Is Amazon HQ2 Worth it?

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00:05 Paul Matzko: Welcome to Building Tomorrow, a podcast about how tech and innovation are making us freer, happier and more prosperous or might just give us more Jeff Bezos. Who knows? But today, we’re talking about Amazon’s decision to open a second and third and kind of a fourth headquarters in New York City, Washington DC and Nashville, Tennessee. If that’s not enough to tantalize you, let me frame it this way. This week, you get to hear your favorite, obviously your favorite libertarian podcast hosts agree with the Democratic Socialists of America. Not every day that happens. Now, as usual, I’m your host, Paul Matzko and with me are Will Duffield, editor of Prototype, and Vanessa Brown Calder who’s Cato’s policy expert on housing and urban policy. Thanks for joining us, Vanessa.

00:51 Vanessa Calder: One of them, one of them.

00:52 Paul Matzko: One of the them. So the… Just take all the credit.

[laughter]

00:55 Vanessa Calder: Glad to be here. Thanks for having me.

00:57 Paul Matzko: So, a few numbers to kick things off. So, we can’t just assume that everyone knows… Around here, you say HQ2 and people automatically know you’re talking about Amazon and it’s a topic of conversation in DC circles. What this is though, Amazon, which is based in Seattle, announced the decision, at least a year ago, that it was going to open a second headquarters in some other city. It was gonna bring 50,000 jobs, $5 billion in construction spending, and it launched a competition among cities for that privilege, that benefit. They had some… I don’t remember all the criteria off the top of my head. You had to be a city of a certain size, I think, it was more than a million.

01:41 Vanessa Calder: I think, 1 million.

01:42 Paul Matzko: A million, that sounds right. It had to be close to universities and airports and highways. At the end of the day though, I think it was more than 200 cities entered bids, which I have to guess… It’d probably be easier to list the cities that didn’t enter a bid rather than all the ones who did.

02:01 Vanessa Calder: Yeah.

02:01 Will Duffield: And the idea was that this HQ2 would be transformational, that Amazon might drop into a place in dire need of economic development, somewhere other than the sort of coastal hubs which have profited from the tech revolution and help to lift their boats as well. So, that was the expectation many cities had upon entering bids and turning over reams of information about their towns to Amazon.

02:34 Paul Matzko: And some of those bids were quite… I mean, you can understand then why, it was a development firm in Tucson, Arizona, sent Amazon, as part of its bid, a 21-​foot tall cactus.

02:45 Vanessa Calder: A lot of peacocking.

[laughter]

02:46 Paul Matzko: A lot of peacocking. You have to think it wasn’t a… That wasn’t all that serious of a bid, but it got them press coverage.

02:52 Vanessa Calder: Yeah.

02:53 Paul Matzko: But the Amazon ended up narrowing that list down to about 20 cities, major cities you’ve heard of. Philadelphia, Atlanta, Austin, which some of the handicappers before the announcement, those three were consistently at the top. I think Austin was the top for one major firm as the favorite to receive the headquarters. Of course, in the end, none of those received HQ2 but Amazon did surprise by choosing not just one city but two cities. So, they already kind of welshed a little bit on the idea of, “We’ll drop in with $50 billion… $5 billion in construction costs and 50,000 jobs. Actually, half that, two of you will get that privilege.” Then they also tacked on the lesser noticed. They are sort of putting it… So, they’re putting one in New York City or in Long Island City, one here.

03:47 Vanessa Calder: Which is Queens.

03:48 Paul Matzko: In Queens.

03:49 Vanessa Calder: Yeah.

03:49 Paul Matzko: Yeah, just across the river from Manhattan, right?

03:52 Vanessa Calder: Yeah.

03:52 Paul Matzko: One here, I guess it’s not technically DC. It’s Crystal City or soon to be National Landing.

03:58 Vanessa Calder: Yes.

04:00 Will Duffield: Yeah, so…

04:01 Vanessa Calder: A re-​branding campaign there.

04:02 Will Duffield: JBG and Amazon, I suppose, along with Arlington County have come up with this National Landing designation to include both Crystal City, an old sort of brutalist-​built business district in Northern Virginia named, actually, after a large crystal chandelier in one of its first hotels, and Pentagon City a, both, suburban neighborhood and the area that contains the Pentagon into one cohesive area they’re calling National Landing.

04:39 Paul Matzko: Have you seen this chandelier? It’s gotta be quite the chandelier.

04:43 Will Duffield: I think I’ve seen photos of it. It doesn’t look like all that much but, if all you’ve got otherwise is big faceless concrete buildings, you’ve gotta fall back on that chandelier.

04:54 Vanessa Calder: Something better than that. Well, from what I hear, there’s not actually limits to the neighborhood which will be encompassed by National Landing. So, it sounds that it’s actually gonna be both Arlington and also, Alexandria. So, spill over there as well and that seems to be true if you look at the maps of where the Amazon buildings are gonna go, which they released.

05:14 Paul Matzko: And you guys are both Arlingtonians?

