Caution required: Indy area’s interest in Amazon offers lessons

By Michael Hicks

Jeff Bezos recently announced that Amazon is looking for a location other than Seattle for a second headquarters building. The proposal is for perhaps 50,000 total jobs with an average annual compensation of $100,000 or higher.

This would make it the largest potential economic development deal in U.S. history. Naturally, this announcement sent city leaders across the U.S. scrambling to craft a proposal for Amazon.

The specifications for the new site leaves just a dozen or so metropolitan areas as potential places for the facility dubbed HQ2. Any reasonable analysis would rank the Indianapolis area in the top half-dozen potential sites. This raises a few issues that everyone in Indiana and the Midwest as a whole should consider.

This proposal comes on the heels of what is arguably the most irresponsible economic development deal in modern history, Wisconsin’s $3 billion plus bid for 3,000 Foxconn jobs. Compared to that piece of fiscal insanity, the Amazon deal should be worth about $25 billion in incentives.

By comparison, Indianapolis spends just over $1 billion running the city each year, and New York City’s annual budget is about $75 billion a year. Beyond offering an immediate illustration of Wisconsin’s folly, there are other insights into this deal.

Tax incentives, which Bezos suggests will be a key part of this deal, should be viewed by all citizens with some skepticism. Business relocation accounts for a vanishingly small share of jobs here and elsewhere. The best data I have seen suggests that maybe 1.5 percent of current net employment in Indiana is due to firm relocation.

More importantly, there’s little real evidence that incentives play a leading role in firm relocation decision. On the contrary, most real research in the matter suggests such seemingly mundane factors as school quality and safe, attractive neighborhoods plays a larger role in the location decision of firms than do incentives.

The best way to think of tax incentives is as compensation that a community must pay for its flaws. And that leads us to the next lesson of Amazon.

Indianapolis and Fishers already have announced a partnership in crafting a proposal for Amazon and have invited other local governments, notably Carmel, to participate. We should welcome regional cooperation, but doing so on a business development deal is especially tough.

The simple reason is that the actual firm location within the greater Indianapolis area hardly matters. Once the inevitable slew of incentives are handed out, the only economic benefits will flow to the communities where workers decide to live. And this leads to my final point.

The business attraction model that has so long been the widespread hope across much of Indiana has largely failed for the simple reason that footloose firms (firms that are able to relocate) represent a vanishingly small share of total employment.

Big deals tend to cause otherwise sober politicians to act like drunken sailors. What we need instead is a new model of economic development, where business attraction activities occur in regions, such as the greater Indianapolis area. These places can afford experienced professional staff who should be agnostic about the location decision of a firm within the region. They would know full well that the benefits follow household locations, not that of headquarters or factories.

This would leave local governments the job of making themselves the attractive place to live, generating a competition for excellence in schools, neighborhoods and downtowns. This is a complete reversal of five decades of economic develop policies and practices that seek to commoditize workers and communities, driving down investment.

Those policies failed and far too many communities spent the last few decades paying incentives to compensate for poor schools, potholed streets and vacant downtowns.

The simple fact that Indianapolis is on the short list of potential cities is because so many communities across the region have been investing in themselves.

The greater Indianapolis region will prosper and grow because of these decisions, with or without Amazon’s HQ2. That’s a lesson all of Indiana should heed.

Michael Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected].