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Does Amazon’s Retreat from New York Signal the End of Corporate Subsidies?

21 February 2019

From The New Yorker:

 In November, Governor Andrew Cuomo and Mayor Bill de Blasio held a press conference in New York to announce a deal to bring a new Amazon headquarters to Queens. The event felt familiar: two ambitious politicians, side by side, explaining that a large company had promised to create thousands of jobs in the area in exchange for enormous tax breaks and other incentives, totalling almost three billion dollars, from the city and state. It was the kind of scene that has played out in dozens of American cities and towns. “For years, big corporations have been getting tax forgiveness and tax abatements, as well as, in many cases, money to train workers, and, in some cases, outright cash grants or subsidized loans,” David Cay Johnston, the author of “Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill),” which explores corporate subsidies, told me recently. “The reality, unfortunately, is that this is going on all over the country.”

Opposition to the Amazon deal was instantaneous and fierce. Retail workers and union representatives organized protests; local and national politicians complained that one of the largest and richest companies in the world didn’t deserve billions in tax breaks and criticized its opposition to allowing its workers to unionize; people took to calling Amazon “Scamazon” on Twitter. “Our subways are crumbling, our children lack school seats, and too many of our neighbors lack adequate health care,” two of the most vocal critics, Michael Gianaris, a state senator, and Jimmy Van Bramer, a city councilman, said in a statement. “It is unfathomable that we would sign a $3 billion check to Amazon in the face of these challenges.” Increasingly, it began to look like the company would not be able to gain the legislative approvals that it needed for the deal to go through without making concessions, in spite of the support that it had from the mayor and the governor.

. . . .

Shortly after the decision became public, General Electric—which, three years ago, had been offered millions of dollars in tax breaks to move its headquarters from Connecticut to Boston—cancelled plans to build a new office tower and drastically reduced the number of employees it planned to hire, citing financial concerns. Foxconn, the Taiwanese technology manufacturer, has also suggested that it might not go through with a plan to construct a ten-billion-dollar manufacturing plant in Racine, Wisconsin, which it had promised to build with the help of more than four billion dollars from the state; the company said that it no longer made sense to manufacture liquid-crystal displays in Wisconsin due to the cost. (Two days later, after criticism, Foxconn said that it was still planning to move forward with the plant.) Neither company cited public protest as the reason for its decision to modify its plans, but each decision took place against a backdrop of rising popular anger about income inequality and the advantages that are often bestowed on large corporations.

. . . .

According to Johnston, state and municipal governments have extended publicly financed benefits to corporations for decades, but the practice didn’t really take off until the nineteen-nineties, when major chain stores and developers of sports stadiums began to demand large tax breaks and construction financing in exchange for promises to create jobs and revitalize neighborhoods. In recent years, dozens of companies, including General Motors, Boeing, and Intel, have taken advantage of such deals. (The New York Times calculated, in 2012, that states, counties, and cities are giving away more than eighty billion dollars a year in subsidies to large companies.) In many instances, though, the promised jobs and other benefits to the community never materialize or end up being more modest than was initially suggested in flashy press announcements.

Johnston explained how the process typically works: “You come in as Walmart or Home Depot or Lowes and say, ‘I want to build a store on that land, and the guy who owns it doesn’t want to sell it.’ ” In its eagerness to entice the company to build there, the local government might seize the land through eminent domain and then sell municipal bonds—essentially borrowing money—against the lease on the store. The chain then builds its store and parking lot and employs local people to work there. The bonds that the government issued, meanwhile, are repaid not by the company but through residents’ sales taxes. “When you check out of a Walmart that has this deal, and you pay eight dollars and change in sales tax, that money does not go to cops, library, schools, or parks,” Johnston told me. “That money goes to pay the bonds.” Approximately ninety per cent of Walmart distribution centers were built this way, according to Johnston. The situation is exacerbated by the fact that states, and even different municipalities within states, can compete with one another to offer the most generous subsidies and the lightest regulation, leading to an arms race of giveaways. “Often these things turn out to be complete frauds,” Johnston said. Multiple studies have shown that some short-term economic benefits may accrue to the community that has extended the tax breaks, but, over the long term, there is little positive benefit (and often none) because the practice saps money from public education and infrastructure, which is extremely harmful to a local economy.

