By Sam Natapoff| President | Empire Global Ventures LLC
State & local governments have pressing social, economic fiscal challenges so why pay rich corporations? Here’s why
After a 14-month competition among 238 North American cities for the richest economic development prize in a generation, on November 13, 2018 Amazon announced it would locate two new “headquarters” in Long Island City (LIC), New York City, and in Arlington, Virginia. In return for creating 25,000 jobs paying an average of $150,000 and investing $2.5 billion in each location, Amazon will receive up to $3 billion in economic incentives from New York City/New York State and $796 million from Virginia and Arlington. New York offered tax credits equal to $48,000 per new job, while Virginia promised workforce cash grants of $22,000 per job. Was landing Amazon worth what New York paid for it, especially since the $860 billion company might have selected NYC without it? More broadly, is it worth it for governments to pay to attract companies to their jurisdictions?
Other major tech companies are increasing their NYC presences without governmental support. Google just announced its own NYC expansion, investing $1 billion in its Manhattan campus and doubling its 7,000 NYC employees to 14,000 over the next 10 years. Apple declared it would add hundreds of jobs in NYC as part of its $30 billion investment in new facilities and new US employees by 2023. Facebook is currently negotiating to lease more space in Manhattan in the One Madison Avenue tower. Many tech people don’t consider Amazon a true “tech” company (more an e-commerce firm) but tech is coming to NYC in waves.
Many opposed New York’s incentive package to Amazon, including several elected New York officials. Congressional Representative Alexandria Ocasio-Cortez, a Democrat from Queens, tweeted, “The idea that [Amazon] will receive hundreds of millions of dollars in tax breaks at a time when our subway is crumbling and our communities need MORE investment, not less, is extremely concerning”.
LIC’s State Senator Michael Gianaris and LIC City Councilman Jimmy Van Bramer, both Queens Democrats, inveighed against the incentive package, stating that “Offering massive corporate welfare from scarce public resources to one of the wealthiest corporations in the world at a time of great need in our state is just wrong.” Finally, NYC Comptroller Scott Stringer attacked the deal, insisting that it was “negotiated in the dark, circumventing a comprehensive public review process and leaving an entire community with more questions than answers.”
Should New York have paid so much for Amazon to come? Yes, it should have, not simply because the prize was so big, but because there are multiple ancillary benefits. Such deals generally focus on how many jobs are created, how much the company itself will invest, the desirability of the sector, and what else might result for the region from the deal. This Amazon deal fulfills many of these (Full disclosure: From 2008-2010 I served as New York State’s senior government official to attract international investment, I participated in many similar recruitments, and I would have done this deal in a heartbeat).
Not every recruitment project deserves taxpayer dollars. Money alone could not have persuaded Amazon; it was offered far more by other states, including Maryland with $8.5 billion in incentives and New Jersey $7 billion, but Amazon was primarily focused on access to tech talent. Not every city qualified as a realistic site, but among the finalists, there was a multibillion-dollar difference in coming in third in this competition. NYC and Arlington offered vibrant tech talent, but the incentive packages offered demonstrated their seriousness.
Good companies won’t move just for money, but they will move if it makes sense for their business. By contrast, another large and infamous economic development project was the state of Wisconsin offering Taiwanese iPhone/iPad manufacturer Foxconn $3 billion in 2017 to open a $10 billion plant there. With a target of creating 13,000 manufacturing jobs by 2021, this project will not pay back the initial $3 billion subsidy for at least an estimated 25 years and will have average annual salaries of only $54,000, compared to a salary average nearly three times that offered by Amazon. The Amazon deal offered human capital-intensive jobs oriented toward the future, while the Foxconn opportunity involved labor-intensive manufacturing jobs that are stuck in the past. These are the factors economic development officials need to weigh when considering offering public funds to recruit private companies.
This Amazon deal makes sense for NYC for the following reasons:
First, New York City/State will receive an estimated $27.5 billion in total revenues over the next 25 years, a nine-to-one return on a $3 billion investment, and will create 25,000 jobs in LIC, with an average annual salary of $150,000. $1.525 billion of NYS’s package are “performance-based direct incentives”, including $1.2 billion based on a percentage from future Amazon workers’ salaries. NYC’s contribution of $897 million in income tax credits and a $386 million property tax break over 25 yearsare “as of right” incentives: these would be automatically offered to any company that moved to NYC (outside of Manhattan) from elsewhere. In short, NY State Governor Andrew Cuomo and NYC Mayor Bill de Blasio assume that Amazon and its employees will pay back far more than they will be given in the long run, that Amazon will have to earn this money, and that some of these incentives were available for any company willing to move to LIC in force.
