Losers In Amazon Sweepstakes Can Benefit

The saga of Amazon.com's search for a home for its second headquarters continues. The online retail giant recently announced that it has narrowed the field down to 20 cities. I'm happy to see that Raleigh, N.C., my own top pick, made the list.

But there's a worry that the scramble to lure HQ2 will give rise to wasteful urban policies and set a bad precedent. Already there is speculation that Apple Inc. will build an HQ2 of its own, sparking a similar competition. What if this sort of industrial sweepstakes, used in the past to win everything from auto plants to sports teams, becomes the norm?

Many urban policy experts are worried that Amazon-style competitions will hurt cities by enticing them to spend too much on tax incentives and other giveaways. A recent roundup of opinions by the Penn Institute for Urban Research showed that this concern is widespread.

Economist Timothy Bartik of the Upjohn Institute, citing his own research, wrote that incentives are unlikely to make much of a differences in companies' location decisions — in other words, they cost a lot and yield little benefit. Angela Blackwell, chief executive officer of the urban-affairs think tank PolicyLink, noted that even when a city succeeds, the amount spent on incentives usually exceeds the amount of wages and salary received by workers in the city. She raised the concern that Amazon-style runoffs encourage a "race to the bottom" that causes many cities to divert funding from services that help their poorer residents.

Noted urbanist Richard Florida urged cities to eschew financial incentives and instead devote more resources needed to support economic growth — schools, transit, housing and infrastructure.

The urbanists raise valid concerns but tend to overlook the value of such city competitions. First, the economic benefit of having a big company like Amazon or Apple can far exceed the amount that the company invests in the city — a top company can act as an anchor that creates a technology cluster, as Texas Instruments, Dell and others did in Austin, Texas.

More important, competition can be healthy for cities nationwide, even ones that don't win. The "race to the bottom" scenario is a concern, but there can also be a long-term race to the top.

The key concept here is that of local public goods. City governments help provide their residents with things like law enforcement, infrastructure, firefighting, education, transit and parks that private companies wouldn't provide enough of on their own. But there's no guarantee that government always gets these things right either. Often, special interests can block cities from spending enough on these items, or cause cities to waste large amounts of money. Also, prospective new residents in a city don't get a vote, meaning that cities may fail to spend enough to live up to their true potential.

Getting city government to do the right thing is incredibly tricky, which is one reason local politics tends to be so contentious and full of unpleasant compromises. The urbanists are right to warn that the competition for Amazon and other urban sweepstakes can worsen the situation. If local politicians spend big money to lure companies just to please special interests or to grab headlines while hiding the true cost to the city, the "race to the bottom" will come to pass.

But it's also possible that competition for corporate investment will cause cities to spend more on local public goods. To be the kind of place that Amazon or Apple would consider, a city needs many things that are also good for its residents. It needs good schools, affordable housing and a pleasant urban environment. It needs mass transit and good roads so workers can get to work. Instead of spending money on tax incentives, cities should be spending money on building the long-term urban infrastructure that makes such incentives less decisive or unnecessary.

Amazon's urban sweepstakes will have only one winner. But it may prompt many cities to wonder why they lost — or why they weren't even in the running to begin with. It might be due to dilapidated infrastructure, patchy transit, failing schools, unsightly concrete jungles, congestion, or inequality and the suffering of poorer residents. To win the next big round of corporate investment, city leaders may decide to stop listening to special interests, to raise the taxes necessary to upgrade services, or to spend less on white-elephant projects and expensive sports stadiums.

Having Amazon help to provide local public goods would be great for whichever lucky city wins the competition. But the vastly greater number of cities that lose can still benefit, if they resolve to win the next round.

Noah Smith writes for Bloomberg View, where this first appeared.

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