It's chaos out there ...

No, not the snow, but the government's approach to localism which one Conservative MP has described as deliberately chaotic (you can listen here - 7.14). There is a serious point here with which many urban economists would sympathise. Because people are different, with different preferences over public good provision and taxation it can be good to have different policies implemented in different places. This holds even if all places are otherwise identical. Add to the mix the fact that places may be different (say rural or urban), and there are many reasons why policy should vary.



The problem, of course, is that the British appear to be allergic to "postcode lotteries" - where outcomes differ across areas - and the hysterical reaction to Nick Boles' comments suggest that nothing much is changing there.

Localism and House Building

The localism bill has confirmed more power to local people to overrule planning decisions.

Back in August, I reflected on the fact that honest and direct debate about housing would convince most existing local residents that they should oppose new homes. The BBC has a nice example of how this might play out in practice.

High Speed 2 - no more consensus

In October this year, I wrote: "The case for spending £33bn on high speed rail is greatly exaggerated; the case is even less convincing in light of government spending cuts; yet all the main political parties are for it. Go figure ..."

One main political party is no longer so convinced by the project it appears. Better late than never, I suppose.

Building regulations

The coalition government has announced that it is scrapping new proposals that would have further tightened building regulations. I don't claim to be an expert on building regulations (they are complex - which is part of the problem CLG are trying to address) but I am fairly confident this is a sensible move.

Tight building regulations for new homes impose a regulatory tax which reduces the number of new homes built (although land prices and planning remain a more important barrier). These regulations are imposed so that new build should be of a better quality than existing stock (with respect to safety, living environment, carbon footprint etc). So, the flow of new housing stock is better quality as a result of building regulations. But the effect on the overall quality of UK housing depends on the flow relative to the stock. Unfortunately, in the UK we build very few new houses so the effect of these tight regulations is almost completely diluted by the state of the existing stock. The coalition government's move should help with the flow rate and providing that the increase in new build is sufficient to offset the marginal decrease in standards will improve the total impact of the regulations on new build. But none of this will have a very large impact - that requires action on the much bigger existing stock.

Rural Living Costs

The Commission for Rural Communities report on rural living costs has received wide coverage today. According to the report you need 10-20% more to afford a minimum standard of living in the countryside.

It's interesting to see where those differences come from. The report assumes that people (non-pensioners) in rural areas have to have at least one car (two if both people are working age). Because the stock of housing is different in rural areas a couple with two children, get a three bedroom semi-detached house (rather than terraced); while a single working age adult gets a two bedroom house (their urban equivalent gets a one bedroom flat). However, the fact that you get a bigger house doesn't enter in to the cost calculation, while the fact that it costs more to heat bigger houses does. Because these places have gardens, rural people need more money to look after those gardens. They also need wellies.

So, if I understand the report correctly, it costs more to have a car, heat a bigger house and look after a garden (including the need for appropriate footwear). For rural people all these things are considered requirements for the minimum standard of living, while for the urban poor they are not.

Not only do I find it odd not to compare like with like, but these kind of calculations also seem to imply there are no amenity values to these things which compensate for the costs. A useful thought experiment - how many urban poor would be willing to give up 10% of their income (around £1,400) to have a car, and a house with a garden? Of course, in reality, they can't do this because it would cost much more to have these things in urban places (particularly the house and garden). Of course, all of this ignores the fact that (some) rural areas deliver other amenity benefits that make people willing to buy expensive houses to benefit from them.

For these reasons, I don't see how these minimum income standards provide an accurate picture about differences in the quality of life between urban and rural poor, even though I am sure they will be interpreted as such.

Local Procurement for Local Authorities?

Someone suggests to me that Local Authorities are increasingly interested in local authority procurement as a way to create or sustain local jobs.

I hope that this isn't true, but worry that it might be. Let me put it bluntly: Local procurement is a pretty silly policy. One LA doing it might have some benefits but at the cost of higher procurement costs (if they could be lowering costs by procuring locally, why aren’t they already doing it?). If many LA's try it, how will that help? LA1 stops buying from firms in LA2 and vice-versa? That would appear to be a recipe for costs up with no obvious benefits (again, assuming that LAs are sourcing for their particular needs at lowest cost currently).

Tit-for-tat protectionism (may have) contributed to prolonging the great depression. With finances tight and the economy struggling, surely not a good moment to start encouraging protectionism at the LA level?

New Homes Bonus

The government has provided more details on the new homes bonus that local councils will get when they allow houses to be built.

I am certain that this is a step in the right direction in trying to counter the considerable disincentives LAs face in agreeing to new homes. It's hard, however, to be optimistic that it will lead to that much more house building. This will depend on whether the incentives are sufficient to offset the reduction in direct government expenditure and the moves to give local communities more say in decisions. On the latter the BBC reports: "Ministers say the number of new homes being built is at its lowest peacetime level for 85 years and it intends to overhaul the planning system to make it easier to get schemes off the ground and to give councils and communities the final say over where developments are sited." I continue to think that these two objectives largely contradictory.

Local growth

The government launched its White Paper on sub-national growth last week. This spells out the government's approach to local growth policy, lists the first local enterprise partnerships (LEP) to get the go ahead and spells out some of the details of the £1.4bn regional growth fund.

There are, unsurprisingly, complaints from LAs whose LEPs proposals have not yet been accepted. These complaints have been reinforced, by some impressive mis-reporting on the consequences of this (LAs outside LEPs can still be part of consortium bidding to the regional growth fund, despite initial press coverage to the contrary). Others complain about the overall amount of money available. Coverage has been largely overshadowed by the continuing row over housing benefit. This is a pity, because the White Paper spells out an interesting shift in the approach to local growth.

