Photo Credit: Rober Scoble, CC BY 2.0
Amazon, obviously embarrassed at the way their HQ2 process has been received, leaked the results of the competition the night before Election Day, ensuring coverage will be largely muted.
Amazon has reportedly decided to split HQ2 between two locations, New York City (Long Island City, Queens) and Washington (Crystal City, VA).
I will have more analysis over the next several days, but this shows that the superstar effect is alive and well. Amazon chose note one but two elite coastal cities for its new headquarters.
There’s no other way to slice it: Amazon repudiated the heartland with this decision. This was probably the ideal case for a heartland choice. It was not just a small executive headquarters but a gigantic number of employees. And Amazon, having lower margins than say Google, has to be much more cost conscious. My own analysis turned on the question of whether or not Amazon would be concerned about costs. I thought they would be, but it turns out they didn’t care. No matter what subsides Amazon extracts from New York and Virginia, they certainly won’t offset the labor cost differentials in those locations.
A friend of mine who works at Google several months ago predicted NYC, saying he thought that Amazon was looking for the “upgrade HQ.” It will be interesting to see if the center of gravity in the company tilts away from Seattle. And where Bezos himself spends most of his time. Another correct prognosticator was Joe Cortright, who predicted Amazon would pick multiple cities so they could retain leverage over time to keep extracting more subsidies.
This choice is a profound challenge to much of America, and particularly to red state philosophies of economic growth. At the high end of the economy, where the most value is being generated and where much of the future of the country is determined, the critical factor is ability to hire top 1% type talent. These companies need the best of the best. And that talent is located disproportionately in the coastal elite cities.
As one person tweeted, “A friend is the founder of a fintech company. They want to hire more college graduates to their Austin office instead of NYC. New talented recruits have multiple offers & most want to be in NYC, not Austin. Austin isn’t exactly a horrible place to live.”
At this level, cost is essentially irrelevant at present. The ability to attract A+ caliber talent is all.
That’s not to say heartland places can’t be successful in many ways. But it won’t be at the elite tiers of the economy.
The Biggest Loser
The biggest loser in this is Chicago. Chicago had the urban location, transit, a great pipeline of talent from the Big Ten, and lower costs. That’s why I picked Chicago as the favorite in my analysis. It checked every box at some level and had lower costs than the coasts to boot.
It didn’t matter. Real estate magnate Sam Zell attributed this to the city and state’s political and fiscal problems, saying, “On a pure competitive basis, Chicago is far and away the No. 1 place that Amazon should pick for their second headquarters—major international airport, major universities, talent, etc.—and yet if I were Amazon, that’d be the last place I’d consider because you’re taking on, excuse the expression, pre-existing conditions.”
This could well be true. Undoubtedly these items are a huge boat anchor on the city, no matter what local boosters might say.
But the talent issue shouldn’t be overlooked. Having lived in both Chicago and New York I can tell you that the caliber of talent is as different as night and day. Chicago has a ton of solid Big Ten type recruits. They are drawing the top 10-20% type people. But Chicago is very weak in top 1-2% types, and that’s a huge handicap when you are trying to position yourself as an elite player. You can’t do it without elite talent, and Chicago doesn’t have nearly enough of it. I wouldn’t be surprised if this were the key factor for Amazon.
Dallas and Atlanta were the other heartland places that could have handled the job influx. But they can console themselves by saying that they weren’t urban enough. The Columbuses and Indys of the world can feel good just to be included on the final 20 list.
But regardless of where you are, this is a big negative indicator for heartland competitiveness at the high end of the economy across the board.
I’m not surprised by this, and I don’t devote much mental energy to worrying about it. In a way, it’s probably a healthy and valuable reminder that the Rust Belt will need to find its own path forward, and that when the next 500 Pound Gorilla actually arrives, it will probably be an effect, rather than a cause, of renewed economic health.
It seems to me they didn’t really go for an HQ2. It’s more like two cities tied for 3rd place – two HQ3s, in other words. Perhaps that will evolve in the future. As you say, it will be interesting to see if the center of gravity shifts.
I would not count out one or more of the other 18 sites being considered for some other Amazon operations center either. Especially now that Amazon knows how much subsidy they can get for each site and what each site offers, in detail.
I have a hard time believing Amazon will reach the 50,000 headcount across these two very high cost locales. My picks where Dallas, Atlanta and Raleigh, based primarily on the requirements in the RFP of employee count and solvent governments. However the RFP was more a vague wishlist than hard requirements and in fact some of the asks were contradictory, eg. ‘solvent governments’ and ‘mass transit’.
