Moneybox

New York’s Amazon Deal Will Be a Lasting Monument to Andrew Cuomo’s Economic Incompetence

NEW YORK, NY - NOVEMBER 13: New York Governor Andrew Cuomo speaks during a press conference to discuss Amazon's decision to bring a new corporate location to New York City, November 13, 2018 in New York City. Amazon announced earlier in the day that it has chosen Arlington, Virginia and Long Island City in Queens as the two locations, which will both serve as additional headquarters for the company. Amazon says each location will create 25,000 jobs. (Photo by Drew Angerer/Getty Images)
Thanks.
Drew Angerer/Getty Images

In return for building a large new office complex in a booming neighborhood of Queens, Amazon is set to receive nearly $1.7 billion worth of financial incentives from New York’s state government. But according to Gov. Andrew Cuomo, taxpayers should really consider the deal a freebie.*

“This is a big money-maker for us—costs us nothing, nada, niente. We make money doing this,” Cuomo said at a press conference Tuesday. The governor, who recently won re-election in a romp, noted that Amazon was expected to pay $27 billion in taxes over the next couple of decades, which he described as a 9-to-1 ROI, “the highest rate of return for an economic incentive program that the state has ever offered.”

This is a poor way to do economic math. But it does offer us a useful glimpse into the governing mindset that has led Cuomo to blow billions on corporate subsidies in fruitless and ill-conceived attempts to drive growth.

When it comes to economic development, Cuomo’s guiding principle is that corporations need to be bribed in order to set up shop within the Empire State. “Businesses do not come to New York state without government incentive. Businesses literally shop states,” he said earlier this year. “It literally takes money to make money.” Obviously, lots of other governors would agree with this sentiment. U.S. states spend $90 billion a year on tax breaks and grants meant to woo corporations, which play governments off one another to secure the most generous possible package in return for opening a plant or office.

What sets Cuomo apart is how aggressively he competes in the game. Under his watch, annual spending on state incentives has risen from $2.9 billion to $4.8 billion per year, for a total of $28.4 billion, according to the nonpartisan Citizens Budget Commission. Much of that money has been channeled into development schemes meant to create a high-tech manufacturing base upstate, where factory jobs have gradually vanished. Cuomo was partly inspired by the growth of computer chip research and manufacturing around Albany, which took root thanks to a large dose of government incentives—an effort that is sometimes held up as an example of successful regional industrial policy. But the results have often been embarrassing or corrupt, leaving the state littered with white elephants.

A partial rap sheet: There was the time the state spent $90 million to build an LED lightbulb factory for a company that decided it didn’t need the facility just as the facility was being completed. There was the $15 million soundstage Cuomo hoped would convince Hollywood studios to start shooting movies near Syracuse; it sat largely empty, and the project was eventually “transferred” to county officials for $1. There was Startup New York, the tax-incentive program that only created 408 jobs in its first two years at a cost of $53 million, leading officials to change its name out of shame. Most gravely, the man piloting Cuomo’s marquee Buffalo Billion project to bring more tech jobs upstate was convicted in a bid-rigging scheme in which he sent construction contracts on government-funded projects to Cuomo-campaign donors.

Even when they’ve managed to lure an actual factory upstate, Cuomo’s efforts have sometimes disappointed. For instance, the state spent $750 million building and furnishing a solar panel factory for Tesla that is up and running, but might not be able to deliver on its job commitments.

The individual flops are less important, though, than the big picture, which is that Cuomo’s spending has done just about jack for upstate’s overall economy. As the Investigative Post summed things up in its essential series on the governor’s subsidies earlier this year:

Employment upstate has grown by only 2.7 percent during Cuomo’s tenure – compared with 13.1 percent downstate and 11 percent nationally. Four of upstate’s 12 major metropolitan areas have actually lost jobs since Cuomo took office.

If it were a state, upstate’s job growth would rank fourth-worst in the nation, below, among others, Mississippi.

Cuomo’s upstate misadventures illustrate a simple lesson: When governors try to spark growth in economically struggling areas using corporate subsidies, it tends to fail. They’re simply fighting the laws of economic gravity, which lead companies to locate in parts of the country that are already thriving, because they can find talent or suppliers. There are exceptions, of course. Once in a while, a state hooks a company with incentives, and then others follow. South Carolina, for instance, has a thriving auto-manufacturing sector in large part because it cajoled BMW into locating there with a $150 million incentive package. But even when a company actually delivers the jobs it promises, it rarely leads to an industrial revival. “There are more failures than successes,” Joseph Parilla, a fellow at the Brookings Metropolitan Policy Program, told me. “It’s like spending a lot for a lottery ticket and hoping it pans out.”

The Amazon deal—which is the biggest incentive package Cuomo has offered yet—illustrates the other pitfall with corporate subsidies: When they “work,” they’re often unnecessary.

Contrary to what the governor says, plenty of companies come to New York City without a gift basket from Albany. That includes other tech companies like Facebook and Google, both of which say they don’t receive state subsidies. There is a strong chance that Amazon would have felt compelled to open a large office in New York at some point no matter what, because it’s already a center of media, tech, and advertising, and Jeff Bezos desperately needs to recruit top talent in those fields who would otherwise go to work at his competitors. Even if it didn’t, there are plenty of other growing businesses that already employ thousands in NYC.

As for Long Island City? It was already the fastest-growing residential neighborhood in the entire country. The place is basically a canyon of gleaming and impersonal condos and rentals. If the land Amazon plans to build its new office on didn’t get used for HQ1.5, it would just as likely get used for something else economically valuable—such as desperately needed new housing, without which New York will only be able to grow so much.

And that gets to the mistake at the heart of Cuomo’s math. Even if the incentive package he gave Amazon convinced it to pick New York over, say, Dallas, something else probably would have grown in the company’s absence. The counterfactual to consider isn’t Amazon or nothing. It’s probably Amazon or a bunch of new housing, or some other tech company and a smaller Amazon office. Meanwhile, the grants and tax incentives Cuomo gave Bezos have created a bad precedent that will lead more companies to demand the same.

Cuomo’s overarching problem is that he sees the economy in transactional terms. To him, growth is about offering companies the best deals, rather than making sure the state offers the best workforce and best resources. In this way, he’s actually quite a bit like Donald Trump, who spent his early days after the election trying to personally jawbone companies into keeping factories in the U.S., and views trade as a series of bilateral contests. Cuomo has a better moral compass, of course. But his effort to lure Amazon is a monument to his same fundamental myopia.

*Correction, Nov. 14, 2018: Due to a careless swipe of the delete key, this post originally misstated that Amazon receive just $1.7 from New York State.