The previous government aimed to get poorer places catching up with richer. That is, it argued for making places more similar. This was always going to be very difficult. First, because the market amplifies small differences across places. Second, because different people choose to live in different places (e.g. higher skilled in the South East) and who you are is much more important than where you live in determining well being. Government might be able to overcome these two countervailing forces, but it would require spending so much money that no government could credibly commit to delivering on the objective. Given that the coalition government intends to spend a lot less money it has simply ditched the objective and accepted that places will be different. At the same time it has also recognised that who you are is as much, if not more important than where you live. This realism is encouraging, because it forces policy to consider the best course of action given local circumstances. This requires decisions made by local communities - hence the shift to LEPs from RDAs. For most policy areas this is a shift in the right direction (I still think there are concerns around transport and land use).

The White Paper then turns its focus to regulations (e.g. land use) and removing barriers to work (e.g. disincentives created by the benefits system). I might have quibbles with the details (e.g. I still don't see that the New Homes Bonus will be large enough), but these considerations are fundamentally important and were not well addressed by existing policy. They will also need to take centre stage in a world where the government has decided to spend much less money.

That brings us to the final part of the White Paper and the proposals for the Regional Growth Fund. In short, £1.4bn of money will be allocated to projects on the basis of competitive bids to central government. I can see there are arguments in favour of this mechanism: local areas have incentives to put forward their best projects, government chooses the best of the best; but it does fit uncomfortably with the decentralisation agenda. Personally, at a minimum, I would have liked to see some funds going to LAs to fund LEPs for them to do what they want in the broad area of local development.

Overall then, I think this represents a step in the right direction. Of course, whether the structural changes are enough to offset the large reduction in expenditure remains to be seen. I am, perhaps, less pessimistic than some because I think a lot of the previous "investment" was wasted. Others, I am sure, would strongly disagree with that assessment.

Housing Benefit Reform

The housing benefit reforms are certainly generating a great deal of debate. So far, I would argue, precious little light.

Here are some of my observations and my "known unknowns".

Placing a cap on housing benefit either reduces the overall cost of housing provision or increases the amount of housing that is provided with a fixed budget (because the state stops paying high prices for some of the housing it is purchasing).

Some people will have to move from high price accommodation in high price areas. This will be a cause of considerable distress for the individuals involved. We have estimates of how many people will be affected but very little idea of what will happen in terms of where these households relocate. I suspect that stories about them all having to move to Hastings greatly exaggerated.

There must be some effects on house prices because of the redistribution of public sector demand. These effects will differ by area (down in the highest cost places, up in the cheaper places). The effects of this will be complicated and not all negative. For example, we might see middle income families who currently face long commutes able to move closer to their work. A (big) part of the problem is the overall supply of housing. Will government reforms to address this problem, such as the new homes bonus, be enough to offset the move towards more local say on planning decisions?

The changes to the rules will put upward pressure on wages for the lowest paid workers in high cost areas. In the private sector firms will have to respond. In the public sector national pay structures already prevent wages from correctly reflecting costs of living. That is why some of the worst affordability problems (or at least the ones which get a lot of attention) involve nurses, social workers and teachers on low levels of public sector pay. Will the government do something to address this issue?

In terms of the move to 80% rents for new social housing, to what extent will this simply be a transfer from capital expenditure to revenue expenditure? Will the implicit subsidy via rents be enough to offset the fall in per housing capital subsidy? What will all this do to work incentives for individual households? It must change them, but how?

I do not currently know the answers to any of these questions and what I have read of the debate suggests no one else knows them either.

The Spending Review: Jobs

We are told that (more than?) half a million jobs in the public sector will go as a result of the spending review. As well as trying to figure out which families are hardest hit, the media are full of stories trying to identify which places are likely to prove least resilient.

Abstract from issues about the timing and speed of cuts, it is as interesting to think about the long run impact on the economic geography of the UK. A growing public sector has clearly propped up total employment in some areas that are very bad at generating private sector employment. The direct effects of public sector job cuts simply must be bad for those areas. But the tricky thing to predict is how the economy will adjust to this initial effect. For the private sector in these areas there are two offsetting indirect effects. The first is that public sector jobs create demand for local goods and services - so cutting them will be bad for the private sector. High public sector salaries also create distortions in local labour markets - particularly in competing for the best workers - so this cutting jobs will be good for the private sector. The coalition is banking on the second effect being larger than the first. Labour used to think that the latter effect dominated in the South East, but that the former dominated in the rest of the UK. In reality we simply don't know the magnitude of these two offsetting effects.

The situation is further complicated by the fact that the demand response is likely to generate a supply response as people move away from places where demand falls disproportionately as a result of public sector job cuts.

In the end, the balance of these effects are likely to lead to a redistribution of population towards areas that are relatively good at generating private sector jobs. This may be bad for the balance across places, but there are things policy can do (e.g. around the supply of housing) that mean many individuals may be better off as a result of these moves (at least compared to staying put).

I should finish by noting that, in terms of long term welfare, these "job effects", are surely second order compared to the debates about what kind of public goods we want the state to provide. But I doubt that observation will prevent further speculation on the spatial impact of the spending review.

House prices

Interesting to see Grant Shapps talking about house prices yesterday. He suggests we need a period of stability.

Personally, I would go further than this: given house price to income multipliers, stable won't do it - we need falling real house prices. I can well understand that no government minister will ever call for this!

It's more interesting to see how they think they will achieve it: "Mr Shapps admitted the Government could not ‘dictate’ house prices, but said it would help stabilise the housing market by using economic policy to ‘keep interest rates low’. [...] Mr Shapps also vowed to look at building regulations to make it easier to build new homes."

The second of these is key. Keeping interest rates low increases demand and prices rather than lowering them.

