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BOHANON & CUROTT: The Amazon equation includes costs, too

March 16, 2018

Economic Analysis by Cecil Bohanon & Nick CurottThe Indianapolis area is on Amazon’s short list for its second national headquarters. We are told the benefit of Indianapolis’ winning the competition is the 50,000 jobs paying an average of $100K that Amazon will bring. But as our colleague T. Norman Van Cott has pointed out, we do well to see the 50,000 jobs as a cost. Say what? Yes, this is basic economics.

The first principle of economics is opportunity costs. Any choice you make implies you forgo some alternative. The value of that next-best alternative is the cost of the choice. Your choice to spend part of Saturday morning reading IBJ has a cost, perhaps 30 minutes of extra sleep. The benefit of reading IBJ is the insight and information you obtain from reading its great articles, minus the benefit you’d get from the additional snooze time.

The same calculus holds for jobs at Amazon. Take Indy worker Judy, who is currently toiling away at XYZ Corp. for $100K a year. If she quits XYZ for Amazon, she loses $100K at XYZ and XYZ loses her services. This is a cost. Of course, she makes this choice because Amazon gives her a better deal, such as annual earnings of $110K. It is this $10K pay bump that measures the benefit to Judy. If Amazon comes to town, the price of non-labor resources—such as land for commercial development—will likely be bid up, too.

It is the sum of these “bumps” that are the benefit Indianapolis gets if Amazon locates here. It is not Amazon’s job count, nor its projected annual payroll of $5 billion that measures Indy’s gain from Amazon.

The implications are straightforward when it comes to Indy’s offer to Amazon. It makes no sense for Indianapolis to pay more than the expected net gains to existing Indy residents. The exact nature of these net gains is hard to foresee precisely and even harder to measure with accuracy. But net gains must include both costs and benefits. And we can be pretty sure that most of the “sweeteners” public officials offer Amazon add to the cost side of the ledger.

Landing a new national headquarters has benefits—but also has costs. We are right to insist our state and local leaders proceed with great caution in this bidding war by being aware of both costs and benefits and being circumspect in their calculations.•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

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