Luring Amazon
Dear local officials: Set some boundaries
The Amazon “HQ2” headquarters auction is in full swing, so prepare to witness some reckless behavior out of the reported 238 bidder states and localities. Like groupies in a 1960s rockumentary, public officials will be throwing themselves at the stage trying to catch the star’s attention.
Nothing in public life is more dangerous to the public interest than politicians chasing “jobs” with the people’s checkbook. They can buy their way into the ribbon-cutting photos knowing that, if they grossly overbid, they won’t be around when the bills come due. Chances are the Amazon “winner” will fall into this category.
Abuse of this practice is robustly bipartisan. As many Republican as Democratic officeholders have lost their fiscal virtue when a big score seemed in prospect.
The best defense against this alltoo-human behavior is to establish some rules in advance and make them transparent to citizens and potential business investors alike. In Indiana, from the 2005 inception of a reconstituted public-private state economic agency, its board (which is chaired by the governor, to underscore his accountability) established boundaries to govern negotiations with firms seeking investment incentives .Examples include:
No upfront cash. Any assistance must be strictly conditional, receivable only as promised new jobs materialize.
Only new, incremental jobs are eligible; no incentives for merely staying put. A state creating such a precedent almost ensures a run on the bank. Shortly after Illinois paid Navistar $65 million not to depart for another state, it found itself giving Motorola $100 million and the Chicago Mercantile Exchange $100 million more, without the requirement of a single additional job. An explicit clawback mechanism. Things change in business. Competitive pressures or economic slowdowns alter the most careful plans, so a subsidy agreement should provide for the repayment of any incentives tied to jobs that later were eliminated, as well as a mechanism for regularly auditing and certifying those that remain active.
Governments should measure and report to the public the efficiency of their business-recruitment efforts. Incentive dollars per new job and per dollar of new capital investment are two good places to start, with the obvious objective of driving those ratios down as far as possible. In Indiana, the new agency brought the first number down from $36,000 to $9,000 per job within a year. Tracking those figures over time can help establish another critical boundary: a walkaway level beyond which negotiators areinstructed not to go.
Yes, Amazon may be the exception that justifies some bending of these rules. The new headquarters’ enormous size and the highly paid, hightech nature of its workforce may make it appropriate for bidders to assume a multiplier effect on the surrounding economy and to assign some premium to intangible, “transformative” benefits. Still, such premiums should be rigorously calculated and debated, not the product of wild guesses or heat-of-the-moment attemptsto outbid the state next door.
Remember: This is a multidecade decision a company is making. The most important criterion in its thinking will be long term: What taxes are we likely to pay? How high is the cost of living and what will our wage scale have to be? How burdensome or collaborative are state and local governments? Are permits and regulatory approvals quick and reasonable or ponderous and hostile? If — make that when — we are sued, are the local courts fair or do they operate in cahoots with predatory litigators?
Front-end goodies are not unimportant, but they are almost certain to be outweighed by the 20- or 30-year effect of these factors. If you are the people’s negotiator, it’s your job to remember that. Indiana has captured new business when other aspirants offered higher incentives. Too many officeholders enter discussions without business experience and their taxpayers pick up the tab.
So let the auction begin. Amazon is dangling a big prize, but establish your limits and keep your head. Anyone in business learns that often the smartest deal of all is the one you didn’t make.