Who benefits from HS2

On reflection, aside from my doubts about the overall benefits of HS2, it is puzzling that the transport secretary chose to highlight the benefits to the North East ("This great connectivity is fantastic news for the North East and other regions and will transform the economy").

Economic modelling of these wider impacts suggests that, if they do arise, it is likely because of the increased accessibility generated by the new high speed line. But a Y-shaped line to Manchester and Leeds surely means accessibility improves least for the North East? Perhaps there is some new "research" that suggests otherwise but to my mind, the spatial distribution of any gains is yet another uncertainty about these wider economics impacts.

Even more high speed 2

Philip Hammond, the Transport Secretary, has backed plans for high speed routes to Leeds and Manchester.

A year ago I wrote of the former government's HS2 plans: "the wider benefits - e.g. 'regenerating the north' - are even more uncertain. I suspect the only thing we can say with any certainty is that they are likely to be overstated." So I was delighted to see Mr Hammond upholding that tradition with his assertion that: "This great connectivity is fantastic news for the North East and other regions and will transform the economy, I have no doubt about that at all."

In short: The case for spending £33bn on high speed rail is greatly exaggerated; the case is even less convincing in light of government spending cuts; yet all the main political parties are for it. Go figure ...

Council Tax Revaluation

Late last week the government announced no council tax revaluations in this parliament.

Of course, council's will still be free to change the level of taxes (at least once the government removes it's centrally imposed freeze). So this announcement is about the distribution of the burden of council tax rather than the overall amount. Holding off on a major revaluation exercise probably makes sense when we are promised a full review of local government finance by summer 2012.

It is clear that the review needs to deliver some serious reform if the government wants to meet its objectives of devolving power to LAs. At the moment, LAs are "highly geared" with council tax receipts only covering a small percentage of total expenditures with the balance met by central government grants. This means that small changes in total expenditures need to translate in to much larger percentage changes in council taxes, and any changes can easily be offset by changes to central grants. This creates all kinds of problems for LAs when deciding on spending and revenues.

But the coalition decisions on council tax so far (a freeze plus no revaluations) signal just how difficult is devolution of tax raising powers. It will be interesting to see how that circle gets squared by 2012.

Resilience Rankings

Research for the BBC has identified the places most vulnerable to spending cuts. I am not sure it throws up that many surprises. As the Guardian puts it: "Assessing more than 30 separate measures of a local authority's ability to withstand tougher economic times, the report found that poor areas still feeling the effects of the recessions of the 1980s and 1990s were likely to be hardest hit."

The initial shocks in the 1980s were big, but this does highlight the issue that 30 years of intervention has done very little to address the problem. There seem to be two takes on this. One is to say we haven't spent enough and that the UK is sufficiently small that anywhere can be turned around. The other is to suggest that the shocks represented a fundamental shift that reasonable policy expenditure will struggle to ever address. My feeling is that the impact of this recession gives further strength to the latter argument.

NICs Holidays

Not some new, soon to be broke holiday company, but the government's National Insurance Contributions holiday scheme which started today.

According to HMRC: "The ‘Regional Employer NICs Holiday for New Businesses’ offers substantial reductions in employer NICs for new businesses in those parts of the UK most reliant on public sector employment." Looking at the list of eligible regions, this turns out to be the whole of GB except for the SE region and London.

My understanding of the (now quite old) evidence on regional employment subsidies was that they did have an impact but that the costs per job created were quite high. I imagine that will be the case with this holiday as well. It's an employment subsidy, so we expect some positive impacts, but because there will be plenty of deadweight (businesses that would have started anyhow) and quite a lot of displacement (new subsidised businesses driving out old) the net impact will be considerably smaller than the gross impact. It will be interesting to see how the effects play out.

Housing Starts

CLG released the latest figures for housing starts were released a few days ago.

There were 28,590 starts (seasonally adjusted). According to the press release:
- 13% higher than last quarter
- 84% higher than the March 2009 trough
- 42% below there March 2007 peak

CLG provide more comparisons but all those numbers left me a little dazed. If you take a 10 year pre-recession average of Q2 you get around 42,000 starts. So I guess we should view that figure as about 2/3 of the 10 year average.

There are some reports that scrapping the regional spatial strategies has led to plans for 84,000 houses being reviewed or cut. Of course, not all of these may not have been planned for the same year, but if these figures are right you would expect them to start showing up in the Q3 figures.

Who benefits from new housing?

I was thinking a little more on the new home bonus and reflecting, in particular on the following: "Mr Shapps urged councils to open up an honest and direct debate with the communities they serve about the benefits of building new homes in their area - how they can reap the benefits of development and not just the costs."

The problem is that new development doesn't tend to benefit existing residents. NIMBY's are generally acting in their own self interest because new housing will tend to decrease the value of the existing housing stock (because it takes away valuable amenities that are capitalised in to prices). An honest and direct debate doesn't address that problem!

[PS: From Today's (11/08) FT Editorial: "But the bonus scheme does not do enough. It smacks of bribing councils not to use the beefed-up powers to veto development the government gave them by scrapping Labour’s housing policy. What if councils think new developments hurt their constituents’ house prices more than extra government money makes up for?"]

New Home Bonus

The coalition has announced plans to provide LAs with financial incentives to agree to new housebuilding.

In the area of housing, I am no fan of top down master plans (like the, now defunct, Regional Spatial Strategies). We need a mechanism that allocates land to housing where it is needed and that compensates affected local communities so that they support new housing rather than opposing it. Against this background the approach advocated by the government is a step in the right direction.

