FYI: About the Amazon HQ2:
Man, so many people are getting this wrong. No, Amazon did not pull out of the NYC deal – and a lot of people have done a terrible job trying to explain this.
A few details that will make things clearer. 1/
— Barry Ritholtz (@ritholtz) February 15, 2019
I was appalled by the erroneous back and forth I saw on Amazon. Credit people’s selective perception for so many missing all of the important factual details. Some of you may shrug and say, “This is America in 2019,” but a reality where facts do not matter is something I am unwilling to accept. That’s my cognitive dissonance.
That is why I jotted down a few thoughts about HQ2 Friday that morphed into a tweetstorm; everything I wrote was in the public domain already, but it went viral regardless.
There was enough curiosity about the matter it was worth fleshing out more fully. Hopefully, sourcing the details will allow people to better understand the situation. Facts matter, the truth is important and having a grasp on reality turns out to be desirable in many situations. This is especially true for those who put capital at risk in the markets. Someone has to be on the wrong side of the trade, more often than not, it is the ignorant and the biased.1 We do what we can to avoid those conditions.
A quick disclosure: I am a huge Amazon consumer and a Jeff Bezos fanboy (especially as my ardor for being an Apple-only household starts to cool). I first started getting junk from $AMZN back in 1998. I am a Prime customer, have 2 kindles, an Echo and a Dot; I replaced my mediocre AppleTV with the far superior Firestick with Alexa Voice control. I generally like the disruption he brings to Retail (which has been wildly overbuilt for a long time and was due) and hopefully, to HealthCare.
That said, let’s delve into a few issues about the HQ debacle that many seem to get wrong.
Before we determine who killed Amazon’s HQ2, let’s note who did not: It was not the progressives or the Anti-ICE lefties. No, the Socialists have not taken over America. The biggest opponent to Amazon HQ2 in NYC was not from the new Congressional class, all they did was make some noise, and little to do with what actually mattered. It was not, to the chagrin of FoxNews, AOC or Elizabeth Warren, or anyone else in Congress. All of the incentives for this were State + City, not Federal. Congress literally had no say on this.
Spoiler alert: It was Jeff Bezos. He belatedly realized the political landscape had changed, and decided he was unwilling to engage further. He did not want to deal with it or be embarrassed. Full stop.
Political Backdrop
Had he not pulled out, Amazon ran the risk of being embarrassed by Michael Gianaris, a little known New York State Senator. He was the guy who threatened to kill the deal; it would have embarrassed Bezos to have Amazon look like a politically naïve company that made a rookie mistake. So Bezos he hit the eject button before Gianaris could.
There is a national and a local angle — both of which seemed to get overlooked by the team from Seattle.
An anti-Trump wave during the 2018 mid congressional elections swept Democrats into power in the House of Representatives with a 40 seat swing; as happens during wave elections, the effect impacted races further down the ticket.
To wit: A side effect was the change in control of the New York State Senate, from GOP to Democrat.
The NYS Senate has been dominated by suburban Republicans for much of the 20th century. “Between World War II and the turn of the 21st century, the Democratic Party only controlled the upper house for one year.” But the GOP’s grip was slipping to a mere slim plurality. For the past few years, they held on with 30 or 31 seats out of 63, which thanks to several Independents and the one Democrat who caucused with the GOP, was sufficient to control the chamber.
2018 changed all that – the GOP Senators took a drubbing; the partisan alignment (post-2018 election) favored the Democrats, 39-23. (There were signs of this as early as April 2018).
The relationship with Democrat Governor Cuomo and the Senate has been testy, even contentious; the Governor chose not want to push back when the new Senate Majority Leader Andrea Stewart-Cousins nominated Gianaris to the little-known Public Authorities Control Board (PACB).
This turned out to be a fatal error for HQ2.
The PACB’s approval was required before the project-related financings for the Amazon HQ plan was authorized. Any of the 3 voting members of the board has the power to veto this plan. It was not a coincidence that Gianaris is the state senator who represents the Queens district where Amazon wanted to build its new home.
Overreach
Gianaris began as a supporter of Amazon’s HQ2 in NYC. But the incentives were becoming too generous, and other issues began to rankle.
There was some concern Amazon was taking unfair advantage of a tax cut decided to help the poor. Called “The new hotness for tech billionaires.” opportunity zones were created to help facilitate growth in economically disadvantaged areas. It was part of the 2017 tax code reform, and seemed to be quite generous to real estate developers. Amazon reiterated it was not pursuing this capital gains tax break as recently as February 1.
There were other signs of over reach by Amazon — perhaps none were more silly than the Condo issue.
No one at Amazon apparently thought this through. Before it was publicly announced, but after it was decided on internally, Amazon employees, began quietly slipping into Long Island City to make stealthy purchases of condos before the news broke. Many of these folks are quite wealthy, courtesy of AMZN stock’s meteoric run up.
There was nothing illegal about this. It is not insider trading of stock. However, it is not a great look to take advantage of the information asymmetry. The Real Deal noted legislation was proposed by Gianaris that would prohibit those sorts of transactions on nonpublic government action in the future (This is poor legislation, and challenging to enforce). We cannot say for sure that was the last straw, but for some, it may have been a bridge too far.
