The ugly truth behind Amazon’s beauty contest

However, there was an awful lot at stake: 50,000 new jobs and a $5 billion investment in new construction: a huge prize for a big city; the promise of complete transformation for a smaller one.

Which is why a grand total of 238 cities (including some in Canada and Mexico) entered the competition to be chosen. This was narrowed down to a shortlist of 20 cities in January, with the final result announced earlier this month (of which, more later). The whole process was distinctly reminiscent of the competition between cities to host the Olympic Games.

Unfortunately, for Amazon, its quest to find a second home has become a symbol of corporate welfare. That’s because the company wasn’t just looking for the best possible location, it was also angling for incentives.

It is estimated that the various levels of American local government (including state governments) spend between $45 and $90 billion every year enticing businesses to invest in their states and communities (or to not move existing investments elsewhere). The sweeteners take many forms from tax breaks to targeted infrastructure investments (though what counts as a special favour and what is something that the state or city would have done anyway is not always clear). The justification is that the locality will receive much more in return once the corporate welfare recipient moves in and starts creating jobs, tax revenues and reasons for other businesses to move in. From a nationwide perspective this amounts to a system of subsidies for businesses big enough to demand them, but from the narrow perspective of the locality, it can look like a good deal.

Therefore, Amazon wasn’t doing anything out of the ordinary… for corporate America. But if they thought that the spectacle of a trillion dollar company touring the country soliciting favours from investment-hungry cities would look good, they were mistaken.

The secrecy surrounding the bidding process didn’t help. One could argue that this is just how business is done – with Amazon expecting no more confidentiality from its prospective public sector partners than it would from the private sector. However, government, whether national or local, is not just another client/supplier, it is a democratic institution. While it isn’t necessary to give a running commentary on every twist and turn in a negotiation, the people of a community can’t be frozen out altogether – not when the deal is as consequential as that on offer from Amazon. Citizens need to be treated with at least as much respect as shareholders – in fact, rather more, because they not only ‘own’ but also legimitise the government side of the deal.

*

All of these concerns and others were bubbling away during the 14-month competition, but it was the final result that blew the lid on public anger.

It wasn’t that most of the cities making the bid were doomed to be disappointed. After all, with one new HQ there could only be one winner – something the 238 bidding cities will have been aware of going into the process. As it turned out, there were two winners, because Amazon decided to split its second HQ between two locations. But rather than lessening the disappointment the joint award accentuated it. That’s because neither winner was a city that really needed the break; both winners were located along the BosWash corridor – the mighty connurbation that runs from Boston to Washington. Hopes that Amazon might establish an HQ somewhere in heartland America – helping to bridge the divide between the coastal cities and flyover country were dashed.²

One of the winners was New York – always a strong contender given its global profile. But the other winner was, if anything, of greater geographical significance. Arlington County, Virginia cannot be described as heartland America. It’s not even heartland Virginia – but rather in the western suburbs of Washington. It is therefore well within the infamous ‘Beltway‘ – seen by much of America as the home of an out-of-touch political elite (though it’s also home to a great deal of poverty). The specific location is a business district of superblocks called Crystal City. Despite the name, it is not the most sparkling of places – but it is right next door to Reagan National airport. It’s also got metro stations, is just across the bridge from the Capitol and handy for the Pentagon (where Amazon has business). Jeff Bezos also happens to own the Washington Post.

So despite a high profile competition in which cities across and beyond the nation were considered, the winners were America’s biggest city and its capital city. A big-ticket investment decision that might have helped disperse the concentration of economic power in America, has confirmed it instead.

In the light of the outcome, Amazon is open to accusations of having staged the competition as a publicity stunt. Though to be fair, if it had opted for New York and Washington without the competition, it would have been accused of not giving the rest of America a chance.

Other critics see the competition as a clever way of obtaining commercially useful information about the expansion plans of candidate cities – handy when you’re in the business of building a nationwide distribution network (not to mention a chain of automated retail outlets). That said, obtaining such information is what major developers are pretty good at anyway.

