The True Absurdity Of The Amazon HQ2 Bidding War

After a year of twists and turns on the Amazon HQ2 roller coaster, it ended as we expected: in the same place that we started and sick to our stomachs. Amazon passed over dozens of communities that could have really benefited from the company’s presence and instead chose to split its new headquarters between two of the most dynamic cities in the country New York and Arlington, Virginia that were likely the front-runners in the competition all along.

Cities across the country offered billions of dollars to the richest man in the world but probably didn’t change his investment decision. This crazy process seems shocking but is actually more common than unique in economic development.

If we go back a year, the seeds of this absurdity were already planted. Amazon, one of the most sophisticated companies in the world, issued a public call for bids for a $5 billion, 50,000-job investment. It listed its requirements on a simple PDF and provided a generic email address that seemed more like a Nigerian prince email scam than a thoughtful call to assess candidates for a multibillion-dollar investment.

Many locations hid their HQ2 bids from the public and from city leaders . Chicago , New York , Pittsburgh , Philadelphia  and Virginia hid their bids through legal challenges. Places like Austin and Dallas submitted their bids through their Chambers of Commerce , which aren’t subject to public records laws. Some mayor’s offices claimed that they didn’t keep a copy of the bid so they couldn’t respond to public records requests. Even in January 2018, when Amazon announced a second round of the competition, narrowing the candidates to 20 finalists, most cities kept their bids secret.

This secrecy in economic development has become the norm. The public rarely finds out about deals like those offered for HQ2, given the code names Project Clancy in New York and Project Cooper in Virginia, until a local politician makes an announcement.

But then the HQ2 public process took another turn toward the absurd. The announcement of Amazon’s massive investment wasn’t a ribbon cutting ceremony befitting this yearlong process. It came in the form of a leak on the day before the midterm elections and then a simple announcement a week later that the company would split HQ2 between New York City and Arlington, Virginia. There seems to be no showmanship in this circus.

Some responses from the locations might not have been exactly what Amazon expected. Instead of Super Bowl parades for HQ2a and HQ2b, there were scathing op-eds and anger from city leaders . Perhaps Americans just hate it when a competition ends in a tie. Or perhaps people were upset not only because the public was kept in the dark but also because city leaders in New York were not consulted on the $3 billion incentive package offered by the city and state to a company that was probably coming anyway.

But this criticism shouldn’t be just about Amazon and the HQ2 bidding process. Most of the research on incentives has found that they are rarely pivotal in shaping investment decisions. Summarizing a body of literature on the subject, Tim Bartik at the Upjohn Institute found that only 2 to 25 percent of firms are swung by tax incentives. The promised helipads are a great example for headlines and comedy shows, but it is the tax incentive packages that harm communities, and often they aren’t even necessary to swing investors to places like New York or Northern Virginia.

You don’t have to read the research. Just look at a map of the D.C. area. Arlington offered an incentive package of about $800 million for HQ2. Another bid, from Montgomery County, Maryland, included special legislation, comically title the Prime Act, worth over $8 billion to Amazon. So even within the D.C. metro area, incentives didn’t shape Amazon’s decision. Jay Carney of Amazon admitted as much on TV .

Thus the anger about HQ2 should really be about the process of economic development. Secret deals that cost cities and states millions or, in the case of Foxconn in Wisconsin , billions of dollars, have become all too common. The bids that have become public reveal how far cities were willing to go in their private dealings with Amazon. Thursday, D magazine reported that DFW International Airport in Dallas offered Amazon a 99-year lease deal that would have amounted to more than $20 billion in tax incentives.

A few other losing cities — like Austin , Denver  and Indianapolis  — are holding out and won’t reveal their bids. Why? What could they be hiding? Maybe offers of over $10 billion? Something better than a helipad? The sky is the limit, apparently.

Politicians love to show what they have done for their districts. And incentives are a way to show you put in effort . In our survey research on economic development, we found that voters are more likely to vote for a governor who attracts an investment with an incentive than a governor who attracts an investment without an incentive. This may sound like absurd cost-benefit analysis by voters, rewarding politicians for spending more of our money, but we argue that politicians need to show they did something to attract the investment. We found an even larger impact if the investment doesn’t arrive. If an official offers an incentive, voters are less likely to blame the official for failing to bring an investment. So win or lose, politicians can take credit or minimize blame by using incentives.

And here is the final absurdity. Incentives are generally bad public policy, and the billions offered to Amazon HQ2 is madness. But my guess is that the finalist cities that didn’t reveal their bids are the ones that failed to come up with equivalent billions of incentives. The only thing more embarrassing than building the world’s richest man a helipad is not offering one in the first place.

Nathan Jensen is a professor in the department of government at the University of Texas–Austin, a senior fellow at the Niskanen Center and a co-author of Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain.