It has been less than two weeks since online retailer Amazon.com dropped the news that it would open a second headquarters in another North American city, and the competition is already hotter than any reality show.
Eager local officials have blasted out clever tweets and rah-rah news releases touting their region’s suitability as Amazon’s second home. Urban experts are forecasting where “HQ2” will land, major newspapers are crunching the data, and economic development teams from coast to coast are poring over every syllable of Amazon’s RFP. Putting an exclamation point on all this wooing, the city of Tucson shipped off a 21-foot saguaro cactus to Seattle to show its love. (Amazon CEO and founder Jeffrey P. Bezos owns The Washington Post.)
And for good reason: Amazon has been a great boon for its home town, spurring close to $40 billion in economic activity, transforming a neighborhood of surface parking lots and tire shops into a bustling and walkable tech district and revving up a dynamic and diverse start-up ecosystem. At the same time, however, it has become a prime example of how high-tech growth can overwhelm a place already struggling with transportation problems, a tight housing market and a squeezed middle class.
If a city wants to avoid becoming what one Seattle commentator termed “richer and angrier,” there’s a way to do it — and it doesn’t involve tax breaks, which are one thing Amazon is suggesting cities provide if they want the HQ2 prize. Cities instead need to skip past the “incentives” section of the RFP and focus on strengthening the other things Amazon lists as desired qualities in a city — mobility and sustainability, strong higher education, cultural diversity and tolerance.
Here’s why: Historical and economic research shows us that luring corporations with big tax breaks and infrastructure subsidies is a zero-sum game that can cost cities and regions far more than they earn back. However, history also teaches us that public spending pays off when it takes the form of broad investment in people and places, not just particular companies or industries. If a city follows this route to winning Amazon’s heart, it increases the odds that it will benefit from the good promised by the digital retail giant without experiencing the bad.
Cities and regions have been dangling incentive packages in front of footloose corporations ever since the middle part of the 20th century, when a perfect storm of historical circumstances set manufacturers on the move — and triggered a race to be the place that could offer the best tax-and-incentives deal to lure them in.
New Deal-era government investments that dammed rivers and brought cheap electric power to the rural South and West made industrial development feasible in places where it never had been before. The postwar spread of air conditioning encouraged it further. At the same time, the swelling ranks of unionized labor increased workers’ paychecks but also brought more strikes — two things that sent manufacturers fleeing to states with nonunion workforces. In response, whether in suburbs or Sun Belt, local officials scrambled to build state-of-the-art plants and industrial parks, spending millions as they jostled to get ahead in the economic development game.
By the 1960s, places such as Taiwan and Singapore jumped into the mix, spending big on industrial infrastructure to draw electronics manufacturers across the Pacific. The script flipped in the 1970s and 1980s, when Rust Belt cities cut taxes and floated big bond issues to bring back the employers who had fled.
The biggest tax-break boondoggles in recent history have been sports stadiums, as cash-strapped municipalities plunked out billions to build ever-fancier homes for professional franchises. Faced with overwhelming evidence that the economic development impacts of stadiums were negligible — and several cases in which cities built new facilities but teams left town anyway — the tide is finally turning.
Yet beyond the pro leagues, the perverse state of play continues, most recently in the jaw-dropping $3 billion incentive package with which Wisconsin lured Taiwanese electronics powerhouse Foxconn and its promised 13,000 manufacturing jobs. For those keeping score at home, that’s a potential public investment of more than $23,000 per worker — close to half of the average salary promised by Foxconn.
When it comes to high-tech, cities and regions have spent decades tripping over themselves to become the next Silicon Valley. Across the world, gleaming research parks and tech incubators attest to the “if you build it, they will come” belief that high-tech magic will fix all urban ills.
Special economic zones — low-tax, low-tariff, foreign-investment friendly — have been a particularly popular lure in recent years, especially in China and India. And these efforts produced impressive results, drawing in research labs and multinational brand names to create clusters of high-powered, high-paid knowledge work from Singapore to Bangalore to the Cote d’Azur.
Yet this targeted approach is part of why tech hubs have often ended up as dysfunctional and sharply unequal places. Cities and regions have put too many of their economic development eggs in one silicon-coated basket, leaving less for broader strategies that benefit a region as a whole. They’ve focused on buildings, not the people who fill them. And today, when giant technology companies like Amazon are enjoying eye-popping market capitalization and sales, funneling public resources into them makes about as much economic and political sense as helping a billionaire sports owner build a new stadium.
The winner of Amazon’s sweepstakes can avoid these dangers by playing a long game, not a short one. The key is building an environment in which tech — and tech people — can thrive.
For all its entrepreneurial triumphs, Silicon Valley is itself a testament to the long-range effectiveness of public investment and smart public policies, from California’s spending on infrastructure and higher education after World War II to the massive federal outlays on research and development made during the Cold War. The big payoff from these investments was talent: turning the Valley into a magnet for young and talented risk-takers from across the country and around the world.
Same goes for Seattle, which in the postwar years enjoyed the publicly sourced trifecta of aerospace and defense contracts, strong public research institutions and pioneering environmental policies that sustained natural beauty that lured people in and kept them there.
Taxes matter, to be sure: Washington state’s small tax base (e.g., fewer customers paying sales tax on Internet products) was one reason Bezos brought his company to Seattle in the first place, and he and other local tech titans have fought strongly against a state income tax (Washington currently has none).
When it comes to what really makes a tech hub tick, however, talent and tolerance ultimately matter more than tax breaks (see, for example, high-tax Silicon Valley and Boston). The real winning combination for tech and cities is the same: long-term investment in urban infrastructure, strong education and research institutions, and quality of life.
The HQ2 beauty pageant presents an incredible opportunity for a lucky North American city — not just to land 50,000 jobs in one of the globe’s fastest-growing and most influential companies, but also to work with Amazon’s leadership to reinvent the rules of the game. Don’t send cactuses, send proof that your city is growing and thriving, with great neighborhoods, world-class schools and universities, and connections across the globe. The things that make a city great for tech can also make cities great for everyone — but only if urban leaders and technology companies work together to make it so.