Amazon sweepstakes can help losers

The saga of Amazon.com Inc.’s search for a home for its second headquarters continues. The online retail giant recently announced that it has narrowed the field down to 20 cities, including Boston.

There’s a worry that the scramble to lure HQ2 will give rise to wasteful urban policies and set a bad precedent. Already there is speculation that Apple Inc. will build an HQ2 of its own, sparking a similar competition. What if this sort of industrial sweepstakes, used in the past to win everything from auto plants to sports teams, becomes the norm?

Many urban policy experts are worried that Amazon-style competitions will hurt cities, by enticing them to spend too much on tax incentives and other giveaways. A recent roundup of opinions by the Penn Institute for Urban Research showed that this concern is widespread.

Economist Timothy Bartik of the Upjohn Institute, citing his own research, wrote that incentives are unlikely to make much of a difference in companies’ location decisions – in other words, they cost a lot and yield little benefit. Angela Blackwell, CEO of PolicyLink, an urban-affairs think tank, noted that even when a city is successful at luring a big company, the amount spent on incentives usually exceeds the amount of wages and salary received by workers in the city. She raised the concern that Amazon-style runoffs encourage a “race to the bottom” that causes many cities to divert funding from services that help their poorer residents.

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Noted urbanist Richard Florida urged cities to eschew financial incentives and instead devote more resources needed to support economic growth – schools, transit, housing and infrastructure. Amy Liu, director of the Brookings Institution’s Metropolitan Policy Program, has offered some concrete ideas for how companies such as Amazon can accomplish the latter.

The urbanists do raise some valid concerns. But they tend to overlook the value of city competitions, such as the one Amazon sparked. First of all, the economic benefit of having a big company such as Amazon or Apple can far exceed the amount that the company invests in the city – a top company can act as an anchor that creates a technology cluster, as Texas Instruments Inc., Dell Inc. and others did in Austin, Texas.

But more importantly, competition can be healthy for cities throughout the nation – even ones that don’t win. The “race to the bottom” scenario is a concern, but there can also be a long-term race to the top.

The key concept here is that of local public goods. City governments help provide their residents with things such as law enforcement, infrastructure, firefighting, education, transit and parks that private companies wouldn’t provide enough of on their own. But there’s no guarantee that government always gets these things right either.

Special interests can … cause cities to waste large amounts of money.

Often, special interests can block cities from spending enough on these items, or cause cities to waste large amounts of money. Also, prospective new residents in a city don’t get a vote, meaning that cities may fail to spend enough to live up to their true potential.

Getting city government to do the right thing is an incredibly tricky problem, which is one reason local politics tends to be so contentious and full of unpleasant compromises. The urbanists are right to warn that the competition for Amazon and other urban sweepstakes can potentially make the situation worse.

But it’s also possible that competition for corporate investment will cause cities to spend more on local public goods. In order to be the kind of place that Amazon or Apple would even consider, a city needs many things that are also good for its residents. It needs good schools, affordable housing and a pleasant urban environment. It needs mass transit and good roads so workers can get to work. Instead of spending money on tax incentives, cities should be spending money on building the long-term urban infrastructure that makes such incentives less decisive or unnecessary.

Amazon’s urban sweepstakes will only have one winner. But it may prompt a lot of cities to wonder why they lost – or why they weren’t even in the running to begin with. It might be due to dilapidated infrastructure, patchy transit, failing schools, unsightly concrete jungles, congestion, or inequality and the suffering of poorer residents. In order to win the next big round of corporate investment, city leaders may decide to stop listening to special interests, to raise the taxes necessary to upgrade services, or to spend less on white-elephant projects and expensive sports stadiums.

Florida and Liu’s idea – having Amazon help to provide local public goods – would be great for whichever lucky city wins the competition. But the vastly greater number of cities that lose can still benefit, if they resolve to win the next round.

Noah Smith is a Bloomberg View columnist.