The withdrawal of Amazon from its proposed headquarters in the New York neighborhood of Long Island City—after the protests by City Council members and other local political leaders, including U.S. Rep. Alexandria Ocasio-Cortez, over tax breaks and credits promised to the company—shows how public policy economics plays out in the real world.
I am inclined to agree with the officials, whom I call the Good Gangs of New York, who opposed Amazon despite the company’s pledge to bring more than 25,000 jobs to the area. We need more gangs like this one in municipal governments. State and local governments hardly hand out tax breaks to small and medium enterprises. Why should they give them to near-monopolies like Amazon?
On the other hand, we live in a world where we often have to accept the second-best possible outcome. There are a lot of distortions in the real world. For example, state and local governments routinely give tax breaks and subsidies to professional sports teams; no governor or mayor wants to let a major team leave the state or city during their watch. Sports teams bring in tourists for big events, but they do not generate many high-paying jobs, and not all taxpayers are sports fans. So if this game of tax “arbitrage” is being played across the country, why not play the game with Amazon and at least get high-skilled jobs, as Governor Cuomo was willing to do?
State and local governments routinely give tax breaks to professional sports teams. Why not play the game with Amazon and at least get high-skilled jobs?
The actions of our New York gang could be compared to the academic economists in the United Kingdom who supported Brexit. Their issue was simple: Why should U.K. taxpayers support a bloated European Parliament—with two locations, one in Brussels and another one in Strasbourg, as well as a General Secretariat in Luxembourg—and a European Commission that is forever passing needless laws such as specifying what ingredients constitute a Greek salad? Better for Britain to just have low tariffs and reap the benefits of free trade on its own, without working with a cumbersome, highly paid European bureaucracy.
But the New York experience is different in one important respect from Brexit. We live in a world of frictions, and the long-run benefits of extricating the United Kingdom from the bloated European Union bureaucracy will come at a very high cost of job losses in the short and medium run. Meanwhile, New York is surely losing employment opportunities in the short run, but the gang who stopped Amazon are not creating massive dislocations in commerce and finance. Brexit may be a good example of a popular uprising against a bloated bureaucracy, but it certainly does not stand out as an example of prudence in collective social choice.
New York is losing employment opportunities, but the gang who stopped Amazon are not like Brexit proponents, who created massive dislocations in commerce and finance.
What is the lesson for public policy economics? The first-best cooperative outcome would be for all state and local governments across the country to refrain from tax breaks and subsidies for corporations and sports teams and just compete for jobs on the basis of comparative market advantages and geographic considerations. But this is unlikely to happen. We are in the world of Nash outcomes (named for the mathematician John Nash and featured in the book A Beautiful Mind, by Sylvia Nasar, and its film adaptation). In a game governed by the Nash equilibrium, strategies and decisions have to be made on the assumption that other players are operating out of less-than-perfect and less-than-altruistic objectives.
A good example of a Nash outcome would be going to dinner at a restaurant with a good number of folks, most of whom one does not routinely see, and ordering the most expensive items on the menu because you know that the bill is going to be evenly divided. Why not? Why should anyone be frugal, to keep costs down for all, if there are no assurances that the others are behaving the same way? Nash outcomes highlight the coordination problem in all interactions among decision makers.
Following the restaurant analogy, New York leaders could have gotten an expensive “plate” for Long Island City—with most of the bill picked up by statewide taxpayers, who, far from New York City, would not share in the local benefits. Instead, our New York Gangs took on Amazon and thus opted out of the Nash game.
This action, as J.F.K. might say, is a profile in courage. It also sends a message from New York to the rest of the country that some public officials are no longer willing to play the “tax arbitrage” game, even with giants like Amazon. Three cheers for our New York officials who bucked their governor in a welcome show of good governance. Following the shared restaurant bill analogy, there are times when it is refreshing to see someone who does not try to play the Nash game by ordering the most expensive items on the menu.