at the Show-Me Institute, a free-market think tank based in St. Louis. 

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