There are still important problems to resolve. The idea is that the scheme will give LAs incentives by matching council tax receipts for six years on any new homes. This will help resolve the problem that grant funding allocation (which is broadly proportional to population) takes time to respond to population growth. It will not address the problem that new homes may impose marginal costs that are considerably larger than the average costs of serving existing populations (for example, if they require communities to build new local facilities such as schools). Presumably, the intention is that the Community Infrastructure Levy will try to address this problem. Whether the combined incentives provided by the homes bonus and the levy are significant depends on the costs that LAs face - I don't know of any good evidence on this.

Assuming the resulting incentives are "significant" will this be enough to get houses built where they are needed? That's less clear for two reasons. First, house prices provide a strong signal as to where we need new housing but when looking across LAs council tax is not very strongly correlated with house prices. This means the incentives are not much stronger for LAs where there is the strongest demand for new housing. Second, the incentives compensate LAs but not the most directly affected local residents (the immediate neighbours of housing development). Traditionally, the planning system has tried to get around this problem by (mostly) ignoring the wishes of local residents. Quite rightly, the coalition government is trying to move away from this unpopular position. But giving more say to local residents means greater opposition to new developments and, as yet, the government do not have good mechanisms for addressing that problem.

Social Housing Swap Shop

Social housing is associated with three "mobility" problems relating to tenure (people are unlikely to move out to renting or owning), size (people have homes that are too big or small for their current needs) and geography (allocation is quite localised making it hard to get housing in another Local Authority and making it hard to move). The coalition government has been talking about how to tackle these problems.

In terms of size and geographical mobility, CLG have been talking about mechanisms to encourage swaps. I am retired with a big house near the city centre, you are a working family with a small flat in the suburbs. We are both better off if we can swap. It really is hard to see why anyone should object to this, aside from the fact that it may have relatively little impact on the problem (at some point early on in economics, students learn that one of the roles of money is to facilitate exchange because it removes the need for double coincidence of wants - i.e. we both have to want to swap).

Other proposals are more tricky. For example, giving people the right to ask to move must be good from the point of view of the person asking. But, the overall effect depends on the supply of social housing in different areas. In unpopular areas it means low occupancy, while in popular areas it means excess demand. How do you square the latter with the idea that Local Authorities should be allowed to prioritise "local people"?

Similarly, removing the job market disincentives created by social housing provision (and through the housing benefit system) would seem to be very important, but changing tenure conditions may well exacerbate that problem, not mitigate it. More generally, insecurity of tenure is (at least according to the anecdotal evidence) a major cause of considerable distress to many social housing tenants. That isn't to say that you shouldn't try to tackle these issues but it does highlight how difficult is the road ahead.

Mixed Communities

It will be interesting to see where the coalition government goes on "mixed communities" which were such a strong, centrally imposed, feature of the planning regime under the previous administration.

Those of us who questioned the evidence base for this particular policy prescription suggest that there are obvious costs that may offset the (hard to detect) benefits. One of these is that specialised communities (e.g. just for the old or young) are better able to offer local services people want. If that sounds a little dry, Firhall, the "child-free" village in Scotland provides an interesting example.

Development Control

My colleague Tim Leunig quoted in the FT last week raised the possibility that strong planning controls in the South East would force businesses to set up in the North. He suggests this might be good for the North, but not for the UK as whole.

I imagine that the coalition government would be quite pleased with this outcome given its emphasis on rebalancing. So it seems important to point out that this is the optimistic scenario. More realistically if a business that wants to locate in the Greater South East is prevented from doing so one of two things is likely to happen: (i) the entrepreneur goes off and does something else; (ii) the firm sets up outside the UK.

Businesses need to make a return on the capital that they invest. If they are forced to locate in places which are not suitable for their business they make lower returns. They either decide to do something else with their capital, or to invest elsewhere in the world where returns are higher. Assuming there is some lump of UK businesses out there which can be easily shifted around the country ignores this first order effect. Not a good thing when we need to generate more private sector employment in this country!

On Your Bike (Policy Exchange no Longer Insane)

It's interesting to see the government raising the issue of helping people move to take advantage of job offers, given the way they got their fingers burned when Policy Exchange suggesting something very similar sometime before the election.

I think the evidence on this is clear. Some places are better at generating job opportunities than others. For many years policy has tried to fix this by creating more job opportunities in places that are not generating enough employment. This policy has not worked very well. Therefore, it seems sensible to put more focus on helping people to move to jobs (rather than moving jobs to people). Two important caveats. First, it's important not to overstate the likely impact. Where you live is far less important a determinant of job market outcomes than who you are. Unemployment in London remains a big problem for those at the lower end of the labour market. Second, high house prices in better performing areas are a crucial economic barrier that prevent people from moving to take advantage of opportunities. It is still unclear how government intends to address the question of providing LAs with adequate incentives to address this problem.

Housing and the budget

John Muellbauer, of Oxford University (and a SERC affiliate) has a nice Guardian comment piece on housing.

John is one of the economists who did "see it coming" in the sense that he has been talking about problems in the housing market for a long period of time. Unfortunately, while the coalition government's decentralisation plans are surely welcome, it's still unclear (as John points out) what, if anything, they are going to do to provide appropriate incentives to LA's to allow residential and commercial development.

Well, that's one (brownfield) target met

In 1998, approximately 50% of development occurred on brownfield land (a figure that had been remarkably stable for long periods of time). The Labour government committed itself to a target of 60% of new development on brownfield land by 2008. The target had been met by the early 2000s. In 2005, 73% of new development was on brownfield land.

Brownfield land is expensive to build on. It is often re-developed at high density to meet national targets. Lots of it is in ex-industrial cities where demand for housing is low. Large pieces of land that become available (ex MOD of NHS sites) are some way from existing settlements (working against stated objectives on densification). Worse, as highlighted by the coalition government today, a large proportion of building on "brownfield" land has been building on private residential gardens.

