Economic Impact of Amazon’s HQ2 Cities

At the beginning of November, Amazon announced the conclusion of a year-long search to find the home of their second headquarters. They elected to split their headquarters between Long Island City in Queens and Crystal City in Arlington, Virginia. Their original promise of 50,000 new jobs and a $5 billion investment into the HQ2 city will now be split evenly between the two locations. These investments can be viewed in two different ways. Some believe an Amazon expenditure in these cities will be beneficial, as these new employees will support local businesses and increase tax revenues, potentially leading to an improvement in school quality and infrastructure development. Others have argued against this move due to the expected gentrification that will occur, displacing predominantly low-income residents who have lived in those areas for years. This not only destroys important social ties within communities but also exacerbates the inequality between high and low income groups. Thus, a venture like this will likely create more adverse effects than originally anticipated.

Gentrification
Economists tend to evaluate the effectiveness of policies or actions by whether they are maximizing monetary benefits for firms or other organizations; social costs are typically missed in these type of analysis. Many have praised the Amazon expansion arguing that it will stimulate positive economic development. However, the social impact on the lower income class in NYC and D.C. is forgotten about. Most often, these residents are the ones that experience the worst effects of new developments in urban centers. Looking at Seattle, the home of Amazon, we can see how the rise of the tech giant has displaced residents over the past 20 years and caused a homelessness problem. Gentrification is already a problem in large cities in America. In NYC, home ownership of black residents decreased by over 20,000 units between 2005 and 2017 as people were priced out of the city. Additionally, there is a $118,000 difference in median household income between Queensbridge and Hunters Point -two neighborhoods both within a 5-block radius of the new Long Island City Amazon campus. In D.C., 50,000 white residents moved into city limits while 39,000 black residents left between 2000 and 2010. Lower income residents tend to work service jobs that help cities function. With the introduction of 25,000 new Amazon workers, low income minority groups will be forced to locate even further outside of city limits. This leads to longer commutes and torn social fabrics, breaking down the relationships within these communities that are critical to ensure the overall well-being of its inhabitants. The loss of these social connections can have a dramatic impact on workers as urban cities become an enclave for wealthy, white collar workers. I would argue that this negative impact offsets any type of positive monetary benefit.

Tax Breaks
On top of the strain Amazon will be placing on the existing economic minority groups of these cities, Amazon will also be benefiting from the large tax breaks the cities are offering them. When they initially announced the competition for the location of their second headquarters, 238 cities around North America submitted bids offering large tax breaks to lure Amazon to their city. Queens and Crystal City both offered some of the cushiest incentives. The governor of New York has agreed to give $1.5 billion in tax breaks if they come through with the promised 25,000 jobs in ten years, with an additional $1.7 billion in state credits and grants if Amazon hires 40,000 workers in 15 years. Virginia plans on giving $573 million to Amazon for each job created in the next 12 years and Arlington has agreed to a $23 million grant paid over 15 years. These are extremely generous benefits, which likely played a large role in why Amazon chose these two cities to locate their second headquarters. The main problem with the tax breaks is that it shows cities are optimizing and designing cities for the rich working class who will benefit from these Amazon jobs, rather than the service class. A well-functioning and sustainable city is one where economic investments maximize the well-being of an entire population, not just those from privileged economic backgrounds.

Amazon logo - kristyfields, Pixabay

Potential Solutions
The issue cities face of balancing increasing employment while not displacing old residents is by no means an easy problem to solve, but steps can be taken to improve market efficiency in these urban economies. For instance, increasing the supply of homes will bring prices down to a more affordable level, and might mitigate the most adverse effects of the current demand for housing after the Amazon announcement. This is much easier said than done, as zoning laws and bureaucracy can often impede new housing projects, especially those with intentions to build affordable units. Many have hypothesized that Amazon knew that it was going to pick the large metros of New York and D.C. all along but wanted to conduct research about the willingness of cities to offer tax incentives, and thus set up this elaborate contest. This seems like a plausible theory, as New York and D.C. are located close to major airports with direct flights to Seattle, have existing and reliable transit routes, and a large tech talent pool. This contest increased competition between cities, leading them to perhaps offer higher incentives then they would have without such a public spectacle. For city leadership, an Amazon presence in your town is appealing because it provides jobs for your workforce as well as drives economic development for the businesses that operate coffee shops, restaurants, gyms and other amenities around the offices and homes of employees. As we have seen, this overly positive view leads many people to forget about the negative impacts the tax incentives they were offering would cause. These economic minority groups are rarely given the tools to advocate for a more equal society. If Long Island City and Crystal City are not careful, this Amazon investment will undoubtedly create long-term problems for the service class, resulting in a more unequal society.