Hi Aaron – great analysis. I agree with Zell on the benefits of Chicago, but not sure I agree with the downsides.
I have not lived in NYC, but I have lived in DC and Chicago. I don’t think the talent is better in DC than Chicago, and I’d say that a case could be made that it’s worse. When I was there, basically everyone worked or the government or on the hill or for a group working with the government (just not much innovation). I know it is changing, but I don’t think it’s changed that much. Plus, Amazon will never be a bigger employer than the federal government – I think their influence will be muted. DC was my first home after college, and I (to some degree) always wanted to move to NYC – seemed far and away a better place to live.
Agreed that the Big Ten talent is top – you have covered this extensively. I live in the Bay Area now and after the standard CA schools, I see more Michigan, Wisconsin, and Indiana gear than other schools – even places like Oregon and Colorado. (Not empirical, I know!). I also believe a lot of U of I grads come out here given they have a good engineering school (maybe they aren’t as overt about it). I have no data about this – but I can’t believe a lot of these grads would pick DC. If they are from the midwest, they likely have been to Chicago. So moving to DC would be a slight downgrade with a 2x cost of living increase! (harsh, maybe…) If you want to attract them, it has to be Chicago (close to home) or what’s considered a real upgrade – SF or NYC.
So, the NYC pick makes sense to me. The DC pick does not.
Amazon did not pick DC, they picked Crystal City. Big Difference. Crystal City is across the river from DC and next to the Pentagon and DCA National Airport. It is basically owned by one developer and has had 20% vacancy rate due to BRAC related move outs. It has two subway stations and a important commuter rail station with room to grow. It’s in retrospect a very obvious choice if you want to be the Washington DC region.
My point is that I don’t understand why they want to be in the DC region… That’s probably an ok spot in the region, though.
Assuming this all goes through, DC makes sense because it’s our nation’s capital. Bezos wants to have the ear of the federal government at all times. Plus a Crystal City skyscraper is great place to cackle at the White House from.
Oh Jesus, we’re talking about metros. If it’s Crystal City, it’s DC.
Come on.
they are not the same nor are they in the same state / district. Location, politics and history matter. here is a good sum up of Crystal City https://ggwash.org/view/69791/crystal-city-is-probably-ready-for-hq2s-transformation
WOW, it’s like you totally ignored the point of cities as metros. The political state boundaries are irrelevant to this point.
They picked DC to cherry-pick underpaid tech talent from the federal government. Let the government recruit and train them out of college, then steal them away without having to worry about the government beating you on compensation.
I feel like “repudiation” is the wrong word. Chicago is great and it’s big. New York is also great and it’s bigger. The D.C. area is almost the exact same size as Chicago’s MSA, but it’s part of a megalopolis. If talent is what matters 1st and a connected, urbane environment is 2nd, this choice seems to make sense?
When Amazon looked for a place to relocate, it chose urbanity over suburbs. That value decision is going to benefit Chicago more than most other U.S. city because of Chicago’s relative affordability. If you need a big talent pool, walkabilty, transit and cultural amenities, there are only a few places in the U.S. you can get that and Chicago is one of them. And it offers a much higher quality of life than non-coastal peers like Dallas like Dallas, Miami and Atlanta, depending upon ones values. Chicago is going to get its share. Just in the last few years:
-Between 2000 and 2013, Chicago metro gained 545,484 people with college degrees. It has the highest percentage of residents with a college degree of any large U.S. city. A trend that does not appear to be slowing down.
-Chicago is tied for #7 globally (with Sydney, Boston and Toronto) for most innovative cities. Up from 47 in 2010
-Chicago is second only to NYC in number of fortune 5000 companies in the city.
-For the sixth year in a row in 2017, Chicago was the top city in the US for for foreign direct investment. #5 globally behind London, Paris, Singapore and Amsterdam.
-5 of the top 10 fastest growing fortune 5000 companies are in the Chicago area in WI, IL or IN. Two are in Chicago.
2017: #1 Restaurant city in America
2018: #2 in quality of life behind NYC
2018: #2 in U.S. behind Seattle in construction
2018: #1 City for expansion, Site Selection Magazine. Again.
Anyone can ignore or discard a few of those bullet points and the pattern is the same.
These are great points! So while Amazon may not see this – others do. I think Google’s second biggest office is in Chicago, right?
