Category: Law

The open letter on Amazon from Robert Mujica, New York State’s Budget Director, is on fire. It shines an unflattering light on many people involved in the Amazon decision but its analysis of twitter mobs goes well beyond Amazon.

In my 23 years in the State Capitol, three as Budget Director, Amazon was the single greatest economic development opportunity we have had. Amazon chose New York and Virginia after a year-long national competition with 234 cities and states vying for the 25,000-40,000 jobs. For a sense of scale, the next largest economic development project the state has completed was for approximately 1,000 jobs. People have been asking me for the past week what killed the Amazon deal. There were several factors.

First, some labor unions attempted to exploit Amazon’s New York entry. The RWDSU Union was interested in organizing the Whole Foods grocery store workers, a subsidiary owned by Amazon, and they deployed several ‘community based organizations’ (which RWDSU funds) to oppose the Amazon transaction as negotiation leverage. It backfired.

…Organizing Amazon, or Whole Foods workers, or any company for that matter, is better pursued by allowing them to locate here and then making an effort to unionize the workers, rather than making unionization a bar to entrance. If New York only allows unionized companies to enter, our economy is unsustainable, and if one union becomes the enemy of other unions, the entire union movement – already in decline – is undermined and damaged.

Second, some Queens politicians catered to minor, but vocal local political forces in opposition to the Amazon government incentives as ‘corporate welfare.’ Ironically, much of the visible ‘local’ opposition, which was happy to appear at press conferences and protest at City Council hearings during work hours, were actual organizers paid by one union: RWDSU. (If you are wondering if that is even legal, probably not). Even more ironic is these same elected officials all signed a letter of support for Amazon at the Long Island City location and in support of the application. They were all for it before Twitter convinced them to be against it.

…Furthermore, opposing Amazon was not even good politics, as the politicians have learned since Amazon pulled out. They are like the dog that caught the car. They are now desperately and incredibly trying to explain their actions. They cannot.

…Third, in retrospect, the State and the City could have done more to communicate the facts of the project and more aggressively correct the distortions. We assumed the benefits to be evident: 25,000-40,000 jobs located in a part of Queens that has not seen any significant commercial development in decades and a giant step forward in the tech sector, further diversifying our economy away from Wall Street and Real Estate. The polls showing seventy percent of New Yorkers supported Amazon provided false comfort that the political process would act responsibly and on behalf of all of their constituents, not just the vocal minority. We underestimated the effect of the opposition’s distortions and overestimated the intelligence and integrity of local elected officials.

Incredibly, I have heard city and state elected officials who were opponents of the project claim that Amazon was getting $3 billion in government subsidies that could have been better spent on housing or transportation. This is either a blatant untruth or fundamental ignorance of basic math by a group of elected officials. The city and state ‘gave’ Amazon nothing. Amazon was to build their headquarters with union jobs and pay the city and state $27 billion in revenues. The city, through existing as-of-right tax credits, and the state through Excelsior Tax credits – a program approved by the same legislators railing against it – would provide up to $3 billion in tax relief, IF Amazon created the 25,000-40,000 jobs and thus generated $27 billion in revenue. You don’t need to be the State’s Budget Director to know that a nine to one return on your investment is a winner.

The seventy percent of New Yorkers who supported Amazon and now vent their anger also bear responsibility and must learn that the silent majority should not be silent because they can lose to the vocal minority and self-interested politicians.

…Make no mistake, at the end of the day we lost $27 billion, 25,000-40,000 jobs and a blow to our reputation of being ‘open for business.’ The union that opposed the project gained nothing and cost other union members 11,000 good, high-paying jobs. The local politicians that catered to the hyper-political opposition hurt their own government colleagues and the economic interest of every constituent in their district. The true local residents who actually supported the project and its benefits for their community are badly hurt. Nothing was gained and much was lost. This should never happen again.

Even if you think the end result was fine, as I do, this was a political fiasco for New York. Amazon was wise to exit when they did because the pecking of the chickens would only have intensified as they sunk investments.

No, as I explain in my latest Bloomberg column, I do not think New York should have offered Amazon the tax break.  Still, the polemical outrage over this proposed policy seems to me out of hand.  It simply wasn’t that costly, unusual, or unfair.  Here is one bit:

Consider, by way of illustration, entitlement and discretionary spending on the federal level. A program such as Social Security or Medicare is done entirely by formula, as it should be; large companies cannot lobby for higher payments or lower taxes for their workers. Much of discretionary spending, by contrast, is research grants and procurement contracts. One company or researcher wins, and the others do not. Furthermore, the government will usually offer different prices and terms, based on how much value it thinks the winning bidder can bring to the project. All of which is to say: Discretionary spending requires … government discretion.

Viewed in the context, critics of local development subsidies are also critics of government discretion. Or, to frame the issue in a duller way: They do not believe local governments should treat economic development as a procurement problem. That’s a defensible position, but it is not obviously correct.

Another analogy is with private shopping malls, which commonly charge much lower per-unit rents to anchor tenants, maybe even subsidizing them. That is based on the view that a famous retail chain or movie theater can help other businesses in the mall by attracting customers and burnishing the overall image of the place. When a local government offers tax incentives to relocating businesses, it is in a sense acting like a shopping mall, which treats tenant recruitment as a kind of procurement problem. Offering differential rewards to prospective tenants is standard practice.

And note this point about fixed assets:

When a large company is going to make a significant investment in an urban area, it is hoping for support in terms of infrastructure maintenance or improvement, and indeed it invests on that basis. The reality is that municipalities often have difficulty fulfilling their obligations anyway. (This also holds true, unfortunately, for even basic promises to ordinary citizens. Ridden the New York City subway lately?)

In other words, Amazon cannot walk away from NYC the way a street vendor can move to South Carolina and set up a barbecue shop.  So they will be taxed harder ex post, if only in “in kind” terms, namely inferior services for the company and its employees.  The lower tax rate upfront is in large part an offset to this expected time consistency problem.

By the way, Singapore, Singapore, Singapore.  And I thank Garett Jones for the shopping malls point.