In short, top down targets for brownfield land haven't delivered the kind of housing people want in the places where they want to live. They have also been terribly unpopular with local residents. If top down planning doesn't appear to be making anyone happy*, then you have to welcome today's announcement to localise decision around building on private gardens.

But, all of this comes with a very big caveat: It is still unclear how the coalition government is going to ensure local residents in popular places are offered sufficient incentives to say "yes" to new housing. Partly the existing brownfield target was met because not many houses were being built (and not just in the recession). Prevent building on gardens and supply falls further. Lower supply means higher prices and greater price volatility. We are promised more reform of the planning system, if we are not to make the same mistakes as the last government, it has to tackle the incentive problem head on.


*[I guess it makes planners happy - by some figures the sixth fastest growing occupation in the England in the past decade]

Big Society: Local Planning

From the CLG highlights, I think that for this to work:
"Giving communities a greater say over their local planning system"
we will need this:
"a comprehensive review of local government finance"
or something similar to provide sufficient incentives to make sure that new commercial and residential building can happen in popular places where people and firms want to locate.

Devolving decisions coupled with a system that provides decent incentives should be a better solution than top down spatial plans. But the first without the second will spell trouble in the form of restricted supply leading to higher (and more volatile) house prices and commercial rents.

Cuts, cuts, cuts

RDA's spend around £1.5bn per year. Administration accounts for about 7% of this. The Homes and Communities Agency is budgeted to spend £6bn this financial year. Administration accounts for less than 2%. It should be clear that efficiency savings in the delivery (e.g. through abolishing these quangos) will only make a small difference to the overall expenditure. The new government is going to have to cut programme expenditure. So the crucial question is: what should it cut?

I would significantly decrease government expenditure on the provision of commercial real estate. In a few places (the centres of Manchester, Leeds, Newcastle) such expenditure has probably positively reinforced developments in the private sector. In poorer areas and cities with weaker economies, I believe that shiny new government funded buildings simply transfer employment from other places in the immediate area and as a result don't provide significant employment benefit.

I would continue some of the public realm expenditure in more deprived neighbourhoods. I would focus on the public good (amenity) benefits these deliver to poorer families. For example, public space provision (e.g. parks) likely has large amenity benefits in poorer neighbourhoods where families have little private space. The benefits of signature buildings and public art are, shall we say, less clearly defined.

Improving the quality of private space (e.g. via decent homes) clearly benefits poorer families, although it may cause other problems - e.g. decreased incentives to work. That said, crappy social housing is surely not the best way to deal with these problems so some component of decent homes expenditure should stay.

The government should spend less on building houses. According to the HCA around a half of the homes delivered this year will have been (part) funded by the government. This figure is distorted by the recession but why does the government need to be so involved in the provision of affordable housing? The simplistic answer is that "house prices are too high". But what drives this are policies which raise costs: e.g. the national brownfield building target (because building on polluted land is expensive) and supply restrictions from the planning system. In effect, government restrictions raise land costs, which raise the price of housing, which makes housing unaffordable, so the government spends large amounts of money to provide affordable housing. Government has it in its power to change these restrictions (e.g. through taxing developers and land owners and giving the money to local homeowners, LAs etc, negatively affected by new building).

Moving away from the built environment, there is a case to be made for reducing the amount spent on corporate welfare (specifically giving money to business to locate in poorer areas). I would stop funding pretty well everything which simply shuffles around the existing pool of high skilled workers and focus instead on things that directly improve the employment prospects of poorer residents. Generally, I think that corporate welfare is an effective way of getting firms to locate in places that they otherwise wouldn't. But it is expensive and it doesn't turn areas around (at least on the basis of fifty years expenditure to date).

If the cuts fall in all these areas, it would allow us to protect expenditure that I think matters most - that on improving educational outcomes of poorer children and improving the labour market prospects of poorer adults.

RDAs: It's what you do, not the way that you do it

Before the election, I prepared an election briefing for the CEP on regional and urban policy. It touched on some of the difficulties in evaluating RDAs and concluded:"In short, there is no compelling evidence as to whether the RDAs are a good or bad thing. Labour is committed to them; the Conservatives and Liberal Democrats are (probably) committed to abolishing them. It should be clear that these positions cannot truly reflect evidence-based positions on RDAs’ effectiveness." Revisiting the evaluation evidence over the last few days really hasn't done anything to change my opinion on this.

Even if you look at the overall growth performance it's still impossible to make an evidence-based judgement. Individual region growth rates and the gap between the growth rates in the North and South are essentially unchanged in the periods before and after the introduction of RDAs. If you think the underlying trends (net of the effect of government policy) would have been the same in the two periods, then RDAs were more effective than the previous arrangements if they spent less money (and vice-versa). What if you went to the data and the RDAs had spent more? This looks bad for the RDAs unless you think that things would have got progressively worse for the Northern regions in the absence of intervention, so we had to spend more to stand still. In short different assumptions on the counterfactual (what would have happened in the absence of government intervention) allow you to reach different conclusions, but as the counterfactual is unobserved the aggregate data can't help us much either.

In the end, what we are left with are the broad arguments around costs and benefits of different arrangements. My feeling is that, on balance, the somewhat arbitrary regional structure makes less sense than something based around groupings of Local Authorities. The latter have democratic legitimacy. Such groupings are also more likely to end up covering "functional" economic areas (i.e. sub-national areas in which intra-area economic interactions important). Although, the evidence on whether this makes much difference is surprisingly limited.

In the end, given the evidence we have, I think that we are better placed to answer questions about what policy should do, rather than how it should be delivered. More on this next week.

RDAs and evaluation: A bit more value added

It suddenly occurs to me that I am in danger of appearing contradictory. I complain that I can't learn a lot from the cross-cutting RDA evaluation but then I suggest that its an example of an area where systematising evaluation across subnational organisations may have big payoffs.

