Winner Take All

Give Jeff Bezos this: he just pulled off a truly world-class grift. He 1)got an enormous amount of publicity, 2)used dog-and-pony-shows to obtain critical information about what ransom public officials in various locations were willing to pay, and 3)just went forward with the banal practice of opening satellite offices in metro areas where he always wanted to locate and already owned major residences (and, in one case, a newspaper.) While this process was great for him, and a few people who will get desirable jobs, for everyone else not so much:

The question of local government subsidies to entice businesses remains an urgent one (see, for example, The Verge’s exposé of Scott Walker’s disastrous $4.1 billion Foxconn boondoggle), but the HQ2 drama in many ways reveals an even bigger policy failure than that.

Simply put, while locating large pools of high-salary white collar positions in the New York and DC metro areas makes a ton of sense for Amazon, it doesn’t actually make that much sense for either greater New York City or greater Washington. Amazon’s presence will tend to exacerbate those cities’ crises of housing affordability and overburdened transportation infrastructure.

And it makes no sense at all for the United States of America, which urgently needs more economic opportunity in dozens of other metro areas that have a different set of problems.

America needs to find a way to do better than this. Being the home to a very large share of the world’s most dynamic high tech companies is an incredible source of national strength, but in practical terms it does not benefit most Americans. With better policy it could.

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Every jurisdiction in the running for HQ2 was offering Amazon various kinds of inducements, often secretly. With the HQ2 plan apparently scrapped in favor of the splitting plan, it’s not clear exactly what Amazon will be getting in exchange.

These benefits packages are always controversial and will naturally raise the question of whether whatever the public sector will be kicking in is worth the price. But the scarier news for places like New York and DC is the evidence that an Amazon-type influx might not be beneficial at all.

Over a decade ago, housing economists Janna Matlack and Jacob Vigdor investigated the economic impact of unequal economic development and found that “in tight housing markets, the poor do worse when the rich get richer.”

A “tight” housing market, in this case, is a market like greater New York or greater Washington, where the cost of buying a house greatly exceeds the actual construction costs of new buildings. The problem in markets like this is that when the rich get richer — say because a new office complex opens and hires 20,000 to 30,000 people for six-figure salaries — the price of scarce housing rises.

If you actually get a job at Amazon or have the kind of job skills that you plausibly could get a job at Amazon, this will pay off for you because you’ll end up with higher wages that more than equal the higher rent. But if you work in a restaurant or cut hair or clean houses or a drive cab, you’ll probably end up worse off.

This is, however, not an inevitable consequence of the rich getting richer. Matlack and Vigdor find that in housing markets that are “slack” — where there is either plenty of existing housing or it is easy to build new homes so that sale prices approximately equal construction costs — there are spillover benefits. In a slack market, the new rich people don’t impact rents very much but their presence creates new working-class job opportunities. In the right location, in other words, a big new Amazon office park could have been a boon. But America didn’t get the right location.

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None of which is to say that Amazon made a mistake by opening its branch offices in two prosperous superstar cities. Tech workers, rationally, prefer to live in cities that feature multiple tech employers because that gives them exit options and flexibility. That, in turn, means that companies that want to hire tech workers like to operate in cities that other tech companies operate in. That means first and foremost the Bay Area, followed by New York and Seattle, followed by DC and perhaps Boston and Austin.

But the overall dynamic of rich cities getting richer while their low-income residents actually get poorer and the legacy infrastructure and housing stock in the midwest steadily deteriorates is profoundly dysfunctional. The wishful thinking that the HQ2 search touched off followed by its predictable endgame shows this isn’t a problem that’s going to fix itself — federal policymakers need to take a stronger hand in steering these kind of decisions if we want things to ever change.

This collective action problem does not have a solution that is likely to be enacted anytime soon. It would be nice if the Andrew Cuomos of the world would stop handing out bribes to “induce” companies to do things they already want to do, minimizing the benefits to non-affluence residents while the costs rise. And certainly, cities need to take on NIMBYs if they’re going to bribe companies to locate in the metro areas they want to locate in.