Posted by: jdantos | December 8, 2005

Wall Street’s Value

Yesterday in class we had a guest speaker, the director of economic development in New York’s OMB. We are studying economic development policy, and why cities and towns might give tax breaks to businesses to locate in their jurisdiction (what an old-school crappy website by the way). The speaker was trying to explain the economic rationale behind this practice, often denounced as corporate bribery or the race to the bottom, in that it’s a form of price discrimination, and that benefits can still outweigh costs, etc.. After the class, I must admit I kind of see their point.

So he was trying to justify why the City of New York recently gave away millions in future tax revenues for Goldman Sachs to build their new headquarters in downtown Manhattan rather than just over the river in Jersey City. He said that besides the whole cost/benefit price-discrimination argument, there were two reasons. One, Goldman already has an office in New Jersey, and that almost none of the front-office employees wanted to work there, and two, that Wall Street employees are only 4% of the city’s workforce, and yet their bonuses alone provided a whopping 25% of last year’s City budget. WOW! That figure bowled me over. He showed a number of other examples where an extremely small number of astronomically wealthy people, or like 2% of ludicrously expensive real estate transactions provide like over 90% of mortgage tax revenues for the city – that in turn pay for all kinds of social progams. I guess I understand now why they treat these small sections with such delicacy. Made me think back to my past job when we’d carefully watch this one huge project at the expense of all others, since a single payment hitting the 31st of one month or the 1st of the next could screw up our cash flow. Was/is it fair? Probably not. But it’s the reality of the situation.

It also struck me – what about all the other cities that aren’t like New York? What about places that don’t have the power of Manhattan to keep Donald Trump or all the smart Goldman Sachs employees there? Should a city ever deliberately take a loss to attract one business, in the hopes that it will be the “anchor tenant” or flagship for revitalization? How do you get to be like New York – do you have to compete with it, on its own terms? What if a business honestly doesn’t care in which of a half-dozen towns it locates – how can you stop a destructive race to the bottom that hands the “winning” town nothing more than a Pyrrhic Victory? Perfect competition means no profits by definition – can there be intra-locality competition that still preserves some benefit for residents?


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