Another aspect – Amazon clearly wanted incentives from the government and given that the DC metro is really three different states and has a history of not necessarily fairly apportioning costs/agreeing (see Metro), I wonder how they’ll actually extract value/benefits. For example, are DC and MD going to add a sales tax to improve Metro when the HQ is based in VA? Conversely, will VA pay for whatever Amazon wants even though undoubtedly many employees will live in DC proper (and some in MD)? And, the Metro has received a lot of funding from the federal government, since it transports many federal government employees – does the federal government pay for improvements to help Amazon (upgraded stations, new lines, etc)… This seems like a messier situation given the governmental smorgasbord…
The other take on all this – what if different Amazon departments just choose NOT to move to these cities? Organically, what if other cities become bigger Amazon offices? I think this could be what ends up happening.
Put more simply, Chicago doesn’t need Amazon – period.
No city that Amazon would seriously consider “needs” Amazon. And as a resident, I’d be super jazzed if Amazon chose Chicago. It’s fun to win things. And it’s fun to see the good press and have the envy of others. And it’s nice to receive the validation that things you like are seen as good by others. I wanted the Olympics too. I just don’t see this as a “repudiation” but more as a win-some/lose-some sort of deal.
Chicago’s a successful place and is well positioned to be more successful in the future.
Brett – agreed, did you read this: https://www.chicagobusiness.com/news/dear-amazon-call-us-when-you-want-real-hq2
Silly, chamber of commerce nonsense. Most of these “facts” are quite obviously fabricated (for example, per Census, Chicago is barely in the Top 15 in metro-area construction numbers, and Seattle isn’t in the Top 5).
The reality is that Chicago doesn’t measure up to the coastal cities. It’s the dominant hegemon of the Midwest, but doesn’t have the cosmopolitan offerings or job opportunities of the major coastal cities. Chicago is to NYC as Indy or Columbus is to Chicago. Housing costs are lower because it’s less desirable and a worse investment (worst housing appreciation of any major metro since recession per Case-Schiller Index). Chicago is consistently overrated by its boosters.
I personally never thought Chicago was a top contender. But I also didn’t see New York coming either. I grudgingly concluded that it would probably be in the DC area. Here’s what I wrote previously: https://metroshake.wordpress.com/2018/11/06/amazon-hq2-its-northern-virginia-and-new-york/
Bezos likes DC. He owns a home there and the Washington Post. Amazon stands to gain from good old fashioned rent seeking. Federal contracts are very lucrative and prop up some major corporations like BoozAllenHamilton, Lockheed Martin, SAIC, and so on.
Like Chicago, I assumed New York was too expensive and congested and had too much red tape and special interests group demanding tribute and loyalty – politicians, unions, and so on. DC has all these things too, but the federal connections were too enticing to pass up.
I dislike the term “heartland” because it’s way too generic and there’s way too much variation among metros and regions to just lump them all together by virtue of not being in the Northeast, California, or Pacific Northwest. As for stagnating metro regions, they never had a chance. Top talent doesn’t want to be there, nor does ‘pretty good’ talent. As for the boomtowns, the only big ones that had a chance in my mind were Atlanta and Dallas. Atlanta has a modicum of transit-focused urbanity, and they both have world-gateway airports, and low costs of living and doing business. And while the smaller booming (Austin, Nashville) and somewhat-booming (Columbus, Indianapolis) metros that made the top-20 are also attractive, they’re too small and isolated with too little direct air service to be serious contenders.
I agree this is, in some ways, a blow to the nation, further concentrating the power elite in a handful of cities that already have too much. We need to think of ways to not just have the so-called “heartland” race even further to the bottom. If we keep doing what we’re doing, heartland cities and metros will only further gain the sorts of footloose businesses, the kind that pop up in anonymous industrial parks rather than in office buildings, that will pick up and leave at the drop of a hat or a well-timed tax incentive from a scheming governor in a neighboring state. Rather, let’s get the elites to redistribute themselves away from the global talent-magnet metros and into the heartland areas that could use their services. Public universities offering tuition forgiveness for grads who remain in-state at least 10 years, and so on.
New York, particularly Long Island City, makes sense (not just with incentives) if you consider the expansion of Amazon Studios.
I predicted a stupid post like this from Aaron and it happened like clockwork. All to bolster his little “Superstar” thingy he’s so sold on.
Nonsense. There will be no “Top 1%” working in these Amazon offices. This is not a repudiation of anything. This is just Jeff Bezos expressing his personal preference.
There is little bad news for Chicago on this one. Inaccurate read….
I’m also somewhat perplexed by Renn’s fixation on the 1%. Do those folks really want to work for Amazon? Outside of AWS (and maybe Alexa), most of what they do is run-of-the-mill information technology and administrative work (e.g. running warehouses).