Second, this is a logical continuation of a longtime, successful municipal strategy to attract lucrative new sectors to NYC, to supplement the breadth and strength of the NYC economy. Mayor Michael Bloomberg previously analyzed NYC’s economy and made multiple strategic efforts to develop new local industries, especially in the wake of the 2008 financial crisis, which devastated Wall Street. He vainly attempted to advance NYC’s convention industry with his failed 2004 West Side Stadium effort. However, he was extremely successful in recruiting the tech industry to come to NYC, including spurring the creation of the tech-focused campus of Cornell University and Technion-Israel Institute of Technology. Cornell-Technion was reportedly a major attraction to Amazon, as the school’s dean and vice provost Daniel Huttenlocher sits on Amazon’s board of directors. As a result of Mayor Bloomberg’s, Mayor Bill de Blasio’s, and others’ coordinated and consistent recruitment efforts, NYC is now America’s #2 tech region after Silicon Valley, 10 percent of all US developers now live in the NYC metro area, and NYC is now considered the second highest performing startup ecosystem in the world. New York is the largest market for tech talent after San Francisco, with 254,270 tech employees in 2017, growing 27 percent from 2012 and making up 3.8 percent of all NYC jobs. NYC did not start out a tech hub, it emerged late as one through strategic aggressive recruitment and business savvy, a long tradition into which the Amazon deal neatly falls.
Third, Amazon’s HQ2 and the tech jobs it brings with it can act as employment multipliers, creating many indirect service and support jobs to bolster them. NYC’s financial industry has traditionally produced such spillover economic effects: nearly 1 in ten jobs in NYC are estimated to be directly or indirectly associated with the securities industry and while finance made up fewer than five percent of NYC’s 2016 private sector jobs, it generated over one-fifth of all NYC private sector wages. A similar, if larger, effect has been posited about tech sector jobs, particularly by University of California, Berkeley Professor Enrico Moretti, who wrote that “for each new high-tech job in a city, five additional jobs are ultimately created outside of the high-tech sector in that city, both in skilled occupations (lawyers, teachers, nurses) and in unskilled ones (waiters, hairdressers, carpenters).” By Moretti’s calculus, Amazon’s 25,000 NYC jobs could possibly create 125,000 more. One estimate counted 7,600 NYC tech firms in 2016, up 23 percent from 2010, with an average NYC tech salary of $147,300. Another estimate of the average NYC tech salary is $112,000, while the estimated average supporting non-tech salary is $65,700. In short, tech salaries are higher than the NYC average and support other salaries around them.
Fourth, this will be a boon to NYC’s STEM-focused academic institutions, which will pay dividends across NYC’s tech sector. Cornell Technion started with only seven students in 2013, but by now, 534 of the schools’ graduates (60 percent remain in NYC) have been hired by Google, Bloomberg, Microsoft, and other tech companies. With 340 students today, it is expected to have at least 1,800 students by 2037. New York University has also established a new $380-million tech hub for emerging media, technology and the arts. The City University of New York (CUNY) will also play a key role, as from 2014 to 2016, over 4,000 CUNY students graduated with tech or engineering degrees. In Autumn 2017, CUNY had 47,349 STEM enrollees, some 11,000 more than the total number of undergraduates at the University of Michigan.
Fifth, this may be a significant employment opportunity for minority and non-traditional potential Amazon employees and contract opportunities for minority- and women-owned firms. Consider a potential CUNY-Amazon pipeline; 35 percent of CUNY undergraduates were born outside the U.S. mainland and 76 percent are from underrepresented minority groups. The NYS-Amazon agreement contains a commitment by Amazon to attempt to deploy 30 percent of the state funding on contracts with minority- and women-owned business enterprises (MWBEs). And the scale of the ICAP tax break will require Amazon to pursue a minimum of three city-certified MWBE bids for construction.
Then there is the issue of Queens. NYC is not a unified whole; each borough has its own character and economy. Manhattan and Brooklyn already benefit from tech sector’s economic effects, but Amazon is now bringing it to Queens in force. Facebook, Google, Apple, and Twitter all reside in Manhattan, so Amazon’s expansion outside of Manhattan into Queens, despite the opposition of some of Queens’ elected officials, should not be underestimated, as it is expanding tech’s reach to previously under-engaged areas within NYC.
Finally, Amazon has agreed to build a new school in Long Island City, a tech incubator on its campus, and unspecified “infrastructure improvements and new green spaces.” According to its agreement, the total cost of building a new LIC HQ would be nearly $3.7 billion.
Economic development deals are often unsuccessful, and politicians routinely intervene and claim credit. But public policies can spell prosperity or peril for their cities, a feature that is not confined to the United States. Through its atavistic Brexit folly, London has essentially surrendered the competition for the global financial capital to New York, forcing its financial sector human capital out, while New York is aggressively recruiting Amazon, the tech industry, and other new sectors to diversity its economy.
For this Amazon deal to succeed, NYC will need the private, public, and academic sectors to successfully collaborate. The stakes are high, as is the price tag. But to bring one of the world’s most valuable companies in a cutting-edge sector to an underserved borough of New York City, with potentially long-term benefits and enshrining institutional advantages over time, that seems worth the risk. New York was not too proud to go all-in on what may prove to be an exceptional investment. In New York, delivery is king, so where better for to Amazon go?
This article appeared on SALON on January 5, 2019
Compliments of Empire Global Ventures LLC, a member of the EACCNY