Amazon – Sheila Kennedy

The “But For” Test

When I was in City Hall, in the late 1970s, the use of tax abatements to lure employers to Indianapolis, or to blighted areas, was relatively new. Back then, applicants for those abatements were expected to demonstrate that “but for” the tax break, they wouldn’t make the move–that the incentive made the difference between an economically viable move and one that otherwise wouldn’t make economic sense.

I recall several quibbles about whether this or that business had actually met the “but for” test.

Over the years, of course, we’ve heard less and less about cities justifying the various incentives being doled out to entice employers, with the result that the whole country sometimes seems engaged in a zero-sum game (after all, when factory A moves from state B to state C, jobs may come to state C, but they’re lost to state B. Total economic activity rarely increases.) Incentives have come to look more and more like bribes; larger enterprises looking to move or expand pit “bidders” against each other to extract the largest concessions.

“Who will pay me the most to come?”

Those of us who have looked askance at the evolution of this competition have long believed that these enterprises would move to locations that made business sense without the incentives/bribes. And now we have evidence.

Remember when AOC and many others blocked the three billion dollars in subsidies that New York offered Amazon? Amazon is moving to New York anyway. Without the subsidies.

“The giant online retailer said it has signed a new lease for 335,000 square feet on the city’s west side in the new Hudson Yards neighborhood, where it will have more than 1,500 employees,” The Wall Street Journal reported. “Amazon is taking the space without any of the special tax credits and other inducements the company had been offered to build a new headquarters in the Queens neighborhood of Long Island City, the company said.”

“The new lease represents Amazon’s largest expansion in New York since it stunned the city by abandoning those earlier plans. Amazon pulled back after facing a backlash from some politicians and activists over the roughly $3 billion in financial incentives the city and state had extended to woo the company and the 25,000 new jobs it had pledged to create,” The Journal explained.

Clearly, a New York location made business sense for the company. That being the case, the massive subsidies it extracted during the competitive process were gravy–and taxpayers were supplying that gravy.

The politicians and activists who had blocked the original offer had argued that it was unnecessary. They were clearly correct. There is no way that Amazon could have passed a “but for” test.

The money being spent on these high-profile efforts could be used instead to grow local businesses–why not, for example, create a fund that would finance promising mom-and-pop startups that can’t get conventional financing? Or use that money to make local retail districts more attractive and accessible?

Bribing employers to relocate is not “economic development”–and as Amazon has just demonstrated, it’s usually not necessary.

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It’s Not Just In Washington

It seems as if the rule of law is under assault everywhere.

A recent story by Reveal, a nonprofit news organization, alleges that during the competition for Amazon’s second headquarters, the state made four safety citations against the company “go away.” (I find it illuminating–and incredibly depressing– that the Indianapolis Star simply published Reveal’s investigative report. It’s just one more bit of evidence that the Star itself no longer has the capacity to engage in investigative journalism or fulfill its watchdog role.)

When an Amazon worker was killed by a forklift in a Plainfield warehouse in 2017, the state of Indiana’s investigator found the company was at fault. The state cited Amazon for four major safety violations and fined it $28,000.

But an investigation by Reveal from The Center for Investigative Reporting has found that, as Gov. Eric Holcomb sought to lure Amazon’s HQ2 to Indiana, state labor officials quietly absolved Amazon of responsibility. After Amazon appealed, they deleted every fine that had been levied and accepted the company’s argument — that the Amazon worker was to blame.

The investigator on the case, John Stallone, had arrived at the warehouse a day after 59-year-old Phillip Lee Terry was crushed to death. He was so troubled by the pushback he was getting from higher-ups that he secretly recorded his boss, Indiana OSHA Director Julie Alexander, as she counseled the company on how to lessen the fine.

“It’s like being at a card table and having a dealer teach you how to count cards,” Stallone said.

Stallone is quoted as saying that pressure to back off came from “as high up as the governor’s mansion.”

The governor has reacted angrily, sending Reveal and the Star an intimidating “cease and desist” letter, and insisting that he was not involved in handling the dispute. The officials at the labor department have thus far declined to be interviewed.

According to Reveal,

Indiana OSHA issued four serious safety citations, for a total fine of $28,000. Stallone sought more, but he was getting pushback. On Nov. 20, 2017, Stallone joined his boss, Julie Alexander, the Indiana OSHA director, as she called Amazon officials. He secretly recorded the conversation, which is legal in Indiana, and shared the recording with Reveal.