. . . .

Amazon’s presence in New York might also have helped diversify the city’s economy, which is heavily dependent on the insurance, finance, and real-estate industries for well-paying jobs, by creating opportunities for tech workers. “Once you get an employer that has a large need for certain employment skills, you get other businesses that will also locate nearby,” Johnston said. “That’s why Rochester had not just Kodak but Bausch & Lomb and Xerox. It’s why Fleet Street was called Fleet Street or Madison Avenue called Madison Avenue. That’s why this had potential for other development.” Polls of locals in Queens showed that the majority actually supported the deal. The fact that Amazon didn’t fight harder to make it work suggests that the company is sensitive to criticism and also that it knows it can get an equally good deal in another city. “That they were willing to walk so quickly suggests they were not worried about replacing the deal somewhere else,” Johnston said.

Link to the rest at The New Yorker

PG says one of the benefits of allowing states to make many decisions by themselves and pursue their own way of doing things is that others can see the impact of various financial and tax strategies on the state’s economic well-being.

He has previously linked to stories about the impact of higher tax rates and costs of living on the outmigration of one state’s residents to places with lower taxes and costs.

Differing state policies and programs are most definitely a feature and not a bug.

Amazon

20 Comments to “Does Amazon’s Retreat from New York Signal the End of Corporate Subsidies?”

  1. Title be a question so ‘no’.

    No surprise ‘The New Yorker’ gets it wrong.

  2. The end of subsidies? No. It’s a big boost.

    “Do we want to be like New York or Nashville? New York has a vacant lot and unemployed people. Nashville has a great new development, lots more tax revenue, and many more good jobs.”

    • NYC’s unemployment rate is around 4%, while Nashville is at 2.2%. That is a negligible difference, but I don’t suppose facts matter to you.

      • It’s not a negligible difference at all. Particularly not if you’re part of the extra 1.8% unemployed who could have had a job if NYC politicians were more economically literate.

        To me a good part of the problem is that politicians tend to regard taxpayers money as their own. The reality and an important one is that tax incentives do not give money to the beneficiary of them. The State involved simply agrees to take less from them, usually for a limited period. In the case of Amazon the additional tax they collected from Amazon and from the employees and businesses attracted by Amazon would have been substantial. Perhaps it could have been spent improving the crumbling subways, providing more school seats and better health care. Now they have nothing extra to spend whatsoever.

        Governments giving incentives is a balancing act. They need to be set at the right levels to ensure maximum benefit to their communities and minimise harm to competitors. In playing politics resulting in Amazon’s withdrawal they have got it very wrong indeed.

      • SThat is a negligible difference, but I don’t suppose facts matter to you.

        All I care about is the fact that Occasio-Cortez got $3 billion for the people of Queens to divvy up. That buys a lot of Red Bull and chips. When will the checks be mailed?

      • 4% is almost twice as much as 2.2%, which is not what most people would call a negligible difference. But I don’t suppose simple arithmetic matters to you.

      • Nate Hoffelder, Numbers are my friends. I am their friend. I used to work with them to earn my bread. Every time I said they said something, I did my level best to communicate their meaning honestly. And I took a stand when others used numbers to lie. So I kinda go high and right when somebody says the difference between 4% and 2.2% is negligible. (I can tell you from experience that the difference between 4 KIAS and 2 KIAS is the difference between a bust and a pass. And 4 KIAS was less than 1% of IAS.)