05:16 Vanessa Calder: Alexandrian.

05:18 Paul Matzko: Alexandrian in Arlington?

05:19 Vanessa Calder: But yes.

05:19 Will Duffield: Pentagon City?

05:20 Vanessa Calder: I spend time in Arlington every day.

05:22 Will Duffield: All of my advertisements on the subway are for defense articles. [chuckle] I’m not the potential customer, the government is and that sort of emblemizes where I live.

05:35 Paul Matzko: Are people chattering on the train about the coming of HQ2? What’s the buzz on that side of the river? I know there’s the DC take, which is I think most people working at even… I would say non-​profits but in the defense industry, working for the government, are generally bullish on the prospect because it means more money here for the DC [05:57] ____.

05:57 Vanessa Calder: Yeah, it’s perfect, because it’s across the river, so you don’t actually have to deal with any of the congestion issues or anything else, but at the same time, you get the benefits of having Amazon close by and maybe you can even work there and more opportunities there. I don’t know, I’m not sure that I’ve seen any polling done on Northern Virginians and their views, but I have had a couple of encounters with Lyft or Uber drivers where they’ve told me that they’re very distressed about the coming destruction of Alexandria and Arlington. So yeah, so that seems to be the word on the street that I’ve heard. [chuckle] It’s not a scientific poll.

06:38 Paul Matzko: No, no, no. We’re gonna hold you to that now. That is the majority opinion of Alexandria.

06:44 Will Duffield: As a renter I’m a little bit nervous. I’ll say that. I expect my current good terms to come to an end. And you do see a lot of expectant renovation in…

07:00 Paul Matzko: Already? Wow.

07:00 Will Duffield: Well it’s somewhat of an acceleration of what’s already been going on. On the other side of 23rd Street, from Crystal City, you’ve got the sort of big tower block corporate buildings, and then a smattering of smaller more family-​run or local restaurants, diners, that sort of thing. And that crowd seems pretty excited about it, actually. The idea being that as many Sweetgreens as are put in by JBG, at some point, the Amazon employees are gonna wanna leave the reservation and see something exciting? One gay bar owner saying, “I don’t think JBG will put in a gay bar for Amazon employees over on the strip. So I expect to do quite well.”

07:51 Paul Matzko: So there’s opportunity there, and I suppose this intersects with the standard debates over gentrification, which is a big deal here in DC as development squeezes out minority communities that have been there for decades, the H Street Corridor even in maybe to a lesser extent Northern Virginia, which has been gentrified a long time ago, much of it. So it intersects with other pre-​existing conversations. I do know the local chapter of the DSA, Democratic Socialists of America, have come out condemning HQ2 in Crystal City or National Landing.

08:29 Vanessa Calder: Yeah, so I think that some of that, and maybe we’ll get into this a little bit later in the podcast as well, but I think some of it can be certainly prevented. So Will mentioned that he has some concerns as a renter, and I think that he should unfortunately have those… Hold those concerns as a renter in Arlington area. The reality is Arlington has actually built a little bit better, at least this Crystal City, kinda like National Landing area is more dense than surrounding areas, but there’s a lot of single family home zoning in this area. Will is probably very familiar with that and certainly that’s true in Alexandria as well. And those things really have to change in order to allow for the growth so that this isn’t a gentrification situation. You’ve seen like in San Francisco, for instance, that when the tech boom happened there, that there was a lot of immigration out of the city, and it was immigration of working class types of people of minorities just in droves. And so the demographic in San Francisco has gotten a lot more homogenous over time, which I think should probably concern people a little bit, because gentrification has definitely happened, and it’s not happened because it absolutely had to. That’s the key piece here, is that really cities do need to proactively re-​look at their regulatory policies and there’s so many places where there’s room for improvement and we can get into the details of that later on.

09:58 Paul Matzko: Yeah, we’ll have to. No, I think that’s an important… It’s an important angle to think of it. It’s not just a story about development being good versus development being bad, in like gentrification, which is in a sense another word for development, being all good or all bad. It depends. It really depends on whether it’s being fueled by irrational and counterproductive regulatory policy and zoning policy, or if it’s just happening because there’s demand, there’s pent up demand that needs to be met and that makes a difference.

10:30 Vanessa Calder: There’s definitely pent-​up demand, yes, in this area. In DC as well, but…

10:34 Paul Matzko: It is striking, as you go across the river, I’ve only… I mean I don’t head down that way, that often, but as you cross the river, you can see suddenly on the skyline all these tall buildings, which is unusual ’cause DC everything’s capped at a certain height, and I guess in relation to the Capitol Building. Is that Arlington where they actually have tall buildings, suddenly?

10:55 Vanessa Calder: Yeah, in Arlington.

10:55 Will Duffield: Rosslyn.

