When Amazon.com (Nasdaq: AMZN) announced that it would build a second North American headquarters, officials in dozens of cities rushed to lobby the e-commerce giant.
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Amazon, a company worth about $475 billion, claimed it had no idea where it wanted to move next. Cities would have to help it decide, and billions of dollars in incentives and tax credits sure would help.
More than 100 cities in the U.S. and Canada bid against each other for the windfall economic benefits Amazon promised to bring: 50,000 jobs and $5 billion in capital expenditures over the next 10 to 17 years.
The U.S. has antitrust laws that restrict cutthroat, dominant companies like Amazon from abusing their market power to edge out competitors, but Amazon still has plenty of perfectly legal ways to exploit its power.
And corporate welfare is one of them.
Why cities got in a bidding frenzy. The benefits of 50,000 new jobs, which Amazon says will pay more than $100,000 on average, are undoubtedly substantial. They’re an obvious boon to the local economy, and a great way for local politicians to get re-elected if their bid succeeds.
The $5 billion in capital expenditures — the amount Amazon anticipates spending to build its second luxurious campus — doesn’t hurt either.
Those 50,000 employees won’t be bozos, either. A company like Amazon attracts some of the top minds in tech and computer science, and will result in an influx of talented, well-paid taxpayers. HQ2 is a grand enough project that it could transform a city.
Benefits not immediate. That transformation, though, won’t happen overnight.
“The payback on these incentives is frequently not quick. It can take 10 years, 20 years. The biggest benefits are obtained downstream, not in the short term,” says Mohan Tatikonda, professor of operations management at the Indiana University Kelley School of Business.
Politicians, Tatikonda notes, are often not in power that long. “They would like to have action and outcomes that are more immediate,” he says.
Wisconsin’s $3 billion incentive package to bring Taiwan-based Foxconn, which assembles iPhones for Apple ( AAPL), to the state is a good example. A nonpartisan analysis found it would take 25 years for the deal to pay for itself, and possibly even longer.
But the 3,000 jobs Foxconn’s plant would bring — eventually it could create 13,000 — were the numbers that most mattered to the state’s governor, Scott Walker.
Caveat emptor. There’s no disputing the fact that Amazon’s second North American headquarters will bring big economic benefits to its host community. But any city that offers massive incentives to land the Amazon HQ2 is making implicit assumptions and taking (not insignificant) risks.
First, they assume Amazon will stick around and thrive for the long term. In 2017, that seems like a low-risk assumption, but it’s not a zero-risk situation, and fortunes can turn quickly. In the case of Foxconn, for example, its success relies largely on Apple, which relies largely upon the iPhone, which itself unexpectedly crushed the Blackberry ( BB) and ruined that company’s promising future in short order.
Amazon CEO Jeff Bezos is himself keenly aware that every company eventually dies. By giving billions of dollars in taxpayer-funded subsidies to corporations, local and state government officials are rolling the dice with the well-being of taxpaying American citizens, while giving the company and its shareholders a guaranteed win.
Even if you feel rosy about Amazon’s future and believe it can continue to innovate and stay ahead of well-financed, research-heavy competitors like Alibaba Group Holdings ( BABA), Microsoft Corp. ( MSFT), Alphabet-owned Google ( GOOG, GOOGL) and Apple, there are still more risks.
What if Amazon’s projected numbers are wrong? In 2014, Tesla ( TSLA) got a $1.3 billion incentive package from Nevada to build its Gigafactory there, projecting the plant would employ at least 6,500 people.
At the end of 2016, the Gigafactory employed around 850 people. That number should be higher now considering the ramping up of Tesla Model 3 production, but even that is going poorly. Tesla produced just 260 Model 3s through September, 84 percent below CEO Elon Musk’s 1,600-car vow.
Let’s assume Amazon both thrives over the long run and meets its ambitious projections. Even in that best-case scenario, there are guaranteed negative externalities for the community.
“Amazon imposes huge costs on a city just by the pressures its growth places on the local roads, bridges, sewer systems, electrical grid, traffic and housing prices. Winning Amazon could be a pyrrhic victory,” says Peter Cohan, lecturer of strategy at Babson College and author of the book “Disciplined Growth Strategies.”
There’s something perverse about corporate welfare to begin with. It doesn’t seem quite right that everyday citizens, whose tax dollars are meant to go to education, health care, roads, homeless shelters, community outreach programs and the like should be gambled to benefit politicians and the bottom line of multibillion-dollar businesses. In the case of Amazon, infamous for its ruthless pricing practices that have put countless mom-and-pop shops out of business, it seems especially perverse .
Some cities refused to cater to Amazon.
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San Antonio, predicting the tab for HQ2 would exceed the $3 billion Foxconn incentive package, withdrew from consideration, pointing out that Amazon had likely already decided where it wanted to build its second headquarters but wanted to milk billions in taxpayer-funded subsidies from local governments anyway.
“Giving away the farm isn’t our style,” wrote Mayor Ron Nirenberg and Bexar County Judge Nelson Wolff in an open letter to Bezos.
Workarounds and solutions. Nothing Amazon is doing here is illegal. But Amazon isn’t the only company that does this, and it would be great if communities didn’t have to “give away the farm” to woo a company to make an investment it was already going to make.
One way for cities to increase their leverage is to take a page from Amazon’s playbook.
Amazon is weaponizing its size, scope and economic influence to solicit the cheapest bids. Cities and states could do this as well. If the biggest cities formed a cartel of sorts, agreeing not to offer tax incentives to companies that sought to play them against one another, they wouldn’t have to sacrifice those much-needed tax revenues.
“What if there were a ‘union’ of cities together — this is conceivable. That gives cities more power in the debate for where Amazon and where other companies would locate. Right now, there is power asymmetry,” Tatikonda says. “If they would organize together, they would have … more power in the negotiation.”
In the European Union, this issue is partially addressed by regulators. There, the European Commission determines whether member states’ tax incentives are market-distorting or not. Amazon has shown its willingness to play questionable games with tax incentives there, too; as the HQ2 bidding war was underway, the Commission ordered Amazon to pay about $300 million for unjustifiable tax advantages it received from Luxembourg between 2006 and 2014.
But in the meantime, bidding wars like this one are bound to continue indefinitely in the U.S., simply because public companies have a duty to take whatever they can get.
“From Amazon’s perspective, corporations exist to maximize shareholder value,” Tatikonda says.
Through this lens, what Amazon is doing is perfectly understandable. But this creed, maximizing shareholder value, can be used to justify some truly awful actions that benefit shareholders at the expense of society.
Consider Martin Shkreli, the jailed former CEO of Turing Pharmaceuticals. Under his guidance, Turing bought a life-saving HIV drug and raised its price from $13.50 to $750 per pill overnight. When lambasted by the media, Shkreli stuck to his guns, citing his legal obligation to shareholders. His subsequent convictions for securities fraud and conspiracy were unrelated.
Conducting cost/benefit analyses on whether companies will be more profitable if they pawn off substantial negative externalities on the American public — just to benefit their bottom line — is a chilling way to do business.
[Read: Google Investors Have a Lot on the Line in Europe.]
But unless cities, states and municipalities band together — or we agitate for radically different laws — it’s the way Amazon and other opportunistic companies will continue to do business, regardless of the costs borne by everyday Americans.
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Amazon’s (AMZN) HQ2 Bidding War: Runaway Corporate Power in Action originally appeared on usnews.com
