After Amazon announced the two locations of its eastern headquarters, voices rose in condemnation of the “corporate welfare” involved in the deal. Involuntary friend of the blog Alexandria Ocasio-Cortez didn’t disappoint with her predictable incoherence. Other critics were more measured. But before praise or criticism should come understanding, and that has been largely lacking.
Corporate Officers and Politicians
First, we should use the correct abstraction. The deal announced was between Amazon, the corporate entity, and municipalities in New York and Northern Virginia. But the deals were negotiated by corporate officers for Amazon and politicians for the municipalities. It is the interests of corporate officers and politicians that matter when analyzing the deal.
Corporate officers tend to do things that enhance their status at the expense of their shareholders. (Notice that one of the things Amazon promised to do is fund a “tech-start up incubator”, to serve artists and industrial workers.) But in general, the interests of the corporate officers are aligned with the interests of the shareholders. They both want the best deal for the company.
The situation is different for the politicians. Since deals announcing ‘bringing jobs’ to a given city are almost always popular, politicians face enormous incentives to complete flashy, news-worthy deals. It is all about getting their name in the news with the magical ‘jobs to the city’ mantra. Whether a deal is good or bad for the city in the medium or long term, as long as it is good for the politicians in power, it will tend to get done. Large companies will tend to obtain disproportionate subsidies. A rational incentive system will not tend to get done, because it doesn’t get the politicians’ name in the news.
Role Reversal
So far it looks as if corporate officers tend to win the deals. But that only looks at the bidding process, in which large companies hold a considerable advantage. But after the deal is completed and the companies has invested in the new project, the advantage shifts to the politicians. Politicians may now as the company to ‘pay their fair share’, and to ‘contribute to community development’ and the like. Once invested companies will be reluctant to move, having to disrupt its operation and potentially lose money during the move. This is especially true of companies that operate through large capital investment, such as automobile manufacturing companies.
Notice that, even if plucking the companies is bad for the city in the medium and long term, it will happen anyway as long as it benefits the politicians in power. If demagoguing ‘corporate greed’ gets a politician reelected, what does he care what happens five years from now? The next administration will get the blame. Under this incentive system, unscrupulous politicians will tend to beat honorable ones, because the public doesn’t understand the consequences of political programs.
Cyclical Subsidies and Exploitation
The process I’ve described happens in just about every country, regardless of political system, up to and including North Korea. No one has been able to find a solution to the problem, with the possible exception of nuclear bombs. The incentives pulling the relevant actors are enormous. The best we can hope for is a civic culture that minimizes the problem, by having a relatively educated and virtuous population. Good luck with that.