10:57 Vanessa Calder: Yeah, Crystal City area as well there’s some tall office buildings. That’s where some of the JBG buildings are. So that area is zoned a little bit differently. But if you go inland from there, or if you go down the river a little bit, then it becomes kind of capped again at either, single-​family like, two-​story homes, or maybe like three or four story townhomes, if you’re really getting crazy in Old Town Alexandria. So yeah, there’s certainly a lot of pent-​up demand. And not just in… Not just in DC. And not just in Arlington or Alexandria, but even… Although, we kind of think of New York City being the place of towering skyscrapers, it actually… The majority of New York is zoned for single-​family homes, which is probably shocking to most people. And in Queens, New York, where Amazon Headquarters Two will be located, I think 98% of residences there are three or four stories. So they’re just like, three or four-​story walk-​ups. And that’s not because that’s what they would be, that’s because what they’re zoned to be.

12:07 Vanessa Calder: So I think a lot of times we kinda undersell the effect that these regulations have on just the urban landscape that we come into contact with every day. They really do determine the urban landscape and as a result, they determine housing prices when you can’t… When you don’t have demand meeting supply.

12:26 Paul Matzko: It’s striking when you go to San Francisco and you see the… You have these luxury, again, not very tall, there’ll be like two-​story, single-​family housing. Maybe, a three-​story walk-​up. The town’s littered with these cute brightly painted, single-​family homes that cost millions of dollars each. You have two communities that actually live in San Francisco. It’s the very, very wealthy, a lot of whom are in Silicon Valley tech jobs, and then you have, essentially, the indigent population of homeless people. That’s all who can afford to live in San Francisco. You crowded out the middle classes and the working classes and they all have to go live in the… Oakland. Increasingly Oakland is becoming unaffordable because of zoning.

13:11 Vanessa Calder: Yeah.

13:11 Paul Matzko: And so bad zoning policy really makes a difference in these communities. Yeah, Will?

13:16 Will Duffield: So another big determinant of where people choose to live, and one that is likely to be impacted by these new headquarters, is transportation policy. How people are getting to where they work, be it Amazon or somewhere else, and how much of a role did that play in bringing Amazon to these two locations? Was there a perception that from a transport policy standpoint, these metropolitan areas could better handle Amazon? And is that a true one?

13:53 Vanessa Calder: Well, I think it’s a big plus to have the airport as close. You have Reagan National, that’s kind of adjacent. Apparently, there’s gonna be a sky-​bridge now, to connect Reagan National somehow with National Landing.

14:05 Paul Matzko: Nice.

14:05 Vanessa Calder: That should be interesting. And then you have LaGuardia, which is close to the site in New York City. There’s economic research that suggests that that is actually one of the main considerations that companies have when they’re relocating their headquarters is, where is there easy access to an airport? And so, it seems like at least from the airport, from the airline standpoint, that is probably, a plus.

14:32 Paul Matzko: It’s also, they’re both close to, I think the… National Landing wouldn’t be that far from the… What is it?

14:39 Vanessa Calder: Metroline, and…

14:40 Paul Matzko: Metroline. But also, the ring… Interstate…

14:42 Vanessa Calder: Oh, yeah.

14:43 Paul Matzko: Whatever, 385, 285? One of the [chuckle] ring… The beltways, or whatever, in DC.

14:48 Vanessa Calder: I don’t drive very much. So you’re gonna have to…

14:49 Paul Matzko: Look it up myself. [chuckle]

14:51 Vanessa Calder: Fill in for me here. Yeah.

14:54 Paul Matzko: So they’re close to the rail. They’re close to… Or subway. They’re close to airports. They’re close to roads. They’re also… This is my favorite counter theory is, that they’re… Both locations are within 7 miles of one of Jeff Bezos’s houses.

15:09 Vanessa Calder: Yes.

15:09 Paul Matzko: So, already owned homes.

15:10 Will Duffield: That matters. [chuckle]

15:12 Vanessa Calder: Yes.

15:16 Will Duffield: You can’t discount that. And particularly thinking about this newer generation of much more founder-​driven firms. The head of the board or a CEO of somewhere like Vanguard or JP Morgan, that’s not going to have the same impact as Amazon with regard to Jeff Bezos or Mark Zuckerberg at Facebook.

15:38 Vanessa Calder: Yeah. No, I think that’s right. There’s research, as well, that presents this as one theory that explains why it is, why firms locate where they do and it’s just simply where does their CEO want to live. So that seems to be in play a little bit here, which makes you then wonder, “Well then, why did they need to give away these incentives?”

15:58 Paul Matzko: Or, why to Amazon. Why not literally entice Jeff Bezos to come and live somewhere, offer him free gardening and whatever else.

16:04 Vanessa Calder: Maybe, it’s not Amazon we needed to incentivize. [chuckle]

16:08 Paul Matzko: Well, you push this on to the question of incentives here and I think that’s a nice transition. It would be one thing if this is a conversation just driven by what they chose these places. It’s gonna benefit the places in theory with jobs and with more tax revenue. It was a revenue neutral kind of conversation but it’s not. In both cases, both DC and New York offered very large quantities of tax credits, of cash grants, of various kinds of rebates. I think the total I saw for New York City was about $3 billion over the next decade, a little more than half a billion for the DC, National Landing. In Nashville their little outpost is gonna get $140 million. These are large sums of money we’re talking about even if they are horizoned over the next decade, 10-15 years. Should that be disconcerting to us as libertarians? We’re not generally in favor of the government choosing winners and losers in the market economy, saying, “Hey, Amazon, you, unlike JBG or some other company that’s already here, we’re gonna give you a tax break but not you who’s already here.” Like selecting individual companies to receive billions of dollars in tax credits.

