The Amazon example highlights two more crucial points about the race to the bottom that happens when states “compete” by offering tax cuts, deregulation, and subsidies to mobile businesses. First, the race does not stop at zero. Once corporate tax payments are down to nothing, it keeps going: you start getting into grants, peeled-off sales and payroll taxes, and other financial chicanery—an ever-growing pile of wealth extracted from taxpayers and handed to ever-larger corporations. There is literally no limit to the extent to which corporate players and the wealthy wish to free-ride off the taxes paid by the rest of us. Cut their taxes, give them subsidies, appease them, and they will demand more, like the playground bully. Why wouldn’t they?
A second point is the winner’s curse, an idea well understood by economists. This is a common phenomenon in auctions, where the winning bidder is often the one who overpays substantially, because he doesn’t understand the value of what he is bidding for or what he is giving away; because he’s cajoled, bullied, or bribed into overpaying; or because he wants to be seen as catching the big fish—and he doesn’t care about the cost because he’s using other people’s money. A detailed 2016 study found that the pursuit of corporate megadeals (such as Amazon’s HQ2)—known as “buffalo hunting” in economic development circles—was costing US states an average of $658,000 per job directly created: a massive overall loss for these states. For technology data centers, the average cost was $2 million per job. When President Trump in July 2018 broke ground on a new manufacturing plant for Foxconn, the company claimed it would create between 3,000 and 13,000 jobs, which generated a range of positive headlines in Wisconsin. Yet the subsidy package was worth an estimated $4.8 billion—up to $1.6 million per job. And Foxconn has a long history of backing out of promised investments like this and of replacing workers with robots—what the company itself calls “Foxbots.” The cost per job could be higher still. By contrast, US states spent less than $600 per worker on training schemes, which are known to be vastly more effective than tax incentives in creating jobs.27
This chapter poses three big questions for policy makers. The first is: Will tax cuts and other goodies attract out-of-town business investment to my area? The answer is pretty clear and obvious: yes, sometimes. Since Oates’s 1969 paper came out, this question has been measured and confirmed over and again.28 It doesn’t just happen with US states; it happens with whole countries too.
The second question is: When states or countries “compete” to attract businesses or citizens, is this efficiency good for the world at large, or is it a harmful race to the bottom among the participating states?29 As I’ve explained, the neoliberals used Tiebout’s big idea combined with ivory-tower Chicago School mathematics to argue that such “competition” is healthy and efficient. And if you’re a nerd like me who looks for this argument, you’ll find it all over. For example, in 2013 Switzerland’s president, Ueli Maurer, told the World Economic Forum at Davos, “Locational competition exists within our own borders. Diversity stimulates competition: that is not only the case in business, but also in politics. This leads to good infrastructure, to restraint in creating red tape and to low taxes.” This idea can be boiled down to an appealing sound bite: competition is good; if it works for companies, then it works for countries. Tiebout, Oates, and the Chicago School lent academic credibility to the idea that states and countries can compete as if they were businesses, generating prosperity. This idea has been massively, world-changingly influential.
But there is one small snag with Tiebout’s argument: it’s hogwash. Utter nonsense. Even Tiebout said his model was unrealistic. Indeed, people who were at the seminar where Tiebout first presented his theory to the academic community said he offered it as an inside joke on the conservative economics establishment. He certainly found it delicious to have his paper accepted by the right-wing Journal of Political Economy. Tiebout reportedly said, “I don’t think those fuckers know I’m a liberal and they’ll feel compelled to publish it!”30
And the paper itself is clear about its limits. “Those who are tempted to compare this model with the competitive private model,” wrote Tiebout “may be disappointed.”31 It turns out that each of the major flaws in the model is fatal; collectively they are a catastrophe. For starters, a moment’s thought reveals that “competition” between countries or tax systems bears no resemblance whatsoever to competition between companies in a market. To get a taste of this, ponder the difference between a failed company like Toys ‘R’ Us (which filed for bankruptcy in 2017, partly due to competition from the market-hogging Amazon) and a failed state like, say, war-shattered Syria. When a company fails it is sad, but hopefully its employees will get new jobs, and the “creative destruction” involved when companies compete in markets can be a source of dynamism for capitalism. But a failed state, a place of warlords and murder and nuclear trafficking, is an utterly different and more dangerous beast, which never disappears, only festers. The only thing the two kinds of competitive failure really have in common is a shared word in the English language. Even if you believe, as I do, that competition between private actors in unsabotaged markets can be a great thing, this says nothing at all about the state-versus-state kind.
Not only that, but the Tiebout model requires eye-watering assumptions to make its “efficient sorting” work. In fact, Tiebout himself laid most of these out in black and white. For one thing, it assumes that hordes of citizen-consumers will flit back and forth from state to state or country to country at the drop of a tax inspector’s hat, selling and buying their homes costlessly and tearing their kids into and out of local schools at the latest tweak to tax rates. Second, it assumes that tax havens don’t exist, that corporations don’t use them to shift profits around the world or even threaten to shift them in order to terrify politicians into giving them unwarranted tax cuts and other goodies. In Tiebout’s model rich people don’t dodge tax or free-ride off public services. Crime, pollution, and other bad things don’t spill across borders. There is only one kind of tax—property taxes—and everyone lives off dividend income alone, while infinitely wise community leaders, in harmony with all other political forces, guide infinitely wise citizens. Company executives pondering where to relocate are never swayed in their decisions by free hookers sent up to their hotel rooms or cash-filled brown envelopes stuffed under doors on their location scouting trips, and corruption is absent from local politics.
To avoid the free-rider problem, everyone must go to school and college or university in one place, then work, live, pay taxes, and grow old in the same locality, exclusively, for their whole life; otherwise jurisdictions will free-ride off each other’s education or pensions systems—and people can’t vote with their feet after all. So there’s no room in this model for people like the technology billionaire Peter Thiel, who has railed against high taxes and encouraged the United States to “compete” aggressively on its tax rates for big businesses and rich people like him—then in 2011 went and became a citizen of New Zealand, likely as a backup plan if politics ends up making life at home unbearable.32
Tiebout’s assumptions, in turn, rest on a whole archaeology of other rickety assumptions required to make the general “efficient markets” theories work. In a nutshell, humans must be rational, wise, and self-interested, and markets are infallible.
None of this makes any sense, outside of a professor’s blackboard. In a world of rising inequality this kind of “competition” is always generically harmful, for it rewards the big multinationals, global banks, wealthy individuals, and owners of flighty capital, who can easily shift profits or themselves across borders, shopping for the best deal, the lowest taxes, the weakest worker protections, the greatest secrecy for their financial affairs, or the most lax financial regulations, and then threaten to go elsewhere if they don’t get state handouts. Your local car wash, your barber, your last surviving mom-and-pop fruit and vegetables merchant,