During the call, Alexander told the Amazon officials what she’d need from them in order to shift the blame from the company to “employee misconduct,” according to the recording….

Some days after the conference call with Amazon officials, Stallone said Indiana Labor Commissioner Rick Ruble pulled him into his office. The governor was there, too, standing by the commissioner’s desk, according to Stallone.

He recalled that Holcomb told him how much it would mean to Indiana if the state won the Amazon headquarters deal. Then, Stallone said, the commissioner told him to back off on the Amazon case — or resign.

Stallone did resign, and reported the situation to OSHA.

The same day Stallone sent his whistleblower email, Amazon’s corporate offices in Seattle gave a $1,000 campaign contribution to Indiana’s governor. It was years before Holcomb would next face reelection, and Amazon hasn’t donated to him before or since.

Perhaps–as the Governor and labor officials insist– Stallone is just making entirely innocuous actions seem nefarious, although it is difficult to imagine what his motive might be. Or perhaps, the prospect of winning Amazon’s headquarters–or at the very least, avoiding measures that might make the state less competitive–persuaded the Governor and other officials to make an exception to the rules.

These days, everywhere you look, exceptions are swallowing the rules.

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Home Advantage

I’m not ready to move on from the subject of yesterday’s post, which was triggered by the efforts of numerous cities to lure Amazon’s second headquarters.

Let me just share two additional observations, one from a recent study reported in Governing, and one emerging from a recent argument in Indianapolis’ City-County Council.

The Governing article shared a study done by the Urban Institute.

In choosing New York and D.C., Amazon opted for two cities that have led the economic expansion since the end of the last recession in 2009, far outpacing the rest of the nation in job growth. The decision drew the ire of politicians at the state and federal levels, along with others who had called on the tech giant to place its second headquarters in a city where it could play a more transformative role in the economy.

Yet a new study from the Urban Institute suggests that landing such a large corporation isn’t actually the best way to build a local economy and spur job growth.

If give-aways massive enough to “steal” large employers–to lure them from City A to City B (in what certainly seems to be a national zero-sum game) isn’t a sound growth strategy, what is?

Instead, the report says, cities should focus on growing existing local firms, not trying to lure out-of-town companies and poaching firms from other cities. “Most job expansion and contractions come from birth and deaths of homegrown businesses or expansion or contractions of existing home-based businesses,” says Megan Randall, a research analyst with the Urban-Brookings Tax Policy Center and a co-author of the report.

According to Randall, when so-called “marquee companies” locate in a new city, they tend to displace existing businesses, especially mom-and-pop stores. Supporting and expanding homegrown enterprises has been a more successful strategy for adding job growth.

Worse, giving up tax revenues to lure a new company puts a strain on local services, particularly schools.

As New York University business professor Scott Galloway put it in an email to Barron’s on Tuesday, the tax incentives from New York amount to “an elegant transfer of funds from municipal school/fire/police districts to Amazon shareholders.”

Cutting into services and school budgets makes the local workforce less attractive in the long run, and the location less alluring, the Urban Institute report notes….

Cities would be better served, according to Randall and other economic policy analysts, by improving schools and public services, and focusing on nurturing their existing network of businesses.

When a city offers tax giveaways to lure a company, the government goes into the negotiation with a marked disadvantage because of what economists call “information asymmetry.” The city doesn’t have all the information about what the company is looking for. In some cases, a company may choose a city it would have moved to anyway, pocketing the tax incentives even though they weren’t a deciding factor.

“Firms are in a advantageous position,” Randall says. “They know cities want to attract jobs and create opportunities for their residents. They know they are in the position to leverage a public benefit from what they have to offer.”

What the article calls “negotiation” is more often–and more accurately–described as extortion. And that brings me to a recent dispute in Indianapolis’ City-County Council.

Corteva is a company formed last year, as part of Dow Chemical’s mega-merger with DuPont. Delaware-based Corteva—which includes the local operations of Dow AgroSciences—is set to be spun off as a public company in June 2019, and it employs about 1,400 workers in Indianapolis.

The City-County Council approved 30 million dollars to “incentivize” the company to maintain operations in Indianapolis. Most Councilors weren’t happy about it.