It seems to be the vast majority of the 25k jobs at each site will be ordinary corporate jobs, but now they’ll have to pay a premium for those positions. I think it would have been more sensible to have HQ2/3 in a lower cost location like Chicago or Atlanta, but have the R&D and engineering sites at an “elite” location.
I also agree that this essay was pretty weak, lacking evidence, elitist and insulting. The author is basically saying, without evidence, that the people that live in the middle of the country are not as smart, talented or capable as those living on the coasts. I guess he thinks we’re all just a bunch of country bumpkins wearing our Big Ten “Go State” tee-shirts. For me, I’ll put my midwestern talent and that of many of my colleagues up against any one from the coasts.
Based on the way Amazon has treated its workers, its fighting against helping the affordable housing tax issue in Seattle, and its effects on rent, I’d say that New York, Washington and their coastal “elite” cheerleaders are welcome to have it. This whole HQ2 thing has left a bad taste in my mouth about Amazon and Bezos.
It looks like Amazon will be the exception, but I still see the beginnings of a larger pattern of expansion of investment into the American interior. Again, Denver, Nashville, and the four texas metros show the way. I think that Minneapolis, Kansas City, Columbus, and Indy show a more modest but still significant ability to produce profits for coastal investors upon which they might build in the years ahead. On thing is clear. a low cost of living does not attract capital. If it did, Tupelo, Mississippi would be drowning in new investment. Capital will find a city if that city shows it can allow you to make a profit. That’s the thing that stagnant and slow-growing cities haven’t done for generations now. Cities dominated by “legacy” companies are actually handicapped by their domination by large established employers. In the end, one percent of something is worth more than one hundred percent of nothing. The world doesn’t need Cincinnati, Cincinnati needs the world.
Damn. In the end, it is always somehow about Cincinnati. Even in a post on a topic not related to Cincinnati.
This post is related to metros across America and their relationship to Amazon and the tech economy. Cincinnati is one of those metros.
“Damn. In the end, it is always somehow about Cincinnati. Even in a post on a topic not related to Cincinnati.”
It does seem that way. This blog often discuss the Midwest and naturally Cincy could be on topic a lot, and in fact has been the topic, but it seems less relevant in this discussion since it wasn’t a finalist.
I’ll look at this another way — that the Midwest dodged a bullet by shelling out billions of dollars to support a multi-multi-billion-dollar company owned by a hundred-billionaire-dollaraire in a scenario where 50,000 jobs may have never appeared. Instead, the Midwest can use its resources for something more productive and be less of a sap about begging some big name to come in. After all, there is study after study showing that these incentives, whether they’re for auto plans, stadiums or tech companies, fail to fulfill their initial promise, and that in fact may result in no net gains in jobs or the economy at all. The third link for a study in North Carolina that showed 40 percent of the companies that got state incentives hired exactly ZERO workers.
https://www.epi.org/publication/unfulfilled-promises-amazon-warehouses-do-not-generate-broad-based-employment-growth/
https://www.stamfordadvocate.com/business/article/Study-shows-incentives-often-fail-to-spur-job-13188661.php
https://www.wral.com/state-leaders-job-promises-continue-to-come-up-short/14949497/
Let’s look at the Foxconn deal in Wisconsin, which was touted by Trump and Scott Walker as such a great thing, and now Walker may lose a third term because this deal is becoming such a boondoggle. First, the promised 13,000 jobs — mostly lower-skilled industrial — is now turning into 3,000 jobs that require more skills because it turns out the plant will be heavily automated. Which means that it’s likely a lot of employees will come from neighboring Lake County, Ill., where people more likely have those skills. And there are also reports Foxconn is going to import a lot of staff from China to fill in holes. I guess that’s a boon in one way because of the addition to the state’s population, though I wouldn’t be shocked if they settle in… Lake County, Ill., which demographically and income-wise is a better fit. So, basically, Wisconsin is giving away up to $1 million per job, degrading its environment, sucking out more Lake Michigan water, and getting next to nothing out of it.
https://www.newyorker.com/news/dispatch/did-scott-walker-and-donald-trump-deal-away-the-governors-race-to-foxconn
If localities really want to spend state or local money to give business incentives, why not find local candidates and work with them? It doesn’t have to big tech names or large manufacturers. The day of the holy grail of 1,000-plus jobs in one fell swoop is really over, yet incentive programs haven’t changed to meet that reality.
I think some big economic development bets that pay off go unreported/ignored.