17:30 Will Duffield: Yeah, it’s not, not all right. And to an extent it de-​legitimizes the economic effects of something like Amazon moving into the neighborhood, because now it’s no longer just Amazon’s come here, they’ve got a lot of employees and they’re driving up the rent. But I am literally paying for the salary of the fellow who’s coming in and replacing me in that rental unit and that feels much less fair than him simply having been hired for a good job in my neighborhood, and coming in. And I think people are more likely to be hostile to their new neighbors as a result of this.

18:15 Vanessa Calder: Yeah, I agree. I think it increases resentment among the community and that’s probably a problem. The weird thing is you could probably make a case that there was some motivation here just to get a lot of PR, just to get a lot of positive PR over the course of over a year, where Amazon was doing this public bidding process. And so, all these cities have to say all these wonderful things and sing Amazon’s praises. But then, when you actually come to the end of the process and you find out what the incentives are, which from my understanding it was surprising that Amazon really revealed that at the end and was really transparent about what all those incentives are, because often it occurs under a non-​disclosure agreement behind closed doors and they actually… Cities will actually take… Or cities or economic development programs will actually make efforts to try to make that as opaque as possible. So you actually don’t know exactly what it is that firms are getting at the end of the process. But at the end of all of that, then you actually opened yourself up for a pretty negative public reaction, which is maybe a little bit different in this case than in some previous deals that have been made. And it seems like the public reaction was actually pretty negative.

19:34 Paul Matzko: It seems like it’s been…

19:35 Vanessa Calder: In New York, anyway.

19:36 Paul Matzko: Very strong, especially in New York. But even here in DC, I haven’t heard anything out of Nashville. But I think that’s just because to the extent which Nashville’s plugged in to the Beltway consciousness is probably really where all the news organizations are headquartered in New York City. But I imagine there’s a lot of folks who aren’t happy in all three of these locations. Now, I do think with the NDAs, I heard that the failed bids, those are all under NDAs and so, unless journalists file FOIAs.

20:08 Will Duffield: They ought to. Get on it. And all journalists listening, file your FOIAs.

20:12 Paul Matzko: Across the country. Yeah, yeah.

20:14 Will Duffield: And in doing so, you’re not just helping the public to understand what this deal-​making process looked like, but potentially aiding the competitiveness of our economy, because the more other firms that get access to the data which was passed on to Amazon by these towns, both future development plans, but also things like traffic flow patterns, the more you level the playing field and prevent Amazon from taking advantage of potentially non-​public information in its future business decisions.

20:54 Paul Matzko: So for a second, let me play devil’s advocate and we’re gonna channel the spirit of Aaron Powell, one of our regular hosts, who couldn’t be here today. And he pointed out… So part of our rhetoric, and I thought of this when you were talking, Will. So you get why it would be alienating. You’re renting, you’re about to see your rent sky rocket and the way you put it was, “My tax money is gonna be paying… Helping pay the salary for some schmuckety-​schmuck at Amazon HQ2.” But Aaron noted this, which was, “Well, no, because the taxes don’t belong to… ” The taxes… Ownership belongs to Amazon, it’s not like where they’re taking tax money away from you. What’s happening is that they’re not going to have to pay as much tax, yes, but that’s their money. It’s not like that’s our money that’s being rebated back to Amazon. In which case, is there really an argument there to be had? Is it unfair for Amazon not to have to give up as much of their own money since that doesn’t necessarily affect… It’s not affecting the taxes we’re paying, necessarily. What do you think?

22:04 Will Duffield: I don’t see how it wouldn’t affect the taxes we’re paying. The money is fungible, it could go to some other purpose otherwise, and at the end of the day, they’re getting a check from the Virginia Economic Development Project. I’d like to speak a little bit more about these public/​private partnerships, because both in New York with the New York Economic Development Corporation, I think it’s called, and in Virginia with the the VDP…

22:39 Paul Matzko: They’re giant slush funds.

22:41 Will Duffield: Yes, but they operate hand-​in-​hand with a select cadre of private firms that the state sees fit to try to bring to the state, and in some cases even foreign governments and foreign government-​backed firms. I know, poking around the VDP website, you as a business owner can pay them money to sign on to trade junkets and go to Qatar for a weekend to talk about how you could export products there.

