Living Social and the Folly of Targeted Job-Creation Subsidies

I’m sad to read that Living Social (where, full disclosure, my sister-in-law works) is going to be laying off 400 employees as the daily deals fad seems to be fading. But this does illustrate part of the problem with the D.C. Council’s recent willingness to pony up tens of millions of dollars in subsidies to keep the company in town.

The tax incentives were nominally about job creation, but a $32.5 million subsidy for a firm employing 1,000 people in its D.C. office most of whom have in-demand job skills doesn’t make much sense on its face. The real issue is that these weren’t just jobs, they were sexy high tech startup jobs—exactly the kind of jobs that every American city is chasing. And D.C. has a particular tendency to view its local economic focus—the federal government and related industries—as a kind of source of shame. Everyone was excited that Living Social started up here and everyone wants it to stay and succeed.

But startups fail all the time. That’s in the nature of the game.

What cities need to do is get less monolithically focused on the high-tech sector and just more focused on the fundamentals. Washington is a great place to launch many kinds of businesses thanks to being at the center of a highly educated and affluent metropolitan area. But it’s a terrible place to grow a business because the Height Act creates an artificial scarcity of office space. It really only makes sense to locate yourself in D.C. if your company is specifically related to the federal government. You can try to counteract that with targeted subsidies, but then you wind up needing to guess which businesses are likely to succeed. If you simply address the underlying issue of unreasonably expensive office space, then sooner or later some successful firms will stick around and grow.

The Height Act thing is a unique D.C. issue, but every city has some version of the fundamentals to worry about. Some respect in which the balance between the cost of doing business and the quality of life could be improved.