The saga of Amazon.comâ€™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. Iâ€™m happy to see that Raleigh, North Carolina, my own top pick, made the list.
But thereâ€™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 differences in companiesâ€™ location decisions -- in other words, they cost a lot and yield little benefit. Angela Blackwell, chief executive officer of the urban-affairs think tank PolicyLink, noted that even when a city succeeds, 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 â€śrace to the bottomâ€ť that causes many cities to divert funding from services that help their poorer residents.
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 Institutionâ€™s Metropolitan Policy Program, has offered concrete ideas for how companies like Amazon can accomplish the latter.
The urbanists raise valid concerns but tend to overlook the value of such city competitions. First, the economic benefit of having a big company like 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, Dell and others did in Austin, Texas.
More importantly, competition can be healthy for cities nationwide, even ones that donâ€™t win. The â€śrace to the bottomâ€ť 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 like law enforcement, infrastructure, firefighting, education, transit and parks that private companies wouldnâ€™t provide enough of on their own. But thereâ€™s no guarantee that government always gets these things right either. 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 donâ€™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 incredibly tricky, 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 worsen the situation. tomâ€ť will come to pass.
But itâ€™s also possible that competition for corporate investment will cause cities to spend more on local public goods.
Noah Smith is a Bloomberg View columnist.