The incentive deal authorizes the issuance of $30 million in economic development revenue notes to Corteva from the city of Indianapolis, which would be paid back with about $5 million annually in tax increment financing funds that the city had been passing through to government units such as schools, libraries, parks, police and fire protection. Those entities would no longer receive those funds while the notes are being paid off.

The council voted 18-7 to approve the deal. Democrats Zach Adamson and Stephen Clay voted against the plan as did Republicans Jeff Coats, Danielle Coulter, Janice McHenry, Jefferson Shreve and John Wesseler.

Even council members voting yes weren’t happy.

“It’s not the best deal; I’m not excited about it,” said Democrat Jared Evans. But he said the long-term benefit of keeping the jobs in the community outweighed the short-term harm to the taxing units.

Zach Adamson characterized the incentives as “nothing short of extortion;” he was exactly right. Far too much of what passes for “economic development” is better described as bribery and/or blackmail. “What will you pay us to come?” and “What will you pay us to stay?”

These deals steal money that would otherwise be used to improve the local quality of life. And as the Urban Institute study reaffirmed, the quality of life–good schools, good parks, convenient transportation, effective public safety, etc.–is what really drives job growth and economic development.

When you rob Peter to pay Paul, you just make both of them poorer.

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This Isn’t Capitalism

A number of people who comment on this site are consistently critical of capitalism. I, on the other hand, am a committed capitalist, provided that economic system is properly defined and provided it is limited to economic areas in which competitive markets work.

The system in America today–the system that pisses off so many contemporary Americans– isn’t capitalism. It’s corporatism.

In a capitalist system, it is true that some people will do better than others. There is nothing wrong with that; the promise of a bigger reward for building a better mousetrap spurs innovation and benefits us all. It’s only when the rewards are disproportionate to the value of the activity involved– and especially when those rewards become disconnected from actual economic productivity– that capitalism devolves into corporatism, and things get seriously out of whack.

Competitive markets have numerous advantages in the areas where they work. Unfortunately, in the United States, we have insisted on “competition” in areas where markets are demonstrably inappropriate. From health care to education to prisons, we have pursued a privatization agenda that benefits the entitled and well-connected without delivering any of the benefits of a true market.

That may be crony capitalism, but it sure isn’t the real deal. As I wrote a few years ago,

When what people make is a reflection of their connections and/or the success of their lobbyists, it’s time to consider whether we still have a capitalist system, or whether what America currently has is corporatism–a system where power is exercised through large organizations in pursuit of their own economic agendas, to the detriment of the common good.

Capitalism creates opportunity; corporatism keeps it “all in the family,” exacerbating inequality.

If you have any doubt that the United States no longer practices capitalism, take a look at the recent, high-profile (arguably obscene) “competition” for Amazon’s second headquarters. As the Intercept recently reported,

Amazon’s announcement thisweek that it will open its new headquarters in New York City and northern Virginia came with the mind-boggling revelation that the corporate giant will rake in $2.1 billion in local government subsidies. But an analysisby the nation’s leading tracker of corporate subsidies finds that the government handouts will actually amount to at least $4.6 billion.

But even that figure, which accounts for state and local perks, doesn’t take into account a gift that Amazon will also enjoy from the federal government, a testament to the old adage that in Washington, bad ideas never die.

Enterprise Zones, one of those ideas that the Intercept characterizes as “bad,” has been resurrected in the GOP’s 2017 “gift to rich people” tax bill.

Under the tax overhaul signed by President Donald Trump last year, investors in opportunity zones can defer paymentsof capital gains taxes until 2026, and if they hold them for seven years, they can exclude 15 percent of the gains from taxation. If investors carry the opportunity zone investment for 10 years, they eliminate taxes on future appreciation entirely. Investment managers have been salivatingat the chance to take advantage of opportunity zones. Special funds have been built to cater to people holding unrealized capital gains — such as Amazon employees with large holdings of company stock.

The article details the goodies taxpayers are providing one of the most successful companies in the country, and notes that Amazon has already received $1.6 billion in state and local subsidies for its warehouses and data centers.

On the same day as the New York and Virginia announcements, Amazon also announced a new “Operations Center of Excellence” in Nashville, Tennessee, a 5,000-worker facility for which the city gave Amazon $102 million in subsidies.

The report notes that these cash handouts don’t take into account “regulatory leniency and accelerated permitting” that Amazon projects routinely get.

