John Locke Update / Research Brief

Amazon: Some of the Hidden Consequences of Crony Capitalism

posted on in Economic Growth & Development, Fiscal Insight, Spending & Taxes
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Last week (9/22), Carolina Journal’s “Daily Journal” featured an important article by my colleague Jon Sanders. It focused on Amazon’s attempt to fleece North Carolina’s taxpayers by soliciting an unprecedented incentive package, i.e., bribe, from the state. I will not recount the sacrifice that would be required of North Carolina citizens to entice this internet behemoth to expand into North Carolina. Jon’s article already does a great job in that regard.

The hook for Amazon and the worm for Governor Cooper and N.C.’s always-anxious-to-extend-the-corporate-gravy train legislature is the claim that 50,000 new jobs would be created if Amazon gets all that it wants. Leaving aside whether or not the claim is true, the question must be asked: where would these 50,000 workers come from?

As of August, North Carolina had a 4.1 percent unemployment rate. Any economist, regardless of ideology, would describe this as a fully-employed economy.  What this means is that Amazon would, on net, not increase the number of North Carolinians employed, i.e., contribute to a reduction in the unemployment rate, but poach workers from other employers. And there is only one way that they can do this: by driving up labor costs for existing businesses in the state.

In a free market setting, that would not be a problem. Workers who were being lured away from existing businesses in the state by Amazon would be going to more efficient uses. Amazon would be coming here, not because of coercive wealth transfers from the state’s taxpayers, but because of real business efficiencies. Under these circumstances, Amazon’s willingness to bid these workers away from existing employers, and the choice of workers to take this new opportunity, would represent a shift from lower to higher valued uses of their talents. This would contribute to greater economic efficiency overall and enhanced economic growth.

But the new jobs that are being discussed would not be created by free market capitalism but by crony capitalism. The state and Amazon would be working hand-in-glove to thwart the labor needs of other North Carolina businesses. The workers that would be employed by Amazon would not be bid away from existing employers to occupy higher valued positions that would be making better and more efficient use of their talents, but, instead, would be being reallocated toward less efficient, lower-valued uses made possible by the state’s largesse. Because of this, if Amazon were to come here based on a coercive wealth transfer from taxpayers in their direction, the state’s economy would be made less efficient and worse off, not more efficient and better off.

There is another possibility. Amazon could import 50,000 workers from other states. In other words, North Carolinians could be forced to subsidize jobs for workers currently living elsewhere. But this would drive up other costs for North Carolinians, particularly those living in the area where the new Amazon facility would be located.  These imported workers would need housing. Their kids would need schooling. New infrastructure would need to be put in place. As Jon Sanders points out, Amazon is already asking to receive some of these services, like expanded public transportation, as part of their incentive deal. Increased demand for housing will mean higher housing costs for existing residents and, to the extent that there are pressures in these other areas, taxes will be higher.

But, wait, there is an upside. The state’s political class will get to boast that their efforts, i.e., their ability to access other people’s money, attracted a high-profile business like Amazon to the state. They will be able to attend the ground breaking when construction starts and the ribbon cutting when the plant opens. And of course, the pictures will look great in their campaign brochures and TV ads. Certainly, all that has to count for something. Like reelection?

Roy Cordato is Senior Economist and Resident Scholar at the John Locke Foundation. From January 2001 to March 2017, he held the position of Vice President for Research at the Locke Foundation. He also holds the title of Lecturer at… ...

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