23:20 Vanessa Calder: Yeah, well, that’s a… Well, so if I can just jump in there, actually, on kind of what you were saying earlier, I think that that… And then maybe we can talk some more about public/​private partnerships, which are always certainly messy, and I see that in housing policy, for sure. So I think, getting back to the question that you were asking, you were saying, “Well, is it really fair to say that? Because we want Amazon to have their money. As libertarians, we want everybody to have their money.” But that’s the thing, we want everybody to have their money, we don’t want Amazon specifically to have their money and everybody else have to either step up and pay more, pay additional taxes in order to, basically, subsidize Amazon having a lower tax rate than everybody else. The Mercatus institute did some work where they looked at what the average state subsidy to Amazon was and what it could pay for in terms of sort of how you could lower corporate income taxes across the state, and they found that for the average state subsidy you could lower Virginia’s corporate income taxes by 45% across the board.

24:27 Vanessa Calder: So that seems like something where… I mean, the reality is that we are making trade-​offs and I think one of the interesting findings, there’s a guy at UT Austin, Nate Jensen, he’s a professor there. And one of the interesting findings that he tries to highlight in his book, which is called Incentives to Pander, is that actually public support for these types of economic incentives and things, they fall when you actually show what it is that could be done instead of provide those economic incentives that are really, really targeted to these individual companies. So yeah, you could cut corporate taxes across the board, that would be one thing. You could cut property taxes for the same cost even if… I don’t know that terming it a cost is right, quite fair or right. And I’m sure that Chris Edwards is cringing if he’s listening to this.

25:22 Vanessa Calder: Or you could do other things. You could increase education spending or something. That’s not something that I at the Cato Institute would say that we should do through public mechanisms, but I’m saying there are other choices that could be made and that those choices to just target one company, they really do have consequences. Overall, I would expect that down the road, the costs with having Amazon locate in Crystal City or Alexandria are going to increase, like the public service costs there will increase, ’cause you have more people, they need more things. Maybe they need more roads, maybe they need more schools and it’s gonna be probably more challenging to pay for that, given that we have these different subsidies and incentives and abatements going to Amazon. So I think it’s kind of a fairness question to me and so I’m gonna have to agree with Will on this one. That said, there’s been a lively continuing discussion here at Cato with some other urban and housing policy folk.

26:24 Paul Matzko: Our listeners know Peter Van Doren.

26:27 Vanessa Calder: Yes.

26:28 Paul Matzko: So there’s been ongoing debate there over… ‘Cause he tends to take the view, which is, “Well, there’s not really a fairness question, it’s just math.” So at the end of the day, you have some cities that are under-​utilized. They have services that are under-​utilized for whatever reason. Some cities are not, they’re at maximum capacity. So New York City is basically at capacity for most of its services, but other places are legitimately under-​utilized and so the marginal cost of bringing in a new headquarters, like Amazon HQ2, are less… Are basically less than… Not every dollar, every location, I guess, not every tax dollar is created equal. So part of that would be you bring in a company, well, yes, you’re gonna have more people on roads, which means you need to spend more on maintaining and building roads. You’re gonna have more people, employees coming, so more spending on education.

27:23 Paul Matzko: But at the same time, a corporation doesn’t… The corporation itself isn’t… You’re gonna be taxing those employees to pay for the services they’re using, but a company coming, especially if there’s under-​utilized services… Let’s say you have a city that has shrunk over the last decade, they’ve got the infrastructure, the road infrastructure already built, so every additional person you add doesn’t cost as much as the first person you add. Or they have half empty elementary schools. So in other words, if you’re under-​utilizing that capacity, it’s worth bringing in someone new, even if they’re not paying dollar for dollar what the first people to come to that city are paying.

28:04 Vanessa Calder: Yeah, it’s kind of like you can split the fixed cost among more individuals and more organizations and that could be a good thing. But I’m not sure how that… And it’s unfair, because Peter’s not here to defend himself…

28:14 Paul Matzko: He’s not here. Let’s tear him down.

28:16 Vanessa Calder: I’m not sure how that relates to the Long Island City and Crystal City situation, because I think marginal costs are rising when you’re gonna bring Amazon into those pretty dense areas. Yes, they can be densified, but there’s already a lot of people on the road. So congestion is already pretty high going from Alexandria to DC and back. I can tell you that from experience.

28:38 Will Duffield: When we talk about the incentives offered in a competitive bidding process between different states, it becomes apparent how much of a zero-​sum game all of this is as well. That the only reason Amazon can in the end get what it does out of New York and Virginia is because other states are willing to offer as much or more elsewhere. And across the board, you end up pushing up bids such that any state where Amazon could have settled would have given them a few billion dollars only on the basis that…

29:18 Paul Matzko: Or a cactus. [laughter]

29:18 Will Duffield: If they went somewhere else they would get a billion dollars there, but at the end of the day, Amazon’s going to locate somewhere in the United States, and states shouldn’t be then in the business of offering them a few billion dollars to pick them over the neighboring jurisdiction.

29:39 Paul Matzko: And folks who’ve opposed that, kind of what you’re saying, Will, that this all was… The whole bid, the competition was a sham. We don’t know this for sure, but that they wanted to be near Wall Street financiers in New York. They wanted to be near the levers of power in DC and near Bezos’s summer homes or whatever, whenever he lives there. So the competition was just a way to eke out the maximum amount of subsidy money out of those places they were already intending to go to.