Indiana Gov. Bob Orr (R) and his lieutenant John Mutz (who ran against Evan Bayh in 1988 and lost) took a lot of guff over ponying up $25,000 per job for the original iteration of the Subaru-Isuzu plant in Lafayette, Indiana. And then Gov. Bayh (D) doubled down to attract Toyota to Princeton, IN in 1996…followed by Gov. Daniels (R) luring Honda to Greensburg in 2008.
Today, SIA employs 4600, Toyota 5500, and Honda 2400. There is also an extensive network of first-tier and second-tier suppliers to those companies in Indiana, Ohio, and Kentucky and I’m not counting those spinoff effects though they are very real.
Now, I realize this isn’t 50,000 well-paid office jobs, and it is only a dent in making up for the GM, Ford, and Chrysler jobs lost in the past 30 years in Indiana. But it’s more than Foxconn, and Indiana didn’t give away billions of dollars over 20 years.
What I wonder is whether Amazon will have any spinoff/secondary effects other than janitorial, real estate, food service, and maybe airline service.
One thing that’s stuck with me — a long time back, when I was a reporter for the Daily Journal in Franklin, Ind., I attended some Statehouse ceremony celebrating some big deal that got some plant opened there. The company basically told me straight out that they had already picked the site from day one — but they wanted to make sure they got everything they could out of the state before making it official. I’m sure Amazon has long known what site it would pick. It had to create the illusion of competition in order to extract what it could from local and state governments.
I’ve read that Amazon has a 2x jobs multiplier in Seattle:https://www.bizjournals.com/washington/news/2018/07/20/the-amazon-effect-the-good-the-bad-and-the-ugly.html
Traditionally manufacturing has had a 3x or better multiple and they tend to be better-paying jobs.
Or how about this — if what businesses want are educated workers, good public transit and strong infrastructure, maybe instead of spending billions of dollars on Foxconn and Amazon, states and localities can spend it on education, transit and infrastructure. Of course, wise spending on long-term investments don’t give you a ribbon to cut or immediate job gains to brag about. Also, let’s call these deals what they are — income redistribution to the very rich. If Wisconsin spent $4.5 billion to give its citizens a basic income, you wouldn’t hear the end of it. But sending it to Foxconn even after it’s long-established these deals never work — no problem.
https://www.bloomberg.com/opinion/articles/2018-11-06/wisconsin-s-deal-with-foxconn-is-the-worst-of-corporate-welfare?srnd=politics-vp
Agree with your general point about misplaced elite priorities, but Wisconsin has a population of almost 6 million, so that’s less than $1000 a person. Not much of an income.
Another piece of news this week is that IBM is acquiring Red Hat for $34 billion, which surely means many new multimillionaires in the Research Triangle metro. Some of those millionaires will likely want to invest in startups, or found their own companies.
In case my point isn’t clear, the Red State model of NC and Texas (and probably Georgia as well), is for the government to spend enough money to get good research universities, adequately but not extravagantly fund public education and basic infrastructure so that they are good enough, and keep taxes and housing costs relatively low. That strategy was never intended to attract the businesses that need the very best of the very best employees. Instead, it is designed to lure employers to set up offices and operations employing the merely very good employees. Occasionally those types will found their own billion dollar companies, fueling a local business ecosystem.
good point!
Meanwhile, Wal-Mart is still HQ’d in Bentonville, AK, pop. 49,000.
I question the extent to which New York City attracts “talent” that doesn’t exist elsewhere. Having parents who can support an unpaid internship and speculative move to the most expensive city in the country doesn’t seem like a “talent”.
S.C. Johnson and Son is still in aforementioned Racine, Wisconsin, population 89,000. I think the similarity here is that both corporations still have lots of family control (the Waltons own 48% of Walmart, and Johnson Wax is still family-owned).
I question the extent to which a corporation can only succeed with top 1-2% talent. Certainly, you don’t want a bunch of dolts running the place, but in a huge company, talent would seem to be just one factor among many (like corporate leadership, another overrated factor).But it seems Amazon disagrees.
In reading about all this, I was wondering early today – is Walmart just going to cherry pick all this data and open up offices based on the proposals? It’s clear to me that they are not going to just give up – Amazon will have a fight on its hands.
And – to the reference about Amazon collecting lots of data on each of these cities – any corporation could just FOIA all that correct?
Individual states may have laws protecting/redacting economic development packages. Indiana is one, so it is unlikely anyone will find out what Indianapolis offered Amazon.
