Amazon and its ecosystems

The biggest topic of discussion in the urban policy Nerd-o-Sphere yesterday was the surprise and sudden announcement by Amazon that it was pulling out of its agreement to set up it’s second (third) headquarters in New York City. The 3 billion in local and state subsidies were under threat by civic groups, and either in a strategic move designed to preserve future incentives at other locations or in a fit of pique over having something it wants, Amazon announced that it was withdrawing from the agreements.

Two views on Amazon’s strategy

Two views on Amazon’s strategy

It’s kind of amazing to be seeing something in the news and know that it will result in at least a dozen different PhD dissertations. I really hope someone is collecting all the different pitches cities made to Amazon so we get a sense of what policy levers cities think they have for attracting major investments from knowledge-based companies.

After the withdrawal, the finger-pointing started. Amazon said they planned to create 25,000 jobs, which in turn will create more jobs outside of Amazon thanks to what those employees would spend. There would be a boost to Long Island City’s real estate market as Amazon would become a massive anchor, attracting new residents to New York and boosting commercial spending. While the city and state would give more than 3 billion in direct subsidies and forgone taxes, the idea is that this would be more than made up by the increased tax base the HQ would create.

Smokestack chasing is a venerable economic development policy. Offering subsidies and tax benefits to an employer to come to a region can boost employment, create local supply chains, and help build a virtuous cycle that leads to more economic growth through entrepreneurship and a higher skilled workforce. But such efforts are usually the domain of smaller, more peripheral regions with high unemployment rates, low wages, and cheep real estate.

The goal of bringing in a major firm through tax subsidies is to create an ecosystem that goes beyond the single company. New firms can spin off of the anchor as entrepreneurial employees find opportunities and reasons to hate their bosses. Employees get unskilled, either through investments the firm (and the government) made with local universities and colleges or just through the experience at working at the company. Corporate accelerators can spur local startup activity and connect it with the strategy of the anchor firm. Senior managers can act as investors and mentors to newer firms, helping them grow. All of this helps the economy grow, which is a good thing.

But NYC has much different dynamics, which make the sheer size of the subsidies seem silly. New York City’s unemployment rate is 3.6%, which is pretty much full employment. The unemployment rate in business service and information technology will be even lower. That means that Amazon creating 25,000 jobs will increase wages across the board for IT workers throughout the Tristate area. In theory this is a good thing, but wages are already so high, this will make it harder for new and growing firms to find the talent they need to grow in NYC. It’s questionable if NYC’s public transportation system can even handle that much increased employment in Long Island City. And Amazon’s hiring won’t just be local: it will attract thousands of new workers to the region who will heat up an already ridiculously overpriced housing market.

In an overheated economy like New York’s, we should be asking very tough questions about how these subsidies will increase the social welfare of the entire city. In most places in the world, the creation of this many high-paying jobs would have been a great thing. But NYC isn’t one of those places. The money that was promised to Amazon would go a long way to keeping the subway from collapsing or building the social housing that is desperately needed. But once those questions were asked, Amazon cut and run.

Economic development officials need to start realising that too much of a good thing isn’t always great. The point of subsidies is that they aren’t needed after a certain point: you build a sustainable business ecosystem that then creates its own incentives for future growth.