30:07 Will Duffield: Yeah, but even outside of formal competitions, you see this with all sorts of… The film industry in particular often gets tremendous state tax credits. Often these films won’t even make enough such that they would be paying that amount of taxes or more in the first place. So the credits are just direct contributions to the film industry by taxpayers. And again, it’s all just this race to the bottom between states.

30:39 Vanessa Calder: That’s what I’ve seen for our film tax credits as well. It’s something like, there’s a 20 cent return on every $1 of film tax credits. So that’s a pretty brutal… Yeah. So, I think there’s a question here which is, are these incentives, are they actually effective at doing what they say they’re gonna do? And so, I guess that’s the fear. There’s some of the Peter Van Doren. There’s theories to explain why it is that these incentives work the way that they do, why it is that cities provide them to firms at the rates that they do. But one thing that I came across that I thought was really interesting is, again, Nate Jensen over at UT Austin. He did some research. There’s a study that he did where he looked at Texas, the Texas Economic Development Program, and he found that out of the cities that received incentives through that process, or not the cities, sorry, the firms that received incentives through that Texas Economic Development Program, just 15% of them were actually swayed by the incentive. So, that to me would suggest that generally speaking, obviously, there’s some cases where it mattered here in this research but the minority of cases, it really mattered.

31:57 Vanessa Calder: But generally speaking, firms actually are looking at other factors in order to determine where to end up, and some of those things, like we mentioned before, like, where is the closest airport? That’s important. What is the business climate like? That’s something that Amazon said that they cared about at the beginning of this bidding process. They said that we care about having a business-​friendly environment and a place that we can attract tech talent. So, I don’t know exactly what that means. That probably means that there’s either a workforce that’s already quite well-​educated in that area, and so they don’t have to do too much outreach, or maybe it… It probably means that they have an educated or tech-​savvy workforce or that they have the amenities and the cultural things that would make young millennials interested in moving there. But yeah, there’s a lot of other things that seem to matter substantially more than economic incentives.

32:57 Vanessa Calder: And so, it does ask… It kind of begs that question which is, “So, why are we doing this?” And is it just to kind of… Is it because we have to, because everybody else is. And that’s maybe what Will is saying, is it’s just expected that you’re going to provide $X billion of or $X millions of incentives in order to win a big company and it’s a mark against you if you don’t. Is it that type of thing or is it actually something where you are really attracting new companies and investment to your area? Maybe it’s more of the former than the latter.

33:34 Will Duffield: On the sorts of regulatory environments that these firms are looking for, in Virginia’s Memorandum of Understanding with Amazon, it includes a commitment to regulatory flexibility, saying the sector of commerce and VDP will actively encourage the Commonwealth’s regulatory authorities to implement forward-​looking regulatory frameworks that increase consumer choice, reassess existing laws and regulations to assure they’re not harming innovation and competition, etcetera.

34:10 Will Duffield: And these read as the sorts of commitments that could potentially lead to very good policy, but at the same time, given that they appear in a Memorandum of Understanding between the state and Amazon, specifically, that they could be realized in a fashion that benefits Amazon more than anyone else or potentially even to the detriment of someone else. So, I don’t know if there’s any data on this, any research as to whether this has positive spillover effects or just looks like firm-​specific cronyism.

34:51 Vanessa Calder: Yeah. So, my reaction, I’ve seen a couple of things as I mentioned to you. I saw that in DC, the DC bid has, some of it anyways, has become public at this point. And one of the things that DC was offering is that they would provide one-​day turnaround to any permits that came through that were related to Amazon. So to me, that seems like… I mean, DC is a very difficult place to get things permitted. In fact, when I was living in DC, a neighbor there told me that the worst part of remodeling their house… And they didn’t expand the footprint. They didn’t do anything crazy. They were remodeling the inside of their house. The worst part was getting a permit. Everything else was basically pretty smooth sailing besides that. And remodeling a house, you have a lot of problems with contractors and especially if it’s an older home. And so, to me, that was a signal that actually this is a very… It’s a very difficult, it’s a very restrictive regulatory environment and certainly, that’s borne out by the data, as well.

35:50 Vanessa Calder: But to me, it’s just a little crazy that DC City Council understands how important that is for Amazon but then, for some reason, doesn’t understand how important that it is for everyone else in the city. Businesses, just homeowners, just your average mom-​and-​pop shop. Certainly that’s more important to the average mom-​and-​pop shop, than it is to Amazon. They don’t have a whole team that can go wheedling through the regulations.

36:14 Will Duffield: Or a war chest to sit pretty on while you wait six months for something to get turned around.

36:20 Vanessa Calder: Exactly, exactly. You know, there’s some environmental regulations that are city-​specific, in New York, and they estimate that there… So this is not just a DC problem, it’s not just like a Northern Virginia problem. Alexandria has massive issues with permitting as well, but in New York, they have environmental rules that require that any discretionary… Any property development that requires basically discretionary overview is required to go through this environmental assessment process. And that costs… It’s six months is the average turn around on that, it takes six months to do and costs between $100,000 and $2.5 million for the average project. So this isn’t like chump change and it’s certainly not chump change for somebody who’s an entrepreneur starting out.