We can quibble over what we should call an economy in which there is nothing remotely like a level playing field; an economy that enriches the already well-to-do at the expense of the rest of us and routinely socializes risks and privatizes profits, but we shouldn’t make the mistake of calling it capitalism.

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Blue City, Red State, Home Rule

In the wake of Amazon’s choice of location for headquarters #2 (and the announcement that it was breaking the choice into two, one to be located in Queens and one in Crystal City–essentially, Washington, D.C.), Robert Reich wrote a provocative essay for Newsweek.

What does Amazon’s decision have to do with America’s political tumult? Turns out, quite a lot.

Amazon’s main headquarters is in Seattle, one of the bluest cities in the bluest of states. New York and metropolitan Washington are true-blue, too.

Amazon could have decided to locate its second headquarters in, say, Indianapolis, Indiana. Indianapolis vigorously courted the firm. It’s also a Republican city in a bright red state.

Actually, Indianapolis–like every other sizable city in the country–is unambiguously blue. But we are located in a very, very red state.

Reich’s main point was that technology is a process of “group learning,” and it advances best in geographical clusters. Those clusters are primarily found along the coasts, where the digital economy has been a real boon. But Reich says that economy has left behind much of the rest of the country, with the result that we are facing what he calls “the widening inequalities of place.”

As money pours into these hubs, so do service jobs that cater to the new wealth—pricey lawyers, wealth managers, and management consultants, as well as cooks, baristas, and pilates instructors.

Between 2010 and 2017, according to Brookings, nearly half of the America’s employment growth centered in just 20 large metro areas, now home to about a third of the U.S. population.

Relative to these booming hubs, America’s heartland is becoming older, less well-educated, and poorer.

I think the reality of “America’s heartland” is more complicated than Reich recognizes. And that takes me back to his mistaken assumption that Indianapolis is a Republican city.

Cities in even the brightest red states have been blue for some time. We form what has been dubbed an “urban archipelago.” Furthermore, the inhabitants of these cities are engaged in a multitude of creative place-making, job-creating and poverty-reducing efforts.

Here in Indianapolis, for example, Community Development Corporations partner with the City, the Chamber of Commerce and a variety of nonprofit organizations to improve transit, health, education and job training, and to remove barriers to self-sufficiency. People may disagree about the likely efficacy or unintended consequences of this or that initiative, but the range of activity–and the good will motivating it–is impressive.

Indianapolis’ problem (which is not shared by every blue island swimming in a rural sea of red) can be found in Reich’s second descriptor: our red state. It isn’t Republican control of Indiana that’s the problem; it’s the fact that we are a state in which there is no meaningful home rule. Public officials in Indiana cities must go hat-in-hand to the state legislature (currently governed by an unimaginative GOP super-majority) to pursue many of the policy initiatives that other cities have authority to pursue as a matter of course.

Want to charge extra for plastic bags? No can do, sayeth our legislative overlords. In just the last few years, the Indiana legislature has also prevented cities from setting local minimum wages, and from regulating housing, agricultural operations and worker schedules, among other things.

Perhaps the most egregious example of legislative arrogance involved Indianapolis’ proposal to tax ourselves to upgrade our inadequate transit system. It took three years just to get the legislature’s permission to hold a vote on the matter, and even then, the enabling legislation prohibited us from considering light rail. Why? Who knows?

As a column in the Indianapolis Star noted,

A move to preempt local rules for services like Airbnb failed to get out of the Indiana House, but it was a rare setback for the never-ending march to scale back home rule. This year legislators successfully banned local zoning rules for certain utility poles and undermined so-called “good neighbor ordinances.”

(“Good neighbor” ordinances hold tenants accountable when they repeatedly inflict crimes and nuisances on their neighbors.)

The attorney who authored the column shared a number of other examples, and made a compelling case for giving greater authority to the people elected to govern municipalities.

The lack of ability to make our own decisions, based on the needs of our own residents, isn’t just making us less competitive for Amazon-sized sweepstakes.It is preventing us from improving everything from education to infrastructure to the quality of life in our city. Legislators who mostly represent the Indiana hinterlands consistently prevent us from reaching our full potential as a thriving urban oasis in a rural state that isn’t doing so well.

Urban residents of Indianapolis suspect that’s intentional.

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