Why Bay Area won by losing Amazon headquarters bid

Out of envy of Silicon Valley’s success, more than 80 places throughout the world have renamed one of their neighborhoods “Silicon-something,” as if the very word works economic magic.

So it was not surprising that when Amazon last year announced plans to build a second headquarters — “HQ2” — somewhere in North America, more than 200 cities, including a coalition from the Bay Area, competed for the honor.

Dangling the promise of 50,000 new jobs and $5 billion in investment, Amazon brazenly encouraged local leaders to trample over one another to offer Amazon billions of dollars in subsidies. The most lucrative incentive package came from Newark, New Jersey, which in partnership with the state offered the company a jaw-dropping $7 billion worth of incentives.

When Amazon in January pared the list to 20, Los Angeles was the only bidder west of Rocky Mountains to make the cut.

Is there a public benefit from lavishing billions on Amazon? First consider that Amazon will have to locate HQ2 somewhere. Incentives the company receives, therefore, simply represent a payment from local governments to a giant company for an action it will undertake anyway.

To be sure, adding 50,000 new jobs would help struggling parts of the country. And the tech industry is a source of wellpaying jobs, the growth of which should filter through to public finances via higher property and sales tax revenues. Furthermore, Amazon’s arrival would create jobs in other sectors of the economy — what is referred to as the “multiplier effect” — as its workers spend their wages in supermarkets, restaurants and dry cleaners.

But at what cost? Public resources given to Amazon must come from somewhere. This means that taxes will be raised on other members of a community, or public spending must be cut in some other category. The reality is that resources that are provided to Amazon could otherwise be used on schools or infrastructure or law enforcement. Academic research suggests that incentives provided to a business can come at a significant cost if they starve a local economy of valuable public investment.

Frequently the argument is that the increased economic activity brought on by an Amazon will pay for the subsidies provided. But statistics showing such a “multiplier effect” assume that, but for the investment of Amazon, land and workers would be idle and not put to some other use.

Of course, this isn’t true, particularly not in today’s economy. To fully consider the benefits received from attracting Amazon, a city must understand that, while adding jobs from the company would be a benefit, the costs extend beyond the payments they receive in return. A true accounting will consider that resources consumed by Amazon could have been used in some other way.

This is particularly true for housing, which is a very scarce resource in major cities and especially in California. While tech growth can create jobs in local services sectors, it also can drive up the rents for the people who work in such industries — and displace people in nearby low-income communities.

Given the unclear benefits and significant costs of pursuing HQ2, why do local governments engage in such contests? Part of the answer lies in misguided views about how to develop a local economy. Politicians are predisposed to pursue high-profile projects that make headlines instead of taking incremental steps that are more likely to produce economic gains.

There are better, if less conspicuous, ways for local governments to improve their local economies — like worker training targeted to specific jobs, or extension services that help advise firms on how to reach new markets, improve productivity and streamline production. In the long run, investment in infrastructure and education would provide a bigger return to a local economy than Amazon.

Unfortunately, this is not usually considered by the politicians and development professionals eager to catch the “big fish” to pad their own resumes.

Christopher Thornberg is founding partner of Beacon Economics and director of the UC Riverside School of Business Center for Economic Forecasting and Development. Taner Osman is a senior research associate at Beacon Economics.