The people have rejected corporate welfare; now let's make it illegal

The people have rejected corporate welfare; now let's make it illegal
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Amazon recently announced that it would be canceling plans to build a new headquarters in Queens, New York due to political opposition to $3 billion in promised subsidies,.

Backed by Governor Andrew Cuomo (D-N.Y.) and Democratic NYC Mayor Bill De Blasio, the new headquarters had been considered a done deal.

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But Amazon reversed course after a growing number of elected officials, unions and citizens organizations publicly questioned why one of the world’s most highly valued companies should be provided subsidies to make investments that were in its own economic interests. 

States and the federal government should learn from this experience and enact new laws that curtail or eliminate corporate incentives programs.

As studies have repeatedly shown, economic development incentives do not change the number of jobs created. Nor do they tend to help economically depressed areas or the workers who have been most negatively affected by globalization and technological change.

To the extent that new jobs are created, they come at the expense of other states and municipalities. 

Indeed, Amazon’s HQ2 competition provides a clear example of the questionable benefits of incentives programs. Not only did Amazon reject more lucrative offers from Maryland and New Jersey, but in making its announcement last month, the company indicated that it would continue to hire across its 17 corporate offices, suggesting that, even if all of the 25,000 jobs do not materialize in NYC, they would still be created elsewhere in North America. 

Unfortunately, the poor record of these programs has not prevented states and cities from continuing to pour tens of billions of dollars into them each year. An examination by the New York Times of 150,000 awards programs found that companies received at least $80 billion in annual subsidies.

This includes billions paid to some of the world’s most well-financed corporations:

  • technology companies, such as Amazon, Google and Apple;
  • financial services institutions, such as Citigroup and Goldman Sachs;
  • computer manufacturers, such as Intel;
  • all of the major domestic and foreign auto producers; and
  • several of the largest oil companies. 

The ultimate solution to these beggar-thy-neighbor policies is to limit the ability of corporations to demand large subsidies from cities and states in exchange for investment. The European Union offers one model for such a framework.

Except in limited circumstances, member states of the EU are prevented from providing subsidies to individual companies. Governments can, of course, invest in infrastructure, education, training and research and development programs that encourage economic development without targeting specific companies. 

They may also establish general policies that foster business growth. However, outside of underdeveloped regions, where limited investment subsidies are permitted, countries cannot provide individual companies with tax breaks or other aid when such expenditures do not address a specific market failure or when they will distort competition in the European single market.

Constrained from providing state aid, governments have more funds for essential services and public goods. Restricted from using their political connections to demand subsidies, companies are forced to compete on the quality of their products and services rather than the strength of their political connections.

Currently, American antitrust law does not explicitly cover state action, and courts have been resistant to expand this mandate in the absence of new congressional authorization. However, Congress could enact legislation that expands the coverage of antitrust to include state activities. 

Another approach would prohibit companies from extracting bribes from cities and states — a sort of Foreign Corrupt Practices Act for domestic economic development policy.

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The federal government could even consider tying money for highways and other programs to promises by states and cities to agree to an economic armistice, or taxing state and local subsidies that distort marketplace competition. Whatever form it takes, federal action is needed to prevent a race to the bottom in subsidies.

Ultimately, the Amazon case shows that elected officials have the power to reject the corporate subsidies race. While Amazon will no longer have a second headquarters in Queens, like other companies, it will continue to hire tech workers in the area, given the region's deep pools of human talent.

However, unless federal rules are established to limit state aid, politicians will continue to face incentives to provide state aid in exchange for investment. To build a dynamic, productive and fair 21st-century economy, we need federal rules that limit the ability of corporations to extract rents from local and state governments and encourage broad-based investments in education, transportation and other public goods that will create the jobs of the future. 

Chase Foster is a fellow in public policy and administration at the London School of Economics and Political Science. He is writing a book on the comparative politics of competition policy in the United States and Europe. Cassandra Robertson is a postdoctoral associate at Cornell University who specializes in American public policy.