37:13 Vanessa Calder: So to me that’s actually one of the… I mean, you’ve kind of hit on a… Obviously a hot button for me which is, this is something that I’ve tried to talk about a lot, which is that we need permitting reform, we need to streamline the permitting process in Northern Virginia and DC and basically in most densely populated coastal areas, this is a real problem. And it seems that there’s actually the ability to do this for the right person, or for the right company, and that’s a little crazy.

37:47 Paul Matzko: But to roll that out for only one individual company… We have a term for what that is. When you say we’re gonna give one specific firm, one industry interest is going to get special access to the regulators and get you more of an ear than any other firm, public choice economics, we call that regulatory capture, right? Baked into this agreement, is, “We’re just going to make it overt. You have special regulatory access, you have the ear of the regulators in a way that no one else does.”

38:18 Will Duffield: You get a special employee, VEDP, just to handle your problems.

38:21 Vanessa Calder: Yeah. That’d be nice.

[chuckle]

38:22 Paul Matzko: This is just… Rarely is it so overt. Usually, they at least pretend that the…

38:26 Vanessa Calder: Keep it behind the scenes a little bit.

38:28 Paul Matzko: Behind the scenes. But to your point, I think, which is a good one, Vanessa, both on the regulatory front and on the tax front you make an argument, you’ve actually written an article about this or a blog post about this, which we will link to in the show notes of this episode, making an argument that in general, one size fits all… Like when you do tax reform, when you do regulatory reform, you should give it to as many people as possible. Should be as broad a reform and not targeted and narrow. Can you flesh that idea out a little bit more for our audience?

39:01 Vanessa Calder: Yeah, so I thought that this was a really stunning remark from Governor Cuomo. Obviously, there’s some backlash that was generated in the days following the announcement of the location of Amazon Headquarters 2. And he said in defending his position of providing these various subsidies that it’s not a level playing field to begin with, all things being equal, if we don’t do anything, Amazon is gonna go to Texas. Okay, well, but all things are not equal at all between New York and Texas, there are a lot of differences. New York, just to give you a sense, was ranked as the state with the second to worst business tax climate in the US in 2018 by the Tax Foundation, and New York City has some of the most expensive housing per square foot in the nation, and that’s related to New York’s regulatory policy, housing regulatory policies. So it’s estimated, or it has been estimated that 50% of the cost of housing in Manhattan, for instance, is a result of the restrictive regulation in Manhattan. So that is problematic, but those are things that actually New York could fix.

40:13 Vanessa Calder: Now, there’s a political struggle there that has to be had and there are political costs there that have to be had. But to me, and I don’t wanna come down too hard on this, it seems as if Governor Cuomo is interested in having the easy political win with handing out the subsidies, then he can claim credit for bringing Amazon to New York without having the political struggle needed to actually make New York an inviting climate for businesses like Amazon. And so it’s kinda like having your cake and eating it too. And I’m glad that taxpayers are calling his bluff on that. I think that they are, taxpayers or constituents are.

41:01 Vanessa Calder: So, yeah. So, many of the things that I think really matter to companies are things which cities could actually do something about and they could do something about for everybody in order to attract businesses like Amazon. They could reform property taxes or corporate income taxes or they could reform the permitting, streamline the permitting process which we already talked about, or they could increase density. And those types of things will bring housing costs down, which will make it easier to recruit talent, which is one of the things that Amazon mentions that they care about. Nobody wants to move to a place where it costs you $200,000, to buy like, I don’t know, 10 square feet of apartment or something like that.

41:45 Paul Matzko: Yeah. Like you do in New York. Yeah.

41:47 Vanessa Calder: I don’t know, whatever, or 20 square feet. Nobody wants that. So, there are ways that really this could have been done, I think, in a more fair way, in a more, long-​range, long-​term thinking way and those were skipped over.

42:05 Paul Matzko: And there’s something too, here, speaking about broad-​based reform, broad-​based tax cuts rather than targeted ones, is that so much… The theory behind this style of bidding, of subsidization for targeted companies, is all predicated on getting the next, well, Amazon. Can you be Seattle, lure Amazon before people know it’s going to be the behemoth that it is and then, it becomes this tech cluster. It’s not unlike the Silicon Valley, where a Stanford university professor who invented the transistor and starts a company with some of his graduate students. That is the seed around which an entire industry grows, to the benefit of the community. But for every example of that, you have examples of failures. So, all the numbers about whether it’s worth it are all predicated on the idea that this is one of the ones that works and not one of the ones that fails, one of the bids that fails.