Others have pointed out that Bezos has a mansion in Virginia. Does anyone recall a study from the 1970s of corporations which moved their main offices from New York City to the Connecticut suburbs in the preceding decade or two that showed almost all of the relocations were within some short distance (like 10 miles) of the CEO’s home? Sure would be interesting if that still held.
I have read that CEO homes are one of the best indicators of corporate relocations (or maybe THE best). But if Amazon is such a data-driven company, it seems odd that they would just pick a place because the CEO has a nice home there.
There must be a bigger plan, but even if Amazon is worried about government regulation and calls that it is a monopoly, congress is elected by all the states – and members of congress likely will not care if they are killing jobs in DC. They care about jobs in their districts.
The plan could be that every staffer in DC has a neighbor/roommate/romantic partner/friend who works or has worked at Amazon.
In most “company towns” that happens, even large ones. In my hometown, almost everyone knows someone (neighbor, roommate, romantic partner, friend) who works for or retired from the large pharma company headquartered here.
It’s a numbers thing. Any company that employs about 1% of the local workforce in a full range of jobs from CEO to PhD scientists to admin assistants to factory workers to tradesmen touches every level of wage and education.
And with 25,000 potentially working for Amazon in the DC metro, they’ll probably have a little more than 1% of the labor pool; as pointed out above, while the cross-section won’t be as broad as a manufacturing company, they will have lots of jobs that aren’t filled by computer science jockeys.
I would assume that part of the reason to put so many Amazon employees in the DMV metro is in order to turn DC into a “company town” for Amazon, as who the professional politicians (and their staffers) regularly interact with does have a strong influence on what they are aware of and focused on (which is just human nature). So basically Amazon gets 25k employees in DC and as a bonus gets 25k lobbyists for free.
Young grads spend a lot of money establishing themselves in big cities because that is where the experience and connections that define ‘talent’ are in the modern economy. That is not somehow dishonest or fraudulent. Working your way through some second tier state college in a third-tier metro is not somehow a more honorable path to success. It IS clearly a less promising approach these days. If Amazon is going to big metros, it is clearly a good move for those who can afford to move also. The new economy is not a con game or ponzi scheme. It just works differently than the old economy. If can adapt or give up and accept declining fortunes. Amazon isn’t the problem. Failure to adapt to the new economy is the problem.
Yes, those criticizing Aaron’s “elitist” post need to reread it. He is reporting facts about how the new economy seems to be working, and speculating on the implications, not spouting elitism.
The economy has largely bifurcated into global and local, which is at odds with lessons I learned in business school 40 years ago about business and industrial scale.
Today it’s about global product sourcing, “perfect information” (in the classical economics sense) via internet, and a dramatic change in Federal enforcement of US antitrust law; there you have the top level modern economy in a nutshell. It favors concentration, big data, and global scale/reach…and niche players.
As I posted above, Mr. Renn did write that this is a repudiation of the “red state model of economic growth”. However, I don’t think anyone in Austin, Atlanta, or Raleigh are losing any sleep over this decision. As those three metros show, there is still plenty of growth and wealth outside of the top 1%. To put it simply, I think Mr. Renn is drawing incorrect conclusions from the facts.
Now, Amazon’s choice is a repudiation of pinning your hopes on luring one big outsider or one big industry to revive your economic fortunes. But as rkcookjr. pointed out above, people have known for a long time that incentives are a risky bet with an overall poor expected rate of return. So if anything Amazon’s choice actually confirms the wisdom of the Texas/NC model of investing in research universities, affordable housing, adequate infrastructure, public schools, and public services, low taxes, and a business friendly environment.
California was proof of that already…in the 50s through the late 70s/early 80s (the Warren-Brown-Reagan-Brown II years).
TX and NC are just a couple of decades earlier on the same curve, and as they add more well-paid tech jobs they too will move in the same direction.
Eventually the growth slows, the oil boom fades (California had one of those too). The infrastructure ages, the civil servants hired during the expansionary years start retiring, and the exurbs expand to the 1+hour commute range to accommodate “drive ’til you qualify” because the closer suburbs are so expensive…that’s when the low-tax/cheap housing model begins to break down.
Given how much people hate densification, I don’t think anyone has come up with solutions to the problems brought on by successful imitation of the California model.
Is it really “successful” if they just repeat what California did 20-30 years later, and get the same end result…water shortages, congestion, and rising taxes and regulations?
The most dense places are the most productive places. All the city centers of America’s most successful cities are densifying. New York City has an economy larger than a dozen states.
