Government incentives to lure companies can wipe out the economic gains from bringing in the companies in the first place, writes Linda Nazareth.
By Linda Nazareth, May 7, 2018
Tick tock. Soon, the competition will be over and some city will get the Amazon headquarters and the other 19 will be left in tears, figuratively speaking. Maybe Toronto will even be the winner: After all, it is the only Canadian city on the list, and that might look good to Amazon CEO Jeff Bezos (also known as the richest man in the world, ever).
Chances are, however, that, in the final calculation, Amazon will simply go where it makes the most economic sense for the company, with that decision partly based on where it gets the most incentives from government. Tax breaks, subsidies, free land – everything is on the table when it comes to Amazon and cities have promised it all. Question is, where exactly are they going to get the money to pay for all those big promises?
If we go by history, incentives to lure companies have sometimes come from education budgets, and when they do, they can wipe out the economic gains from bringing in the companies in the first place. That is the conclusion of a report from the W.E. Upjohn Institute that looks at the long-term impact of US state and local governments giving lavish incentives to bring in companies.
To be sure, there are plenty of benefits from attracting any company, even one considerably smaller than Amazon. A new company means new jobs, as well as more people to spend their wages in local stores or in local restaurants. Assuming some of the new hires have to migrate from elsewhere, property values go up as well. Estimates done in Seattle, Amazon’s original home, suggest that there is an employment multiplier of three from Amazon, meaning that, for every direct job the company creates, two others spring up as well. It really is hard to argue with those numbers.
Still, the problem with the short-term job creation is that, historically, some of it has been paid for with long-term economic losses.
Still, the problem with the short-term job creation is that, historically, some of it has been paid for with long-term economic losses. At least in the United States (where the research was done), incentives tend to mean less government money to spend elsewhere, which in turn results in cuts in spending on education, never a good thing. As well, as more people move into a city to take the new jobs, there are fewer actual benefits to the original population.
The Upjohn report concludes that, for every 10 per cent that comes off elementary and secondary education spending, long-term wages are reduced by 8 per cent, thanks to a corresponding drop in skill levels. At the same time, the net benefits to incomes to those who live in those local economies come to only about 22 per cent of the cost of the original incentives.
There is always a risk in using the past as prologue when it comes to economics. The companies bribed – sorry, “incentivized“ – during the past may be very different than the ones coming in now. For one thing, the employment multiplier of three, if it is to be believed, is certainly on the high side of what we have seen in the past. For another, it seems crazy not to want job creation now on the off chance that it will hurt the economy over a much longer term (the Upjohn model uses a time horizon of 80 years). The best bet, and certainly the best bet politically, is to bring in jobs now and assume that they will be a good thing for the long term.
Still, as we perhaps do bring in those jobs, whether from Amazon or the next snazzy tech company, it might be a good idea to guard against the mistakes of the past. If Amazon does ultimately choose Toronto, a major reason will be because it has a deep talent pool that has been created through education at levels starting with elementary school and ending with postgraduate training. Whatever way we encourage Amazon or other companies to come to Canada, it should not be in a way that puts our next wave of talent in jeopardy.
Linda Nazareth is the principal of Relentless Economics and senior fellow for economics and population change at the Macdonald-Laurier Institute.