Even with big tax breaks, a city landing Amazon’s HQ2 would be a lucky break
AEIdeas
Some observers see as unseemly the city vs. city bidding war for Amazon’s HQ2. They also think it’s a short-sighted economic gamble, perhaps becoming a catastrophic success for the winning city with their dreams of $5 billion of investment and 50,000 high-paying jobs dancing in the heads of local government officials. All those tax breaks “could undercut a locality’s ability to fund good public schools, hospitals, and infrastructure — the very qualities Amazon is looking for,” notes Axios reporter Kim Hart. And what if a population boom means middle- and low-income families get priced out of the lucky city’s housing market?
Amazon CEO Jeff Bezos. June 18, 2014. REUTERS/Jason Redmond.
I’m skeptical of such skepticism. Lots of the bidding cities are already trying hard to become leading tech hubs by developing the necessary ecosystems such as launching tech incubators and working with local universities. And with good reason. As an AP story recently pointed out, of the five large US cities whose workers averaged real annual pay increases of at least 2% from 2012 through 2016, four were tech hubs: San Jose, Seattle, San Francisco, and Raleigh, North Carolina.
Unfortunately for the wannabees, as economist Enrico Moretti has noted, “If you look at the history of America’s great innovation hubs, they haven’t found one that was directly, explicitly engineered by an explicit policy on the part of the government. [Hubs] often get developed because of idiosyncratic factors like a local firm succeeds and it starts attracting more firms like that. And this creates a cluster that then becomes stronger and stronger, and that feeds on itself.”
Like, for instance, Seattle. As I recently wrote: “The city became a tech magnet, including for Amazon founder Jeff Bezos, thanks to Microsoft. And the only reason Microsoft moved to Bellevue, Washington, back in 1979 from Albuquerque was that founders Bill Gates and Paul Allen were restless and wanted to relocate back home.” And now Seattle has a per capita GDP more than 75% that of Albuquerque.
Getting Amazon HQ2 would be one of those one-off, idiosyncratic factors. The luckiest of lucky breaks, even with the tax breaks. A bit more on the economics, from that AP story, which quotes Moretti:
For the right city, winning Amazon’s second headquarters could help it attain the rarefied status of “tech hub,” with the prospect of highly skilled, well-paid workers by the thousands spending freely, upgrading a city’s urban core and fueling job growth beyond Amazon itself. Other companies would likely move, over time, to that city, including employers that partner with Amazon in such cutting-edge fields as virtual reality and artificial intelligence. Some Amazon employees would also likely leave the company to launch their own startups, thereby producing additional job growth. In theory at least, those trends could help attract more highly educated residents in a virtuous cycle that helps increase salaries and home values.
High-tech firms like Amazon create a “clustering effect,” Moretti’s research has found, whereby a company attracts workers with specialized knowledge in, say, software and data analysis. These workers are rare in other cities but reach a critical mass in a tech hub. And higher-skilled workers are more productive when they work in proximity to each other, sharing ideas and experiences. A result is that each new high-tech job can create up to five more jobs, Moretti estimates. That’s far more “spillover” than is true in manufacturing, where a new job typically creates fewer than two other jobs, he calculates. His findings suggest that Amazon’s second headquarters could lead to as many as 300,000 total jobs over a couple of decades.
The spillover job growth would likely include not only other high-tech positions but also professional occupations — doctors, accountants and architects, for example — in addition to higher-paying blue-collar jobs, in, say, construction, and lower-paid service jobs at retailers and restaurants. Like most economists, Moretti doesn’t think cities should dangle billions in subsidies to Amazon. Many say local governments should focus instead on developing assets that would benefit the larger region, such as offering to upgrade community colleges. Still, for a city struggling to develop a modern economic base, landing Amazon could be transformative.