Let me clarify - I think systematic evaluation is better than no systematic evaluation. My major problem with the cross-cutting RDA evaluation is the reliance on user benefit surveys to calculate additionality. The recent practical guide from BIS notes: "To assess the net impact of an intervention, information is needed on the situation that would exist both with and without the intervention. The standard approach is to use a beneficiary survey – asking questions on the impact [...] and getting beneficiaries to estimate what would have happened otherwise. There are clearly limitations with this methodology. A more robust approach is to compare the change in activity and outputs of beneficiaries before and after the intervention against the achievements of a control group (i.e.: people/businesses that would have been eligible for support but did not receive it). However, results are dependent on identifying an appropriate control group, which is not possible in many cases. [...] In addition, a control group approach is usually more expensive than beneficiary surveys. As a result, using a survey of beneficiaries is generally the preferred approach when balancing costs and benefits of the two methods."

I agree with much of this. But the point is that when you are talking about spatial policy there are complex interactions that mean the impacts extend beyond the direct beneficiaries. Further the beneficiaries have absolutely no idea about the nature of these complex interactions. As a result beneficiary surveys are often not a great way of evaluating spatial policy. To be clear, hopefully better than nothing, but not great.

Quite simply, when you are spending large amounts of money on spatial policy (collectively the RDAs have spent around £15bn) by all means use "light touch" beneficiary evaluation for some (even most) of it. But (i) you shouldn't read too much in to the results and (ii) at least some of your evaluation work needs to try and tackle these issues through more robust analysis.

Evaluation and decentralisation

After spending yesterday reading through some of the extensive material on RDA evaluations I suggested that I wasn't much clearer on the impact of RDAs. But it did get me thinking on the relationship between evaluation and decentralisation.

I confess to knowing very little about the history of the RDA evaluation exercise, but I was interested to read from the national audit office that (with the notable exception of EMDA) an assessment in 2006 found: "impact evaluation to be one of the weakest elements of their performance". BIS and the RDAs responded to this by drawing up the framework that I discussed yesterday and RDAs were then asked to use that framework to evaluate properly impacts by 2008. A follow up review in 2006 found that out of 400 projects "only in a very few cases had RDAs used a robust methodology to forecast or measure outputs and outcomes". By December 2007 external "consultants found that only about 40 per cent of [evaluations] were sufficiently compliant with the Framework". With further intervention 70% of projects had been covered by the time of the overall evaluation I discussed yesterday. Subsequently BIS has published further guidance to help make evaluations more uniform in future.

The broader question that all of this raises for the new government is what kind of frameworks for evaluation to put in place when decentralising powers to subnational organisations (LAs, RDAs - or whatever replaces them). The RDA experience would suggest that this is one area where systematising practice across organisations has big payoffs. Despite these obvious benefits, Local organisations are often hostile to this process because it appears to trample on local autonomy. Whatever changes to delivery the new government is planning it will be interesting to see how they try to square this particular circle.

Bye-bye RDA's?

Pre-election neither the conservatives nor the lib-dems were particularly pro the RDA's. So I thought I would take the opportunity of a quiet day to see if I could get my head around the PwC evaluation of RDAs (which was published last year) and get a clearer idea of their effectiveness.

The crucial thing that I would like to understand is the net (i.e. additional) impact of RDA expenditure. This differs from the gross (or measured) outcomes because, loosely speaking, some of the stuff that RDAs pay for would have happened anyway. Understanding the net impact is crucial for figuring out how the benefits of RDA expenditure compare to the finanicial costs.

The PwC report provides figures for this. e.g. the RDA's have spent money creating or safeguarding 471,869 jobs (gross). The additionality percentage is 45% so more than half of these jobs would have existed anyhow in the absence of intervention, implying 212,873 jobs (net). Additionality for land remediation is higher at 71%.

The PwC evaluation arrived at these figures by reading through many individual evaluations done by consultants for the RDAs. The RDA evaluations in turn follow the framework set out by another consultancy report: "Evaluating the Impact of England's Regional Development Agencies". This report only sets out a framework for getting at additionality, referring the reader requiring more details to another consultancy report for English Partnerships: "The Additionality Guide". This provides some ready-recknors for additionality taken from a number of different sources. For example, on p.15 you can find figures for deadweight (one component needed to calculate additionality) from the City Challenge report. These figures come from a survey of beneficiaries and project managers.

To be clear, asking beneficiaries of a service (or the people who are paid by government to provide a service) whether it does any good is not a particularly robust evaluation methodology. At the very least, we might worry that they have strong incentives to say that the project did a lot of good.

Moving along, p. 16 of the Additionality Guide provides numbers for additionality from the Neighbourhood Renewals Fund Evaluation. I couldn't find the matching table in the NRF report, but I did find a very impressive looking formula for calculating additionality on p. 62:
AI = [GI x (1-L) x (1-Dp+s)/2]*[1-D]
where GI is gross impact and everything else on the right hand side measures some component of additionality (e.g. Deadweight D).

How did the NRF evalution find out the values of these things on the right hand side? Well, they asked intervention managers and coordinators (in other words the people who are being paid to deliver the service) whether they thought deadweight had been very low, low, medium, high, very high and similarly for the other components.

Notice that these are very difficult questions to answer. At least in a medical trial if someone asks whether you are "feeling" better you can provide an accurate answer. Here, these managers are being asked to answer questions about whether jobs in the area would have been created anyhow (deadweight), whether this has been at the expense of jobs at other firms (displacement) etc. The whole exercise does feel rather circular - after all I was reading the RDA evaluations hoping to find answers to these very questions because I have no idea of the additionality of the interventions. 1,000 pages to find out that I was possibly getting an idea of someone else's best guess of the effects was, should I say, slightly disappointing (and may explain the length of this blog).

