Amazon Search A Lesson On Economic Development
This week’s Courier Herald column:
It was about a year ago that Amazon launched a search for a second headquarters. Like most things this “disruptor” company does, it turned the model for selecting a new location on its head. Instead of a mostly secret search that would hide both details and intentions, Amazon released a public “Request For Proposal” and asked potential cities and states to make their best offer.
The publicity surrounding a company pledging to bring 50,000 jobs with salaries in or near six figures served the company well. Cities and states, each wanting the bragging rights for winning this economic development super-bowl, brought billions to the table.
Georgia, flexing its “number one state to do business” brand, made a compelling offer with a headline price tag of $2 Billion. That wasn’t the largest amount offered to the company, by far. Pennsylvania offered $4.6 Billion – and still didn’t win. Clearly, the top line incentives were not the deciding factor.
in the end, the RFP was largely ignored anyway. There wasn’t one fully equivalent headquarters comparable to their current Seattle location. The trophy was split in half, with some jobs going Arlington Virginia and others going to New York City. The RFP’s desire to have a “business friendly climate” appears to have had a fairly liberal interpretation.
So Georgia won’t be getting 5,000 jobs per year from Amazon over the next decade, or even the 2,500 presuming the jobs are split equally between the “winning” cities. During the year Amazon made its decision, however, Georgia’s Department of Economic Development landed jobs across the state totally even more than one Amazon, including an increased commitment from Salesforce to expand its presence in Atlanta.
This illustrates a point that consistently frustrates state leaders who keep hearing “if we had just taken the money promised to Amazon, we could have recruited… (insert company or location someone wants closer to them or in the industry they prefer.) Well, they did. And are doing.
The first problem with this argument is that most of the $2 Billion pledged to Amazon is performance based. The State and City of Atlanta combined to offer $125 Million directly to Amazon for site selection and build out of facilities. There was an additional pledge of $150 Million to create an “Amazon Academy”. This would have been a joint campus of the University System and Technical College System to train workers for specific jobs/skills needed by Amazon.
The bulk of the “cost” of incentives would have come from tax abatements. These are taxes that will never be collected because the jobs didn’t come here. It’s not $2 Billion sitting in a checking account waiting to be given away. It’s an inducement to create jobs in Georgia – one that is fairly standard in economic development across industries, and applies to existing Georgia companies that wish to expand as well.
Critics and Monday morning quarterbacks remain. Some object to any incentives being given to private companies on principle. That’s fine, but 49 other states play this game. Georgia’s incentive’s weren’t anywhere near the highest, and were pegged to the size of the payroll that ultimately was created.
Others want to use the headlines as an opportunity to grind their favorite ax. An analyst from a left-leaning think tank took to twitter to proclaim that the $2 Billion being given to Amazon redirected to education would “change the complexion of the state for a Generation”.
Given a 10-year incentive program, we were talking about $200 Million per year, mostly in tax abatements. Georgia currently spends about $10 Billion per year on K-12 education at the state level alone. Having 50,000 additional highly educated people employed and paying state income taxes and local property taxes would actually contribute more to education than yet another pledge to increase education spending by 2% per year. That, however, requires everyone actually understand the lessons and math involved here.
About Author
Charlie
Founder of GeorgiaPol.com; Now weekly columnist Very interested in Georgia and Georginas. Interest in politics is waning daily.
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This is the main issue (for me): Georgia – and red states in general – seem to rely more on competing with each other for relocations and branch offices instead of creating their own companies and industries, an activity that seems to occur predominantly in the blue states. Some of the conservative blogs and papers love to talk about the companies that are leaving California and New York for tax purposes, but startups in those states more than cover it. The crack about: “The RFP’s desire to have a “business friendly climate” appears to have had a fairly liberal interpretation” well yeah. Times have changed. The Fortune 500 is no longer dominated by Rockefeller Republicans. Most of today’s corporate titans don’t mind taxes and regulations and they define “business friendly” in completely different terms than the Reagan Republicans who build up Cobb and the other Atlanta suburbs in the 1980s. To them that means “a place more like Los Angeles, Silicon Valley, Portland and Seattle” which is a place where Bezos and company would personally like to live, not a place where they can maximize the growth rate on their IRAs. This is going to play a major role in this nation’s economic leadership in the next 20-40 years. The big companies are going to invest most of their resources in places where they like to live and feel more culturally comfortable. That is not only going to mean Virginia (now an extension of D.C.), the northeast and the west coast instead of the southeast and midwest, but Mumbai, London (well maybe not so much after Brexit), Paris, Tokyo, Berlin, Stockholm and other “international cities” that this crowd would feel much more comfortable in than Dallas, Cincinnati, Atlanta and even Miami.
