Shifting Strategies in Site Selection, China Trade Negotiations, and Inflation Targeting

People want jobs. Elected officials want what is best for their districts. Employers want to lower their costs. These are all good intentions, but aligning them can be difficult. Amazon and New York City recently learned this lesson the hard way.

Governments around the world use economic development incentives to encourage new investment. Internationally,

Ireland has been a leading applicant of this strategy; within the United States, incentives are frequently employed at the state and local levels. The inducements offered can include reduced taxes, subsidized or no-cost lending, provision of land, building new infrastructure, and exemptions to zoning or environmental requirements.

The incentives make intuitive sense. The locality gets new jobs, both directly from the employer’s investment and indirectly as new shops are opened to support the new residents. Employers improve their profits, though the cost reduction of local grants.

On a small scale, economic opportunity zones and tax-increment financing districts help direct new investment to areas with the most need, and have proven effective in attracting entrepreneurs. Because the success stories are small and local, from salons to brewpubs to boutiques, they rarely receive national attention.

As they grow larger, incentive programs become risky. Major projects compete across regions to find better deals. The more jobs that are promised, the greater the temptation is to boost incentives. These competitions become a race to the bottom, with ever-larger offers straining return-on-investment calculations. Successful bidders often suffer a winner’s curse: The entity that paid most generously has probably overpaid.

This is what the residents of New York City became concerned about. Amazon conducted a broad search for its second headquarters, expanding beyond its native Seattle. More than 200 cities and regions submitted proposals, confidentially including incentive offers. Amazon split its decision, choosing two winners: New York and Arlington, Virginia.

The celebration in Gotham was short-lived. Opposition began mounting almost immediately after the decision was announced. Congestion was one issue: New York has little open space for large-scale developments. Long Island City, the neighborhood that would have hosted Amazon, suffers from full trains and full sewers. Labor leaders organized protests against the company over its alleged mistreatment of workers. Critics were also outraged at the offer of $3 billion in incentives to a company that earned $11.2 billion last year (and reportedly paid no income tax on that sum).

Further, growth has other costs. As more jobs are created, communities will need to plat new housing tracts, expand infrastructure and staff new schools. While every new job has a multiplier effect — new residents need grocery stores, restaurants and household services, which generate sales taxes — the risk is that some of the costs of growth will not be covered and that public budgets will be worse off.

The risk of excess is playing out in Foxconn’s facility in southeastern Wisconsin. The region offered a total of $4 billion in incentives for a factory that promised 13,000 manufacturing jobs, a cost of more than $300,000 per job. Now, Foxconn is hedging its local development outlook. Wisconsin’s hope spurring a new cluster of technology employers remains an aspiration.