But, of course, the story doesn't end there because the PwC evaluation looks at the RDA evaluations which use the framework, incorporating the additionality guide which draws on the NRF report etc. So, it is possible that the RDA evaluations themselves have better evidence drawing on, say surveys of both beneficiaries and non-beneficiaries.

Fortunately, many of the evaluations are available on the web, so I downloaded all the evaluations from Advantage West Midlands that were used by PwC. There are 9 of them comprising another 1,000 or so pages of analysis. Here is what I found:
- Regeneration Zones (£280m): additionality based on interviewing 40 project managers responsible for 50 supported projects out of a total of 300 projects
- Land and property (£261m) surveys on 39 project deliverers, interviews with 12 property developers and surveys on 88/180 occupiers who moved to the new sites
- SRB (£218m) used national SRB figures - which, btw - also appear in the additionality guide and are based on interviews in 10 case study areas
- Clusters programme (£72m) surveyed 751 beneficiaries out of 10,930 businesses
- Skills (£47m) interviewed 80 of 6029 individual beneficiaries
- Rover (£36m) used national ready recknors (I think - I was getting tired by this point)
- Technology Corridors surveyed 210/2052 business, 40/237 tenants, 65/1615 individuals (all beneficiaries)
- PARD (£32m) 38 firms out of 592 assisted
- The Market Towns Initiative, Mercia Spinner and Midlands Excellence projects (all quite small) also interviewed beneficiaries.

In short all these reports are based on surveys or interviews with beneficiaries with no comparison to non-beneficiaries. After 2,000 pages I am no clearer on the additionality provided by RDA expenditure.

This is a little depressing because, to make it very clear, I think that the careful evaluation of policy is important. Increasingly, I begin to think the problem is that government funded evaluations of spatial interventions simply try to answer too many questions (this point may apply more generally). I think we need to focus effort on getting a proper understanding of the impacts on a smaller range of outcomes for the more major policy interventions. Less important interventions or outcomes could be subjected to something much more light touch. It could be cheaper, and it certainly should be more convincing on what works. Both important things in a time of budget cuts.

Talking of cuts, I am still no clearer on RDA effectiveness ...

Coalfield Regeneration

Catching up on some reading - specifically, the report on Regenerating the English Coalfields by the Committee of Public Accounts. Its conclusions on the effectiveness of interventions make for depressing, although not totally surprising reading.

The interventions have spent £630m so far on bring 54 coalfield sites back in to working use. But the committee "[has] serious concerns about the value for money of the coalfield initiatives. The Department does not know what improvement the initiatives had made to the lives of people living in the coalfield areas, as it does not have a robust assessment to prove to us the true number of additional jobs created. Nor does it know the business occupancy rates for employment space on the redeveloped sites, or the number of people from former coalfield communities who have benefited. The number of jobs the initiatives had helped to create could be anywhere between 8,000 and 16,000. We are concerned that public money has been invested to create jobs that would have been created anyway."

As I said, depressing - but not that surprising - once again lots of money on new buildings (physical regeneration represents a disproportionate amount of the money) has very unclear impacts on individual deprivation.

I am not that surprised about the fact that net job creation is poorly documented - this problem bedevils the assessment of RDA spatial interventions as well.

Public Sector Relocation

It's been a very busy few weeks and I am only now getting the chance to catch up with a number of things, including the budget.

One of the big spatial issues was the decision to continue the process of reallocating jobs out of central London.

This may well deliver long term cost savings (although the case is often overstated by muddling in efficiency savings with relocation savings) but the evidence on its impact on regional economies is essentially non-existant.

The direct impact on local economies come from the "multiplier" effects of civil service expenditure on local suppliers (including that of civil sector employers). These effects are clearly positive. Offsetting this are the indirect negative effects from the fact that relatively high public sector wages mean that public sector employment crowds out private sector employment. Early reports assumed this crowding out would be complete, later reports assume it will not be. But these are simple assumptions backed up by some multiplier modelling. As far as I can see systematic ex-post evaluation of the local impact of previous relocations is not available. More on this once I have had a chance to dig a little deeper.

High Speed 2

In September last year, I commented on what I felt we would know after the various studies for HS2.

My starting point was that: "The direct user benefits (i.e. the benefits to people making journeys) are potentially quite large. Unfortunately, so are the costs. Both costs and benefits are highly uncertain." The government has now placed numbers on this suggesting that the project will generate £2 for every £1 spent. That might sound like a good return, but the Eddington report found "transport schemes can deliver overall benefits averaging £4 per £1 of government expenditure". So there are certainly many alternative projects which would generate better returns.

Next, I suggested that: "the wider benefits - e.g. 'regenerating the north' - are even more uncertain. I suspect the only thing we can say with any certainty is that they are likely to be overstated." Claims that Birmingham's economic output will increase by 6% suggest this process has already started.

Finally, I pointed out two certainties. First, the environmental impacts are not large and could well be negative (HS2 predict a change in average annual emissions in a range from -0.41 to +0.44 million tonnes, equivalent to just +/-0.3 per cent of current annual transport emissions) The second certainty is that any new route will not be commercially viable and will need large government subsidies (HS2 predict the cost is £30bn). The government suggest they will expect fair contributions - and point to developers and local government. Of course, most of the benefits are to passengers experiencing faster journeys so fair contributions means higher fare contributions (no pun intended). We shall see, but I can't imagine higher rail fares being that popular with voters ...

The rural economy

The Rural Advocate has published his 2010 report. It focuses on how to keep young people in the countryside and includes a number of recommendations including around affordable housing, employment and skills, transport and communications.