43:08 Paul Matzko: So, for example, if you break down the numbers for New York City, 25,000 jobs for $3 billion in subsidies, that’s $120,000 per tech job. But then, because for every tech job, give-​or-​take five non-​tech jobs will follow in the cluster. That’s $24,000 per job over the next decade, and that’s amortized over the next decade. So, $2,400 in taxes per job, you’re probably gonna get more than that. It might be a good deal, but only if you get those 25,000 plus a multiplier of five times number of jobs. What happens if the economy collapses and Amazon pulls the plug? This happens all the time. The most famous example could be in New London, Connecticut, which wooed Pfizer back in the early ’00s, the pharmaceutical company, they promised to build a big plant, lots of jobs, the financial crisis hits. Pfizer pulls out. Now, it’s just a giant vacant lot. And this matters because as part of their, we’re going to do targeted regulatory reform-​type stuff. I guess it’s not realtor reform per se.

44:16 Paul Matzko: But, this is how we get the Kelo v. New London, or is it New London v. Kelo Supreme Court case, which expands the definition of eminent domain to include a city just wanting to provide an economic boost to their community. We can take private property just because we think we can give this to this other company that will use it better than you, oh private home owner or motel owner. This is actually a shout-​out real quick to our producer, Tess Terrible. She did a short-​form, mini-​series podcast called The Pursuit, all about asset forfeiture and eminent domain. So, check that out if you’re interested in the topic. But again, all these numbers are all reliant on the best case scenario. And it might work, it might work. Maybe you’ll get lucky, you will get the next Amazon. You’ll get the next Silicon Valley. Most of the time, it doesn’t. That’s money just thrown down a hole. I don’t think that always goes into the cost benefit analysis. Usually, politicians have an interest in selling the rosiest possible picture, because it’s good for getting votes.

45:18 Will Duffield: And when we see successful hubs, the clustering effect in action, it’s generally the next generation of firms, the people who meet as a result of this proximity, which is enhanced by things like cheaper housing, that really drive that wealth and success. It’s not managing to grab one big anchor firm that just lives in your community and does everything, that often long-​term leads to a certain fragility in your local economy.

45:58 Vanessa Calder: Absolutely.

45:58 Will Duffield: You look to Detroit and…

46:01 Paul Matzko: Or the recent news out of Youngstown, Ohio, with the Chevy Cruze plant pulling out. That was the only real big industry in town, that town’s screwed now. I’m sure they spent large amounts in subsidies to draw that plant there, but they became utterly reliant on just one. Whereas if you do a broad-​based tax cut rather than a targeted tax subsidy, you’re going to be attracting maybe not 50,000 jobs in one lot, but you might attract lots of smaller businesses with 100 jobs here, 50 jobs there.

46:29 Will Duffield: And growth potential.

46:31 Paul Matzko: You’re much more flexible, growth potential, open up to that serendipitous kind of thing that happened out in Silicon Valley. It seems like a much more rational way of proceeding.

46:41 Vanessa Calder: That is the correct view, which is that if you want a healthy, thriving city then you have to have a lot of organically grown small businesses, you don’t want one dominant industry, you don’t want a dominant business. So healthy cities have lots of different types of businesses and yes, and organically things happen, like you have these conglomeration effects where all of a sudden and… In Cambridge, you have all of the different kind of health biotech companies just naturally end up locating there and that’s great and it’s a real strength for Cambridge and Boston area. But you don’t plan that.

47:23 Will Duffield: Yeah, no one expected Vienna to give us all of modern social science.

[laughter]

47:29 Paul Matzko: That’s right.

47:30 Will Duffield: And yet…

47:32 Paul Matzko: And maybe I should channel my inner DSA… I should channel a DSA member here. So let me get in tune with the psychic spirits. But all these cases we’re talking about here, whether it’s Cambridge or Silicon Valley, Stanford, there are stories about the importance of education, not about the importance of subsidies, direct tax subsidies. It’s, there was universities with bright, motivated young educated folks who had crazy ideas that no one could have predicted, the transistor, biotech, and again, there was this… None of that was planned, it was organic, it was disorganized, and out of that kind of natural process of organization you get these great effects for the communities, because of that. But you can’t plan that. If you try to do it, you often mess it up.

48:20 Vanessa Calder: That’s kind of what Ed Glaeser says in Triumph of the City, is something like that, which is that if you wanna have a strong city, one kind of predictor of that is, if you have just a well-​educated workforce. So that will lead you to have development in these different industries and you’ll have a thriving city as a result of it. So you shouldn’t be investing in a particular project or a particular company, necessarily, you should be investing in people. If you ever invest in anything, you should invest in people, so.

48:52 Paul Matzko: That’s great. And I think with that, we’ll come to a close here today. Thank you, Vanessa, for coming on.

48:57 Vanessa Calder: Thank you.

48:58 Paul Matzko: Thank you, Will, and until next week, be well.

[music]

49:04 Paul Matzko: Building Tomorrow is produced by Tess Terrible. If you enjoy our show please rate, review and subscribe to us on iTunes, or wherever you get your podcasts. To learn about Building Tomorrow or to discover other great podcasts, visit us on the web at lib​er​tar​i​an​ism​.org.