Some possible reasons for NYC/ DC:
1. Aaron’s right, its about the 1% of talent. It’s cheaper to hire a few good programmers than lots of mediocre ones. NYC now ranks with Seattle in terms of jobs with Silicon Valley companies. DC has plenty of Beltway Bandits to raid from.
2. Amazon’s one of the biggest companies, and these are world capitals, alongside London, Paris, Mumbai, Shanghai and Toronto.
3. Cosmopolitanism: Amazon hires many Chinese and Indians. They’ll feel more at home among ethnic communities in these cities than in places that give Trump a big welcome.
4. Urbanization: There are transit lines to or near these places. Long Island City is all of three miles from the Brooklyn Navy Yards, and Crystal City is near Georgetown and Alexandria.
5. Alibaba: If Amazon wants into the Chinese market, it will need DC trade officials helping out.
Toronto doesn’t belong in that list. It’s a tier lower than them.
I think Amazon’s decision reflects its current business priorities more than finding a fun dorm for a generic “tech” talent.
They could have gone with Chicago because of the city’s historic claim to mail-order retail and the nation’s preeminent logistics hub … except Amazon already mastered all that.
They go to Virginia because they see a lucrative future in defense and other federal contracts. They go to New York for media and marketing.
I know a guy who left a professorship at MIT to come to the Seattle area to oversee the artificial intelligence division of Amazon’s robotics department. Two out of three, may more, of the jobs at Amazon are highly technical. That talent is hard to find, and even harder to move.
I was a bit surprised that NY won out-I thought given the expense and the fact that Amazon would be just “one of the guys” there would dissuade them. Really same in the DC area- you’ll never be bigger than the Feds in that town. But if they’re splitting it up then they’re not really HQ2, they’re just big satellites, so there’s that.
I really see this whole ” superstar cities” effect as similar to sports teams. We see the Yankees, Red Sox, Lakers, Maple Leafs, etc. Continually drawing in the best talent via free agency. Now does that mean other teams can’t compete? No, but they have to do it differently. Don’t count on landing ther biggest free agents. Instead you need home grown talent. Grow the farm system, capitalize on your strengths and put the infrastructure in place for success. Maybe you won’t have as much success, but you’ll have your share of it
Columbus has had recent success with homegrown tech companies that focus on insurance and back office health care functions. Makes sense, since those are two of our big industries. And they’re not as sexy as Amazon, but that’s ok. You need to build your own community, not just hope someone plunks down a gigantic jobs hub from beyond. At the end Iof the day that’s how most job growth occurs, organically.
Just wanted to make a few comments/corrections regarding the Foxconn project. I’m not a fan of soon to be former governor Walker (having been one of the >100,000 protestors in Madison a few years ago). I think Walker overpaid, but I also think (given the results of the HQ2 process) that it has the potential to be a more impactful project. Most of the national analysis and reporting on Foxconn seems to be either flawed to just plain silly. It’s worth noting that you don’t have to speculate on the details of the Foxconn incentive package as the full 29 page signed contract is posted on the Wisconsin Economic Development Corporation’s website.
The reported $4.5 billion of “incentives” include $400M for the reconstruction of a 30-mile or so section of I94 (a long planned project, delayed by Walker’s underfunding of roads, but for which the Foxconn project resulted in a $150M award of additional federal funding earlier this year). So a positive for State taxpayers.
About $1 billion of the incentives are water, sewer, power, and road infrastructure. $720M of this will be funded through property tax revenues generated by Phase 1 of the development for which Foxconn has guaranteed an assessed value of $1.2 B by 2022, and for which it will make payments based on this minimum threshold if actual valuations fall short. So worst case, the local governments end up with a master planned 3,000 acre business park on a corridor at the center of a 12M person urban area that is already experiencing explosive industrial development.
The main criticism is with the state incentives which include an estimated $150 M exemption from sales taxes on materials used for construction, up to $1.5 B in job creation tax credits (capped, but essentially equal to 17% of zone payroll through 2032 and achievable if Foxconn hires and retains 13,000 workers making an average of $53,875 per year through 2032), and capital investment tax credits of up to $1.35 B if Foxconn invests $9B in the defined project “zone”. The capital investment tax credits essentially mean that Wisconsin taxpayers will be paying 15% of the facility, but these costs will likely be a fraction of Foxconn’s finance costs alone. Wisconsin taxpayers are making an enormous bet only it’s not nearly as large a bet as Foxconn is making on a project that has never been attempted at this scale in the US.