Bad Optics Amidst Changing Political Landscape
I find it healthy that Amazon still thinks of itself as a scrappy lean start up. At least, internally, via Jeff Bezos shareholder letters, and the company’s entire mindset. While it’s a great way to motivate the troops, it clashes with the external reality of Amazon the great disruptor. They need to find a better way to interact with the world than either Dr. Job Creator and Mr. Buh-bye. Team Bezos needs to be able to calibrate a variety of states in between those two extremes.
Instead, they came off as greedy, standoffish and ham-fisted. It was weirdly played.
Note that Amazon is not in the business of forecasting political shifts; nor are they strangers to dealing with challenging bureaucracies (i.e., Seattle). Still, being completely tone deaf to the shifting political winds is a bad strategy. When you have the biggest swing in House seats in since Watergate, one might expect corporate management to take notice. Especially if, say your side gig is also owning the Washington Post.
Duh.
From the start, the entire HQ2 optics have been terrible. When the world’s wealthiest man happens to run the world’s most most valuable company goes looking for a new place to call home, perhaps compelling self-flagellation by states and local officials to win his business . . . well, let’s just say that is not the greatest look.
Which raises the interesting question: Just because you CAN do something does that mean you SHOULD do it? The overreach by Amazon should have been obvious; surely a less mercenary approach could have been more effective.
Apparently, fuck Noblesse Oblige.
Given how wealthy Amazon is, giving them $3 billion in state and city incentives to build here seems rather tawdry. It rankled. That Amazon pays no Federal taxes on $11.2 billion in profits did not help their cause.
Note that other tech giants have been stealthily expanding their presence in New York. Apple just expanded in NYC, and they did not make the city jump through hoops. No tax incentives needed.
The same with Google: It is adding space for more than 12,000 new workers, doubling its size in NYC,s pending a billion dollars. This is how you do it — quietly, professionally, without begging for a handout. Some believe Google quietly ate Amazon’s lunch by locating in Manhattan proper, and winning the Talent war before it even started.
Crony Capitalism
The heart of the opposition to Amazon was how much the city and state bent the existing rules to offer a very generous package. The arguments are pretty clear: On the one side, net net the deal works to the city’s benefit, and $3 billion is not all that much.
The other side is less pragmatic and more philosophical. It is the same issue I have with taxpayers subsidizing Football stadiums. GBYOFS and stop asking taxpayers to subsidize your businesses and/or hobbies. The gaming of the safety net by Walmart and McDonalds to push their labor costs onto taxpayers.I railed against in during the financial crisis, and afterwards. Same with the Foxconn debacle — yet another example of corporate overreach combined with an ill equipped governor who got rolled. The taxpayers threw him out of office soon after.
In my tweetstorm, I called Bezos a socialist, but that was hyperbolic exaggeration.
When any one company gets special treatment, its own sets of rules, taxes, incentives, kickbacks, etc., when specific rules apply only to some but not to all, well, that is much better described as Crony Capitalism.
Amazon began as a bold idea, deftly executed. It embraced risk, and that generated a massive return on money. But many are simply uncomfortable with the one offs for any one company to get. If you want to encourage businesses to relocate to a specific area, then come up with a series of incentives that apply to ALL businesses that will open shop in that location — not just one. Thus, the entire HQ2 competition was conceptually flawed from the start.
As a fire-breathing Wall Street working capitalist, my instinct is to say: Build your own fucking HQ on your own goddamned dime. I say that with no disrespect — its the same thing I have been saying to the corporate welfare queens who run Wal-Mart and McDonalds; to the wimpy Football team owners too poor to build their own stadiums; to the chicken-shit cowards who ran Wall Street banks pretending to be capitalists, but all the while turned out to be commie pinko bastards the moment the going got tough.
I hope Amazon builds its HQ2 here. And that it does not require the most successful businessman of this generation to adopt Crony Capitalism
Best Practices
Rather than turn tail and leave, I would have preferred to see Bezos take a more magnanimous step — perhaps pull together various interests. Maybe even come up with a set of best practices for Companies, Cities and States when competing for business.
It is not in the local governments’ interests to create a race to the bottom. And given Amazon’s size and skills, it is no longer in their own interests to encourage governments to be giving out special tax breaks to its future competitors. Had they though this thorough, played out all of the game theory here, Amazon had the ability to lock in a strategic advantage.
Instead of capturing the lion share of tax breaks for themselves, they could have had the city commit ALL of the incentives to rebuilding the infrastructure around where they were locating the HQ2. Highways, subways, schools, parks, etc. This missed that chance.
If someone else were very smart, they would free ride on all of the work that Amazon did, and make that exact pitch to the city. It is $3 billion in incentives, waiting to be taken.
“It’s every man for himself” said the elephant as he danced among the chickens…
UPDATE: November 1, 2023
Still working the system in an embarrassing and shameless way:
See also:
Its Not Capitalism, its Crony Capitalism (March 1, 2019)
Hudson Yards versus Amazon HQ2 (March 10, 2019)
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1. I won’t bother listing the people debating this topic simply could not be bothered with facts, and instead chose to substitute their personal ideologies. They are simply not worth bringing into this discussion.
Previously:
Downsizing America February 9, 2009
Downsizing America’s Retail Footprint March 24, 2017 Bloomberg
Stop Blaming Amazon for the Retail Apocalypse (April 9, 2018) Bloomberg
Serfdom at Amazon Warehouses April 20, 2018
Don’t Like Amazon’s USPS Deal? Blame Congress April 4, 2018
