This article was written by Mitch Daniels and originally appeared here in the Washington Post on November 20th, 2017.
The Amazon “HQ2” headquarters auction is in full swing, so prepare to witness some reckless behavior out of the reported 238 bidder states and localities . Like groupies in a 1960s rockumentary, public officials will be throwing themselves at the stage trying to catch the star’s attention.
Nothing in public life is more dangerous to the public interest than politicians chasing “jobs” with the people’s checkbook. They can buy their way into the ribbon-cutting photos knowing that, if they grossly overbid, they won’t be around when the bills come due. Chances are the Amazon “winner” will fall into this category. (Jeffrey P. Bezos, founder and chief executive of Amazon, owns The Post)
Abuse of this practice is robustly bipartisan. As many Republican as Democratic officeholders have lost their fiscal virtue when a big score seemed in prospect.
The best defense against this all-too-human behavior is to establish some rules in advance and make them transparent to citizens and potential business investors alike. In Indiana, from the 2005 inception of a reconstituted public-private state economic agency, its board (which is chaired by the governor, to underscore his accountability) established boundary conditions to govern negotiations with firms seeking investment incentives. Examples of these include:
No upfront cash. Any assistance must be strictly conditional, receivable only as promised new jobs materialize.
Only new, incremental jobs are eligible; no incentives for merely staying put. A state creating such a precedent almost ensures a run on the bank. Shortly after Illinois paid Navistar $65 million not to depart for another state, it found itself giving Motorola $100 million and the Chicago Mercantile Exchange $100 million more, without the requirement of a single additional job.
An explicit clawback mechanism. Things change in business and will over the span of a multi year agreement to support a company’s expansion. Competitive pressures or economy-wide slowdowns alter the most careful of plans, so a subsidy agreement should contain a provision for the repayment of any incentives tied to jobs that later were eliminated, as well as a mechanism for regularly auditing and certifying those that are still active.
Governments should measure and report to the public the efficiency of their economic recruitment efforts. Incentive dollars per new job and per dollar of new capital investment are two good places to start, with the obvious objective of driving those ratios down as far as possible. In Indiana, the new agency brought the first number down from $36,000 to $9,000 per job within a year. Tracking those figures over time can help establish another critical boundary: a walkaway level beyond which negotiators are instructed not to go in a given transaction.
I concede that Amazon may be the exception that justifies some bending of these rules. The new headquarters’ enormous size, and the highly paid, high-tech nature of its workforce, may make it appropriate for bidders to assume a multiplier effect on the surrounding economy and to assign some premium to intangible, “transformative” benefits. But even if so, such premiums should be rigorously calculated and debated, not the product of wild guesses or heat-of-the-moment attempts to outbid the state next door.
Remember that this is a multi-decade decision a company is making. The most important criteria in its thinking will be long term: What taxes are we likely to pay? How high is the cost of living and what will our wage scale have to be? (There are enormous differences here: A computer hardware engineer who costs $137,000 in California would cost only $91,000 in Tennessee or $82,000 in Nebraska, with equal purchasing power). How burdensome or collaborative are state and local governments? Are permits and regulatory approvals quick and reasonable or ponderous and hostile? If — make that when — we are sued, are the local courts fair or do they operate in cahoots with predatory litigators?
Front-end goodies are not unimportant, but they are almost certain to be outweighed by the 20- or 30-year effect of these factors. If you are the people’s negotiator, it’s your job to understand and remember that. Indiana has routinely captured new business when other aspirants were offering much higher incentives. Too many officeholders enter these discussions without business experience, and their taxpayers pick up the tab.
So let the auction begin. Amazon is dangling a big prize, and aggressiveness is perfectly appropriate. But establish your limits, and keep your head. Anyone in business learns that often the smartest deal of all is the one you didn’t make. The people’s business should be no different.