The red states are going to have to get serious about creating their own startup/entrepreneurship culture. Take a look at this (from an economic standpoint and not so much a political one): http://nymag.com/intelligencer/2018/11/maybe-its-time-for-america-to-split-up.html
I have always wondered if the way to do this is from the bottom up. Maybe the economy is too nationalized (not in the socialist sense) or globalized for this to work now but it would have been something like creating a bunch of magnet schools to create an elite group of K-12 students, increase funding for our research universities (UGA, GT, UGA obviously but need at least 3 more as California, Texas, New York, Massachusetts etc. have at least a dozen when their private schools are added in to add KSU, MCG/Augusta U and Georgia Southern maybe?) so that in 10 years we would have our own Sergey Brins and Bill Gates. (As well as entrepreneurs in non-tech fields like manufacturing which are arguably needed even more.)
Other stuff … could the state start and manage its own venture capital fund? Or start it and get someone else to manage it? The money that we spend to get companies and professionals (i.e the Beltline, the Gulch etc.) to relocate/relocate here would pay for the best public magnet school network in the country ten times over. Kids in those schools could learn software development, e-commerce, accounting etc. by the time they are done with their sophomore years especially if Udacity, Khan Academy and the other moocs are involved.
Otherwise, we will always just beg out of state companies for the privilege of using us as tax shelters like Hollywood is doing now. This means we will just be getting the fat and scraps where other regions are getting the prime cuts. Think of it this way: if companies relocate here merely because they can hire local talent for 75% of what it would cost elsewhere, that just depresses local wages for everybody: doctors, lawyers, human resources, teachers you name it.
We have to re-engineer this by changing the inputs. We have gotten as far as having cheap land, cheap labor, low taxes etc. can get us if only because the big companies now are making so much money that they can afford it. Amazon, Apple, Google, Microsoft, Facebook etc. are so big and profitable that they aren’t harmed by this. Paying more doesn’t reduce their competiveness because they have no competitors. (Yes this is an argument for the GOP to ditch the Robert Bork ideology and go back to Reagan, who actually was willing to take on and break up monopolies.) We have to figure out a way to start producing the best workers, managers and especially entrepreneurs, and not just relative to being the best in the southeast – again in an national and global economy being better than Mississippi, Alabama, north Florida and South Carolina doesn’t carry the same currency as it used to – but nationwide.
I don’t have time to read all the words you write, but I can generally agree that investing in home-grown businesses is potentially more tremendously profitable. Home-grown talent will always have its roots in the hometown for various reasons.
There has been progress on this front. Business incubators do good work, but aren’t always utilized fully or properly. Educational institutions are stepping up. I think GA Tech has a relatively new and amazing incubator. The potential for growth in industries like medical tech, fin tech, etc. are pretty high.
The problem with Georgia Tech’s incubator is that the companies that they incubate leave the state for Silicon Valley as soon as their contract allows them to. (Also I do not know if you have noticed but a huge % of GT students aren’t from Georgia.) Another thing: lots of kids who go to Georgia Tech do so because they dream of leaving to work for Silicon Valley, for the big semiconductor companies in Texas, the energy companies (again in Texas) and so forth. We gotta do something more fundamental that affects the economic and educational baseline in the whole state – or at least a big region of it – instead of doing piecemeal stuff that only affects one city or one university.
And unfortunately it is something stuck between a rock and a hard place. We have Democrats on one side who just want more spending on things like healthcare and universal preschool, and are more concerned with lifting up the people on the bottom than on creating entrepreneurs and elite workers. And you have the laissez faire or bust GOP on the other side. They aren’t going to admit that Georgia needs a $1 billion VC fund because the banks would rather invest in startups in Silicon Valley than in Buckhead because that would be a direct challenge to the way that they want to believe the free market works: being a total and pure meritocracy free of any form of bias.
With schools the same thing. One group wants to spend more on larger class sizes and social programs to uplift the poor. The other group just wants vouchers and charter schools. Neither group cares about building the sort of schools that we would need to compete with the top talent that is being produced in New Jersey, Massachusetts, DC, California etc.
It was a global company delivering a lesson in suckerdom. Have losers prepare offers on their onw dime that increase offers from a secret short list.