        I did not spend a lot of time with this, ’cause I ain’t getting paid, but here’s what I came up with:

        For the last quarter (Q4 2018), New York City reported a 4% unemployment rate. (Go down to the NYC Seasonally Adjusted Unemployment Rate history link. That will download an Excel spreadsheet. That is where I got these numbers. I assume the City of New York 1) collects data faithfully and 2) reports it honestly. I shall make the same assumptions for Nashville.) That translates to 169,100 people out of work in NYC in December 2018 who were still looking for jobs. So a 1% unemployment rate means 42,275 people out of work in NYC.

        For the last quarter (Q4 2018), Nashville reported a 2.3% unemployment rate. Not the 2.2% stated above. That translates to 24,200 people out of work in Nashville in December 2018 who were still looking for jobs. So a 1% unemployment rate means 10,500 people out of work in Nashville.

        Amazon promised to bring 25,000 new jobs to New York City. (I am confused on this point. Was it indeed NYC or Long Island City?) 25,000 jobs would move the NYC unemployment rate more than half a percent but less than a full percent. But if we count the increase in employment to service those 25,000, the unemployment rate may have fallen by almost 2%. Anyway, (the NYC Comptroller reported Q4 2018 as the New Record Low unemployment rate.)

        Had Amazon brought 25,000 new jobs to Nashville, it would have wiped out unemployment in Nashville. Well, not really. How many of their unemployed qualify for the positions? But the impact would have rocked Tennessee.

        IMO the unemployment numbers from NYC and Nashville are not comparable. Only 169,100 people out of work in New York is cause for celebration. 169,100 people out of work in Nashville is a catastrophe on par with the Great Depression.

        BTW everyone should go back and look at the graph on the Nashville Unemployment Rate Report. That graph reports national (in green) and Nashville (in red) unemployment rates since June 1990. It ain’t obvious, but each dot is the semi-annual mean. Nationally, the unemployment rate peaked at 9.9% in December 2009 and has been falling pretty much in a straight line since. Boo Bush; yea Obama. Trump has only continued the decline which began under President Obama. What does that tell you? I’m trying to figure it out myself. My first thought is that it does not matter much who is in the White House, but that fails because the track record of Bush II’s administration falsifies that theory. Were there some key appointments to financial offices that changed between Bush II and Obama?

      • The employment numbers aren’t that important. What’s important is that these would be better than average jobs. Even if those jobs aren’t targeted towards current residents, they are there and could be aspired to. Like I said before, smart LIC kids will have to move away from home to get a job with Amazon.

  3. On CNBC Squawk Box, Ryan Serhant stated that his real estate firm had 15 apartments under contract in Long Island City, and the day after Amazon pulled out, all 15 buyers called to cancel their contracts. Later he said that by the 2020 election, voters will have forgotten the disruption. He also said that DeBlasio “doesn’t know what he wants.” DeBlasio blows with the wind; that is, he doesn’t know his mind until he reads it in the morning paper’s op-ed.

    At 1m15s of the interview, the female host (Becky Quick, maybe?) of Squawk Box asked, “Can I ask what your political leanings are?” How revealing. She does not know how to frame her questions until she knows Serhant’s politics.

    (FWIW this is the first time I have seen anything produced by CNBC, and I caught it on YouTube.)

  4. I think that the reality of political existence is that the ruling class in any society uses government to achieve private economic ends, including advantages over competitors. The question is not whether, but how much.

  5. Since nobody’s said it: “Title be a question, the answer be no.”

    It’s just the OP author fantasizing.
    Nothing has changed in the legal background nor the political climate. Except, maybe, more companies doing their venue shopping on the sly, ala google, wrapped in NDAs.

  6. > one of the benefits of allowing states to make many decisions by themselves is that others can see the impact … on the state’s economic well-being.

    Lol. The first skydiver out of the plane is called the dummyload – he or she is how the rest find out just how the winds are blowing.

    • Takes guts to go first. Taking point. Being First Mover.

      There are both advantages and disadvantages to being First Mover. A lot depends on follow-up.

      https://corporatefinanceinstitute.com/resources/knowledge/strategy/first-mover-advantage/

      With a good follow up the me-too crowd never catch up.
      SiliValley entrepreneurship being one example. Everybody wants to create their own version but nobody has quite caught up. The closest attempts being Seattle, Research Triangle, and Austin.