The fiercest aspect of the backlash centres on the corporate welfare aspect of the final decision. Despite picking the most ‘Amazon-ready’ locations, the company has nevertheless secured a reported $2.2 billion of additional inducements. Even the most reliable defenders of corporate America have had enough. In an editorial entitled ‘Amazon’s Golden Fleecing’, the Wall Street Journal had this to say:

“We rarely agree with socialist Congresswoman-elect Alexandria Ocasio-Cortez, but she’s right to call billions of dollars in taxpayer subsidies for Amazon “extremely concerning.” These handouts to one of the richest companies in the history of the world, with an essentially zero cost of capital, is crony capitalism at its worst.”

Fox News host, Tucker Carlson also weighed in: “the richest man in the world just got $2 billion in taxpayer subsidies. How does that work?”

And yet, some of the rival locations were offering a lot more than that. Amazon literally turned down billions of dollars so that it could locate in New York and Washington. What clearer proof could there be of the pulling power of a fortunate few locations over everywhere else.

The fact that this involves Amazon only makes it worse. This is a company with a physical footprint of facilities and employees across America. With its expertise in cloud computing services, logistics and distribution, there can be few organisations better positioned to overcome the tyranny of distance. If anyone could have made a non-obvious location work, it was Amazon.

*

The ‘Amazon moat‘ is not a water feature planned for either of its new headquarters, but a reference to the company’s well-defended position in the marketplace. Its operational infrastructure from websites to warehouses is so extensive and interconnected as to make it all-but-impossible for a serious competitor to emerge. Without the Amazon’s economics of scale (and accumulated expertise), it’s very hard for rivals to compete on price across such a range of goods and services – and if they can’t do that they can’t grow big enough or last long enough to match Amazon’s heft.

‘Superstar cities’ like New York and Washington also have their metaphorical moats: the connections, attractions, size and diversity that smaller and/or poorer places cannot compete with. Unlike a company, a city is limited in the scope of its geographical expansion. A city cannot grow ever onwards across the world. What it can do, however, is bring the world to the city. Companies are nothing without people and are, therefore, drawn inexorably to the places that have the people it needs, which in turn attracts more people and, of course, their money.

So is that it, then? Are nations like America doomed to a circular process of growing geographical inequality? A favoured few mega-cities monopolising a favoured few mega-corporations?

A country can’t afford to give up on its smaller cities (or to ignore the interests of its smaller businesses). However, changing the dynamics of economic concentration will require concerted action on the part of central and local government. Here are five things they should be getting on with now:

A crackdown on corporate welfare. It should be against the law to offer inducements to one business that aren’t available to all businesses – especially when it comes to their treatment in the tax system.

A transparent city planning system. All information about governmental land-use and infrastructure investment decisions should be open source – with no privileged access for powerful interests. Maximising the involvement of local citizens in key planning decisions requires radical openness anyway.

Giving communities more control over their land. One of the reasons why Crystal City was so attractive to Amazon is that much of the relevant land was owned by one developer – greatly simplifying matters for a major investment. Instead of offering tax breaks and the like, local government would be much better engaged in entrepreneurially obtaining and preparing land for development.

Rethinking the way the state allocates capital spending – which should be counter-geographical as well as counter-cyclical. Investing to maximise returns on the basis of conventional assumptions means that the same places will get most of the public investment as well as the private investment. It would also help not to include rent in GDP calculations, which counts the inflation of land values in overheated property markets as ‘growth’.

Introducing a land value tax. The concentration of development in a few favoured locations sends rental values soaring. Not only should this bonanza for landlords not be counted as growth, it should also be properly taxed. In the long-term, this would help shift investment out of economically unproductive, socially useless speculation. In the shorter-term, it would raise revenues that could be invested locally in social housing and community land trusts – and nationally in boosting the potential of smaller cities.

Finally a word of warning: dominant cities don’t stay that way forever – and neither do dominant companies. The tendency towards economic concentration is driven by factors that shift over time. Taking active steps to spread the productive potential of a nation isn’t just a matter of maintaining social cohesion, still less is it an act of ‘charity’. Rather, it is the policy of keeping options open in a world where change is inevitable.

Or, to put it more succinctly, don’t put your eggs all in one basket – Amazon baskets included.

---