Michael Hicks is the George and Frances Ball Distinguished Professor of Economics and the director of the Center for Business and Economic Research at Ball State University. His column appears in Indiana newspapers.
Following a year in which almost 3,000 cities submitted a bid, Amazon’s much-touted HQ2 announcement came this past week. Instead of opening a single facility employing as many as 50,000 workers over the next 15 years, the company decided to split operations into two or more smaller facilities. Locations include Queens, New York and Rosslyn, Virginia.
The news was not surprising, but many cities — including Chicago, Indianapolis and Columbus, Ohio, which are all Midwestern cities who made it into the final 20 — felt some understandable disappointment. There are some important lessons here. I will focus on comparisons with Indianapolis and Columbus, because I think Chicago’s fiscal cataclysm made its inclusion in the top 20 a figurative move at best.
The first lesson is that Queens, New York and Rosslyn, Virginia are among the most expensive sites Amazon could have chosen. Land costs are more than $4 million per acre in Rosslyn, and higher than $2.5 million per acre in Queens. There are large commercial tracts available in Indianapolis for $50,000 an acre. The average wage per job in Arlington, Virginia is 40 percent higher than the highest county in the Indianapolis metropolitan area, and double the metropolitan level. Wage and salary data in Queens is similar.
Some 70 percent of Rosslyn residents have a bachelor’s degree or higher, as do more than one third of those in Queens. Indianapolis, Columbus and Queens have about the same level of educational attainment, but Northern Virginia is otherworldly in terms of its levels of education levels. The very robust transportation system in New York means Amazon can draw on a 4.2 million-person labor force. The D.C. metro system is less robust, but the Rosslyn location is rich with talent. To attract the same talent in the D.C. or New York metro areas, Amazon will have to pay close to twice as much in salaries and benefits.
Given the huge gulf in costs, the incentive packages are almost a minor afterthought. Both locations are offering roughly $25,000 per job in incentives, though I would expect that to grow over the coming years.
This is high, but to put this deal in context, Wisconsin has offered Foxconn more than $350,000 per job. The Foxconn jobs pay only between one quarter and one third as much as the average Amazon job. Adjusting for pay differences, the Amazon tax incentives are about 2.0 percent of the Foxconn incentives. Is there any wonder why Scott Walker lost re-election?
The clearest lesson of Amazon is that people matter to business location decisions, probably more than everything else combined. Not only are these two locations several times more expensive than most applicant cities, the sheer scale of the D.C. and New York City metropolitan areas will make these companies far less important than they would be in, say, Columbus, Ohio. This makes them less likely to extract more government largesse from these cities over the coming years.
To understand that firms care about value rather than cost, you must accept the following fact: to attract high-tech jobs means that first, you need a community that can attract high-tech workers and their families. If you aren’t already attracting the workers, you won’t attract the company. And no matter what your local economic developers tell you, it is just that simple.
Indianapolis and Columbus made it on Amazon’s list because they are attracting these types of workers, just not yet at the scale of New York and D.C. That is just fine, as most Hoosiers and Ohioans do not aspire to be residents of Queens or Rosslyn or anything like them. What these residents do want is to live in more prosperous places where their families can flourish. Tax incentives and a business-friendly tax climate likely do little to attract families; it is worth noting that New York ranks 48th for business taxes, and Indiana ranks 10th. So what does attract families?
The Washington, D.C., metropolitan area is home to 33 high schools that rank in the US News and World Report’s top 100 list. The Indianapolis metropolitan areas has only four, and Columbus, Ohio, has eight. Scaling both cities by population, both Indianapolis and Columbus should have at least 12 of these elite high schools. It is worth noting that Ohio does much better at creating elite schools simply through a more flexible local public finance system. Schools are the single biggest residential attractor of talent; however, having very good schools is a necessary but not sufficient condition for attracting talented workers.
No doubt, Indianapolis and Columbus made robust offers to Amazon, featuring the likelihood of attracting many more highly educated workers. Still, it appears there is work to be done in crafting communities of value in both central Indiana and central Ohio. Families don’t flourish because of tax incentives or local economic development efforts. Indeed, the role of government in creating economic development is both narrow and important. High-quality public services, primarily in the form of schools, public safety and transportation infrastructure matters more than all the bells and whistles and fancy presentations to site selectors.