Why a city might want to compete hard to get Amazon HQ2

Every American governor or mayor would love to preside over the “next Silicon Valley.” Since 2011, California has grown twice as fast as the rest of the nation, helped by white-hot 6% annual growth in the San Jose area — home to the actual Silicon Valley, according to JPMorgan. Even regions that are currently tech hubs would love to attract even more high-potential startups and venture capital firms.

So, yeah, expect the mother of all bidding wars for Amazon HQ2 — and the 50,000 high-paying jobs and $5 billion it will supposedly generate for the lucky winner. But wait, there’s more. The company claims its Seattle investments since 2010 “resulted in an additional $38 billion to the city’s economy — every dollar invested by Amazon in Seattle generated an additional $1.4 for the city’s economy overall.”

Job seekers line up to apply during “Amazon Jobs Day,” a job fair being held at 10 fulfillment centers across the United States aimed at filling more than 50,000 jobs, at the Amazon.com Fulfillment Center in Fall River, Massachusetts, U.S., August 2, 2017. REUTERS/Brian Snyder

Of course economists and urban planning experts would advise governments against competing for Amazon’s love if it involves lots of tax breaks or other financial incentives. “I do not think a location should give one red cent in incentives for this Amazon HQ II,” is what urban studies theorist Richard Florida advised on Twitter. That’s the consensus economic wisdom, a conclusion backed up by research. And it’s not an anti-Amazon thing. There’s been a storm of criticism, for instance, about the $3 billion in state tax credits that Wisconsin offered Foxconn, the giant Taiwanese electronics supplier.

But maybe Amazon is a different case. More and more economic activity is centering around America’s tech hubs, including high-paying jobs. And if you’re not one of those hubs or would like to become a bigger hub, policy may not help much. 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.”

Take the case of Seattle. 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. Again, Moretti: “[Innovtion 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.”

So Seattle got lucky as Microsoft accidentally created an impressive and valuable ecosystem for tech startups, greatly driven by former employees starting their own companies. But cities can’t count on getting lucky, so maybe this is a case where they need to make their own luck. Maybe Amazon HQ2 is the exception to the rule.