The story of capitalism since the 1980s has been that of a kind of cold war between capital and politics.
In the decade prior, American government was at the nadir of its prestige and credibility. The so-called War on Poverty, launched with great fanfare and idealism in the late 1960s, quickly collided with immutable economic and social realities that exposed its limitations. In 1969, we’d landed a man on the moon; by 1973, we were rationing gasoline. By the end of the decade, President Jimmy Carter was a piteous and contemptible figure (he has not improved in retirement), inflation was approaching banana-republic levels, and our mighty military and intelligence agencies were being humiliated by a gaggle of dotty fanatics in Iran while our feckless Congress was paralyzed. And it wasn’t only American government: In the United Kingdom, doctors in hospitals were working by candlelight as a series of strikes organized by socialists and union bosses left the country in chaos, darkened by blackouts. The Soviet Union, a brutal gulag state responsible for the deaths of millions upon millions in a series of politically motivated atrocities, was still a going concern — and our most progressive intellectuals were in its corner.
The reaction to all that misery and chaos was personified in three extraordinary leaders: Ronald Reagan in the United States, Margaret Thatcher in the United Kingdom, and Pope John Paul II. Each pointed to the moral and natural shortcomings of étatism and spoke for the dignity of the individual, the citizen, the family, and the life that is beyond the natural reach of politics.
But there were other changes under way well outside the realm of elected office and politics as such. NASDAQ opened in 1971 as the world’s first electronic stock market, though it wasn’t really quite a real full-function stock market until some years later. The primitive digital market was a herald of things to come. In 1986, NASDAQ-listed Microsoft had its initial public offering of stock, a financial event that created three billionaires and 12,000 millionaires in an instant. NASDAQ was also the home of Apple, Cisco, Dell, and Oracle shares, among other firms that would reshape the way business is done and fortunes made. The first commercial Internet service providers appeared at the end of the 1980s, just as Tim Berners-Lee was inventing the World Wide Web at CERN.
The Reaganites and the Thatcherites said, “Let markets work.” And they did, in ways that were enormously productive, sometimes mystifying, often delightful, as the Internet and other technological innovations made possible connections and syntheses that only a few years before would have been the stuff of science fiction, if not quite beyond imagining. The result was the Long Boom, a period of enormous economic growth and innovation that stretched (not entirely without interruption, of course) from the 1980s until approximately Sept. 11, 2001, the event that announced the queer new reality in which we currently live.
Politics and capital have a relationship that is both adversarial and symbiotic. There are not very many Rothbardian anarcho-capitalists in America’s (or the world’s) boardrooms; access to such public goods as independent judiciaries and reliable infrastructure is a dispositive factor in a great deal of corporate decision-making. And politics needs capital, because it can only command resources, not having the faculty to create any of its own. For much of the history of the Western world, politics had the upper hand in that relationship, an almost uncontestable advantage. But that began to change with the emergence of nearly frictionless capital flows and the integration of global supply chains. Private corporations grew to be more powerful than the municipalities in which they resided. Yes, Microsoft needs a fire department and police protection, but it doesn’t have to be the ones in Redmond, Wash. Microsoft could replace Redmond much more easily than Redmond could replace Microsoft.
Amazon exploited that new reality in a fairly vulgar way when it went from city to city shouting, “Dance, monkey!” at sundry mayors and councilmen eager to have their municipalities host the company’s supplementary headquarters. They came bearing gifts worth billions of dollars, laying them at the feet of the world’s wealthiest man in an unseemly display of obsequiousness. Amazon settled on New York City, the greatest of our cities and the proving ground of many of our greatest businessmen and enterprises. New York rejoiced, until it didn’t. A new wave of angry progressive Democrats inspired by Representative Alexandria Ocasio-Cortez denounced the deal that brought Amazon to New York, not only for its corporate handouts but because they object to Amazon’s business model and corporate practices. Amazon, hearing another prelude to the litany of abuse it suffers from the left in its home city of Seattle, canceled the project.