      NYC has been trying but they’re way late to the game and the locals don’t understand the rules anyway.

      • If you’re using the Kindle ecosystem, you are part of first mover advantage.

        What Silly-Vally has is critical mass. If you absolutely have to have a group of people who are highly skilled at very technical positions, what are you going to do – base your company in the valley and be sure you can get them? Or move to Nashville and hope for the best? Critical mass is hard to achieve. Some places are finally getting there but there are still lots of wanna-bes.

        Lab126 isn’t even in Seattle – it’s in Sunnyvale, near Moffet, down the street from Yahoo and not very far from the Googleplex.

        • And critical mass accrues most often to the competent first mover.

          Kindle owes it’s critical mass to the Agency Conspiracy removing price competition and promoting other factors like catalog size and customer service as deciding factors over which platform readers chose…
          …right at the time when readership was exploding.

          SiliValley got its critical mass via spinoffs and “expatriates” experienced staff from one company leaving to establish another. It’s one vast family tree of corporations. Seattle is the same, littered with baby-softs.

          That is yet another aspect ignored by the ADSers: spinoffs and suppliers. Those 25,000 Amazon jobs could have easily created another 25,000 “less demanding” jobs.

      • I wonder if first-mover critical mass is old school thought. I’m basically a product of the Seattle cultural mass, but from the pre-Microsoft, pre-Amazon era, i.e. Boeing.

        With all the woo-woo around f2f, I never saw much value in it. For startups on the Seattle I-90 corridor, it was nice to have a dozen off-site backup services compete for your business and a half dozen rent-to-own coder services within a few miles, but that’s all done better on the network now.

        At Boeing, I worked with teams spread between Wichita, the Seattle suburbs, and Tokyo and lived on a farm near the Canadian border. Later, I worked with teams spread between Hyderabad, Prague, NYC, the Bay Area, London, Beijing, etc. And I still never left the farm.

        Working across widely varying time zones makes scheduling all hands meetings a pain, but you get used to it quickly. If you have any kind of global customer base, you have to anyway.

        I was reminded of this when I happened to meet a new neighbor yesterday. He’s from India, bought a house next door here because he likes the weather and the neighborhood. He’s a wireless instrumentation product manager on a distributed team.

        I was not surprised that Amzn chose Queens. The Amzn people I know spend a lot of time on Wall Street and DC, but I am equally unsurprised that they dropped the plan. Even the tiniest headwind was probably enough to make Amzn reconsider. Just not worth the trouble or expense.

        • Well, Boeing is old-school, early 20th manufacturing. It’s done great keeping up with the times but its corporate DNA is more Industrial age than IP-based startup.

          The startup culture is more a product of the sixties.

          SiliValey itself stems from two companies: Hewlett-Packard, which is the original “Garage Startup” that proved how scalable entrepreneurial capitalism can be; and Fairchild semiconductor, that seeded the entire valley with its spawn.

          https://daviddhovey.files.wordpress.com/2010/09/blog101.png

          The modern aircraft business is actually closer to a financial/services business than a technology business. It uses advanced technologies but technology isn’t their main product. Think of how meaningless the nominal sale price of a plane is. Totally negotiable because the real money is in the support and maintenance contracts. (I too have a bit of a background around there but more towards the propulsion and economics side.)

          In that early Amazon was a lot like Boeing; technology was their competitive edge and enabler but it wasn’t their product. That has changed. The Amazon conglomerate is evolving into more of a tech company with a retail side business: retail provides free cash flow but the profits are coming from tech and IP.

          And yeah, I suspect Amazon wasn’t really all that hot for NYC, incentives or not. The troops might’ve been humoring Bezos’ nostalgia with the choice and just hoping for an excuse to get him to give it up. Which the IdiotPoliticians kindly provided.

  7. Support and maintenance of the high technology they create is high technology. It can be delivered to the user under a variety of terms.

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