It’s worth noting that Foxconn must achieve minimum job creation and capital investment goals each year through 2032in order to qualify for any of the tax credits (1820 jobs by 12/31/20, 5200 jobs by 12/31/22, 7800 jobs by 12/31/24, and 10,400 jobs by 12/31/26). There is a clawback provision in the event of various default scenarios – such as not achieving 5820 jobs by 12/31/23, which would make Foxconn subject to a clawback of up to $1.465 B with 25% subject to a personal guarantee by the chairman of Foxconn.
A boondoggle for Wisconsin. Time will tell, but the contract is much better than commonly reported.
The narratives and reporting seen to be biased by antipathy toward Walker as well as antipathy towards Foxconn (the company known for its factories in China equipped with suicide nets). But the standard narratives on Foxconn and its plans in the US seem absurd. It grew at 15% last year and is now the 24th largest company by revenue on earth. It has achieved this growth on 3% profit margin. Its stated plans in the US are to transform to a company that increasingly develops, builds, and markets it’s own cutting edge technology (through which it would achieve 5 or 10 times higher profit margins, with a proportionate increase in its founders net worth). The plan in 2018 is clearly different than in years past when it was focused on creating additional low margin production facilities (and failed to come through in Indiana, Pennsylvania, Brazil, India, etc.).
One of the comments in this thread is on the potential for many of the jobs to be filled by Illinois residents. As a reminder, this doesn’t really matter in terms of the return to the State of Wisconsin as the income would still be earned in Wisconsin and subject to Wisconsin income taxes.
Other negative stories resulted from the change in plans from a facility/campus that was to employ 70-80% assembly workers to one that is now planned to employ 10% assembly workers and 90% knowledge workers. Even the 10% of workers would be skilled robot operators. The original plan was more aligned with Walkers economic development model and his voters priorities but the current plan seems to have far greater potential for long term transformation of SE Wisconsin. The technology campus as currently envisioned (3000 acres serviced by driverless vehicles) will be unmatched in scale and design by any technology campus I’ve seen in California (which are hamstrung by land costs).
Milwaukee gets the North American headquarters for the 24th largest company on earth and one of the largest technology companies. Foxconn has purchased a full block site on Wisconsin Avenue in downtown Milwsukee and hinted at the potential for a major office tower. The will count towards the 13,000 target but the investment would be in addition to the investments required at the site in Mt. Pleasant. Foxconn has also pledged $100M to construction of a technology center at UW-Madison.
Two more comments regarding Foxconn. First, my sense is that the leaders of Chinese (and Taiwanese) companies have a different thought process when investing in the US. Perhaps fresher eyes, and minds not as colored by the dominant economic narratives of the US, as well as a much greater sense of the magnitude of change that can occur in an urban area in a short time. Whatever the reason, they see the advantages of investing in the Midwest and it seems in particular in the greater Chicago economic area. This has proven true with Milwaukee Tool which was subject to several decades of various US business trends (southern strategy for plant locations, highly leveraged purchase by Wall Street investment banks, etc.) but laying off its last factory worker in Milwaukee in the early 2000s and down to about 200 local employees in Milwaukee when purchased in 2005 by its current owner based in Hong Kong. I remember thinking that surely this purchase would be the final blow to Milwaukee Tool’s presence in Milwaukee. It turns out the new owner had other plans. Based on current expansion plans it should reach 1650 employees in Milwaukee by 2020 – essentially 100% of whom are knowledge workers earning $75K or more. Revenues have grown from $500M to $3.5B and are projected to reach $5B per year by 2020. It will not surprise me if Foxconn not only delivers on their promises but far exceeds them. The reasons for them not doing so seem to reside in the mindset of American observers and the framing of this project in the current national economic narratives, including those related to Superstar cities, winner take all economics, the dim future for the Heartland, etc. Having just traveled to Hong Kong, Shanghai and Beijing and discussed this project, my sense is that the greatest impact will be on bringing a forward perspective to this region to match what is the mindset in these Chinese cities (especially valuable at a time when so much of America seems focused on returning to an imagined past).
Second thought is how this project relates to the Chicago megacity and barriers to cooperation within this region. The lack of regional cooperation was seen in a widely reported 2012 study as a key factor holding the region back. As noted by many observers this project has the potential to benefit suppliers in Illinois as well as to employee workers living in Illinois, and this was spun as a failing. I think this project could do more to advance this more regional perspective than anything that has occurred to date. It is certainly viewed by many if not most in SE Wisconsin as a project benefiting the region (Milwaukee, subsurban Milwaukee, Racine, and Kenosha). No infighting that I have observed.