What Amazon Can Learn from LeBron
By Ryan Bhandari
In 2014, LeBron James shocked the sports world when he left the star-studded Miami Heat to return to Cleveland, a city that had gone 50 years without a championship in a major sport. Now, Amazon should pull a LeBron. It should locate its second headquarters not in a city that’s already won big, but one that hasn’t tasted a big economic victory in years.
If there’s one lesson that policymakers, economists, politicians, thought leaders, pollsters, and everyone else who pays attention to politics learned from the 2016 election, it’s that in spite of falling topline unemployment, people across the country are feeling deep economic anxiety. For most Americans, the scarcity of opportunity to earn a good life is their major economic worry and reflects their day-to-day struggle.
The Economic Innovation Group (EIG) documents one part of the opportunity problem — how business growth has become concentrated in fewer and fewer metropolitan statistical areas (MSAs) since the Great Recession. For example, prior to 2008, 80% of MSAs saw more businesses open than close. In 2014, five years into the “recovery,” three out of five metro areas were still shedding businesses on net, seeing more close than open. From 2010 to 2014, five metro areas produced as many new businesses as the rest of the nation COMBINED.
Most of the country never fully recovered from the Great Recession. Extraordinary growth in a few hubs has masked this fact.
For a few prosperous areas, things have been going well — extremely well to be precise. But the rest of the country, including both rural and urban areas, has been left behind. Most of the country never fully recovered from the Great Recession. Extraordinary growth in a few hubs has masked this fact in the topline economic data, but the opportunity to earn a good life has faded in many parts of the country.
Enter Amazon, the fifth largest U.S. company by market cap and a revolutionary e-commerce giant that affects the lives of nearly all American consumers. The company is “taking bids” from cities for its new second headquarters, cities that can offer incentives to “offset initial capital outlay and ongoing operational costs,” which translates to which city can offer them the most generous tax breaks. It promises to invest $5 billion in the construction of a new headquarters and with it tens of thousands of high-paying jobs (up to 50,000 by their estimates). Amazon also requests that the metro area have at least 1 million people, proximity to an international airport, and a “stable and friendly business environment.”
Right now, Amazon is in a unique position to expand the opportunity to earn for residents of a struggling metro area. It would be a mistake to just think about Boston, New York, Los Angeles, San Francisco, Dallas, Chicago, and the other metro areas where the economy is booming and Amazon’s marginal impact would be moderate. Why not pick a city that really needs help? A number of struggling metro areas are close to an international airport and have 1 million residents. According to EIG, these are the 20 metro areas with the largest decline in firms between 2010 and 2014. Unsurprisingly, many of these had failed to return to their 2006 employment level in 2014.
U.S. cities with largest decline in firms, 2010–2014
Why not consider Cleveland, or Milwaukee, or Norfolk, or Hartford, or Providence, or Memphis? In a place like New York or San Francisco, you’ll be a big fish in huge pond. But in one of these cities, you have the opportunity to build the pond, potentially catalyzing a whole new tech hub in a city that truly needs it.
Amazon has an opportunity to settle in a struggling metropolitan area where it can change the lives of tens of thousands of Americans who’ve been left behind in the new economy and are desperate for an opportunity to earn.
Maybe these cities won’t be able to offer the same sort of lucrative tax incentives that another can. Ideally, states and cities shouldn’t be offering these incentives in the first place. For starters, empirical assessments of these tax breaks show they often fail to generate a positive return through increased tax revenue or employment. There’s some chatter that Amazon specifically might be a worthwhile investment for cities due to the positive spillover effects from clustering, but that still ignores another fundamental flaw with these tax incentives: They harm the small- and medium-sized businesses in their communities. Because every time a lucrative tax break goes to a big company — already privileged with an advantage in brand name, size, and power — it becomes more difficult for small businesses to compete. If states want to make their cities more attractive for businesses, then they should do so for all firms rather than create special handouts that cost taxpayers across the country $45 billion in 2015.
It’s understandable that Amazon wants an incentive package for its new headquarters. Other big companies are privy to these breaks so why shouldn’t Amazon be too? But hopefully Amazon doesn’t need to base its decision on the size of the tax break a city offers. It has an opportunity to settle in a struggling metropolitan area where it can change the lives of tens of thousands of Americans who’ve been left behind in the new economy and are desperate for an opportunity to earn.
Clustering effects can become a vicious cycle. Established tech scenes are enticing because they already have the highly educated workforce Amazon is looking for, but Amazon opening up a second headquarters in one of these cities changes nothing. Amazon opening up its second headquarters in a place without a large tech scene could attract new entrepreneurship, new investment, and new jobs.
Lest you say it can’t be done, after just two seasons, with a surprisingly apropos comeback over the mega-talented, heavily-favored, professional basketball team that represents Silicon Valley, LeBron James delivered that elusive title to the patient fans of the Cleveland Cavaliers.
Maybe Amazon can pull off a similar feat.
Ryan Bhandari is an economic policy advisor at Third Way.