Mercatus scholar Matthew D. Mitchell points out that Amazon’s now-rescinded decision to locate in New York (it still plans to build another facility in the Virginia suburbs of Washington) was not a case of follow-the-money. The company was in fact offered much larger incentives in other places not too far away from the ones it settled on, including Newark, N.J., and Montgomery County, Md. For a company such as Amazon, there’s a lot more to picking a new home than tax breaks. Mitchell writes:
Amazon has decided not to build one-half of its HQ2 in New York after all, teaching Empire State politicians a lesson that economists have known for years: targeted corporate subsidies are not an effective strategy for economic development.
With much fanfare, New York had offered Amazon nearly $3 billion in incentives. The tech giant had chosen New York in spite of much more generous offers from others like Newark, NJ and Montgomery, MD. One reason they may have been willing to [spurn] these more generous offers is that even enormous subsidies pale in comparison to other location factors. It’s been estimated, for example, that locally-supplied labor costs are about 14 times the size of state and local tax costs.
There have now been over 100 peer-reviewed academic studies of targeted subsidies. The overwhelming majority of these fail to find any evidence that subsidies benefit the broader communities that offer them. What does matter is the overall environment. Policymakers who stick to the provision of public goods, keep their taxes low and their regulations reasonable can see their states and cities grow. Those who offer targeted subsidies to high-profile firms like Foxconn and Amazon do nothing to improve the lot of their constituents.
Amazon does not need New York City. There are many advantages to operating in a city such as New York, which offers experiences and opportunities that well-paid tech-company executives are not going to find in such business-friendly alternatives as Houston or Las Vegas. But Amazon has decided that these are not worth the price of admission, which in this case would be subjecting itself to a political climate dominated by people who detest the company, its chief executive, and the model of business it stands for. There was a time when a major financial institution, publishing house, or media company simply had to have a New York City presence — preferably a headquarters — as a matter of course. But that time has passed.
New York’s anti-capitalists are cheering Amazon’s abandonment of their city. They think they won.
Governor Andrew Cuomo doesn’t think so. He is not a very intelligent man, but his parasitic instincts are functional enough. Faced with an unexpected $2.3 billion dip in tax collections, Cuomo explained that the problem was that wealthy New Yorkers were leaving the city to take up legal residence in Florida and other lower-tax jurisdictions. The federal government had long provided a subsidy to high-tax jurisdictions such as New York in the form of a federal income-tax deduction for state and local taxes. The recent tax-reform bill reduced those benefits, and that did not go unnoticed in New York City, where a handful of high-income taxpayers together pay nearly half of the city’s income tax and a good share of the state’s taxes, too. Even before that, tens of thousands of high-paying Wall Street jobs had disappeared as financial-services workers fled to friendlier jurisdictions. And 2 percent of the city’s business taxpayers pay 85 percent of the city’s business income taxes. So long as taxpayers have the option of exit, there are real limits on what can be taken from them. As the much-maligned corporate inversion trend of a few years ago demonstrates, that is true for countries as well as cities.
The balance of power has decisively shifted toward capital away from politics. But rather than deal forthrightly with that new reality, politicians have adopted an ever-more-frantic carrot-and-stick routine: bribing Amazon to choose New York City on the one hand, threatening businesses and their high-income executives with punitive regulation and confiscatory taxes on the other. The politicians should instead take Matthew D. Mitchell’s advice and work on their potholes. Which is to say, government should govern rather than try to act as a dealmaker and kingpin in the business world. Providing excellent public goods economically is difficult enough, but you don’t go to a couple of crassly opportunistic knuckleheads like Governor Andrew Cuomo and Mayor Bill de Blasio, two outstanding specimens of parasitic politics, if first-rate municipal services are your goal.
And that’s the pity. A New York City with a functional subway system and schools you wouldn’t mind sending your children to wouldn’t need to bribe Amazon to set up shop there. It could hold its head a little higher, too.
Editor’s note: This piece has been emended since its original posting.