I have written on rural housing and Digital Britain before and there is nothing new in the report that has changed my thinking on that.

My more fundamental question around this year's report is why should it be a policy objective to keep young people living in the countryside? It is hard to create jobs in rural places because they are less productive (if they were as productive as jobs in urban areas, then why would firms ever pay downtown rents?). Overcoming this productivity disadvantage requires more than just (very expensive) investment in broadband and more mobile coverage. More (heavily subsidized) public transport can only do so much to allow people to commute to jobs - rural areas close to bigger cities are usually expensive, while smaller towns struggle to generate large numbers of jobs for surrounding rural areas.

In short, we can spend a large amount of money to equalizing coverage of broadband, mobile networks and public transport but (likely) failing to generate significant numbers of rural job opportunities. Alternatively, we can recognize that, at least since the industrial revolution, rural to urban migration has played a crucial role in improving many young people's life chances. Perhaps we should be focusing on what we can do to help encourage and support it.

Conservative plans for planning

The Tories quietly published their Green paper on planning earlier in the week.

On the plus side, more local control over planning ("local decision over local plans") allows local authorities to better match local preferences. On the minus, this creates problems of coordination when costs and benefits are felt beyond local authority boundaries. There are two big areas where these problems arise - infrastructure provision and the overall supply of commercial and residential space.

On infrastructure provision, they plan to scrap the infrastructure planning commission and to go back to ministerial approval albeit with some tinkering aimed at speeding things up. So that's one step back (which may surprise some in light of the claim on an earlier page that: "Given the scale of the problems we face, piecemeal reform of the planning system is simply not an adequate response.")

On the supply of commercial and residential space they are being more radical. Out go top down (regional) regional plans and targets and the huge number of guidance notes; in come presumed consent for "sustainable development" (e.g. projects in line with the local plan and national guidelines) and financial incentives to allow more development.

The later issue will be key because the financial incentives will need to be large enough that local plans actually allow for development (presumed consent won't mean much otherwise). The financial incentive will come through the already announced council tax matching incentive. Given current local government financing arrangements it is not clear that this will be sufficient to encourage much increase in development land.

The other side to this coin is that you need to provide some kind of financial compensation to neighbours directly affected by new development. The green paper envisages this happening through private developers negotiating with neighbours. It will be interesting to see whether these financial incentives are sufficient to offset the greater power that local people will now be given to block new development (through their input in to the local plan).

If either sets of financial incentives (to local authorities or neighbours) turn out to be too small, then it will be important that upward adjustment is quick if these reforms are to seriously address the supply problems that bedevil the current system.

(A lot) more evidence on New Deal for Communities

The NDC evaluation process launched a plethora of new publications last week. "Neighbourhood projects make a difference" was the spin CLG put on the findings. As with the last NDC report, however, the details don't make for such happy reading. Quite simply, at the individual level, there is very little evidence that NDC is making much of a difference.

Starting with that headline: "After controlling for base characteristics, residents in NDC areas have on average seen statistically greater positive change in relation to their satisfaction with the area compared with comparator residents, (significant at a 0.05 level), when the starting position is not included in the model. This is not, however, the case when a respondent’s initial level of satisfaction is included."

On health:"This lack of marked positive change relative to other benchmarks is perhaps a little disappointing, given that the case study NDC partnerships have devoted considerable effort and resources to improving health outcomes amongst local residents, and these sorts of efforts have been replicated across the NDC Programme."

On education:"The research team found little statistically significant variation in outcomes for the whole cohort between NDC and comparator areas, even after controlling for the differences between these areas and NDC areas." Or put another way: "Educational performance has improved faster than the national average for pupils from disadvantaged backgrounds and in deprived areas generally, including non-NDC areas. What this means is that for the NDC Programme as a whole, there is no evidence that the presence of the NDC partnerships has made a decisive difference: other disadvantaged areas did broadly just as well." There has been improvement in key stage 3 Science - but when you look across such a huge range of indicators you are going to find some significant differences even when there is no effect.

As I said before, what I take from this is the following: Based on the best evidence that we have available a reasonably well funded ABI has not, on average, improved individual outcomes in targeted areas. You can read the (7) reports yourself for the "wriggle room disclaimers".

Green belt

I enjoyed Centre for Cities' comment on the CPRE report on the Green Belt.

CPRE argue that we should do more to maintain and improve existing Green Belt land. Centre for Cities respond that building on a relatively small amount of it could do a lot to help solve housing supply problems (and provide some nice football pitched based statistics to make this point). Unsurprisingly, I am with Centre for Cities on this one.

One, minor disagreement: Centre for Cities suggest "Green belts have largely succeeded in their primary aim, to contain urban sprawl". While that may be true at the level of individual areas there is an argument to be made that looking more widely Green belts encourage leap frog development and longer commutes - i.e. the fast growth of satellite towns simply gives us sprawl by proxy.

Public Sector Wages and the North-South Divide

Alison Wolf, writing in the Sunday Times, makes the case for more spatial variation in pay in the public sector.

Starting from the individual perspective and the principal of equal reward for equal work it makes sense to pay people in high cost of living places more. You might also try to do things about the cost of living - like deliver more housing. But equal reward means compensating for the remaining differences. One complication is that differences in house price rises means that you need to do something to net out capital gains (so it's not house prices per se that matter, but the differences in imputed rents). Of course, if you claim the principle is equal pay for equal work then you are automatically against this kind of variation. But equal pay, as opposed to reward, is a pretty arbitrary objective.

Of course, localising pay is about much more than equalising reward and has big implications for the supply of public services as discussed at length in the full report. It also has implications for wider spatial disparities. However, as I have argued before, it is surprising how little we know about the impact of these. My feeling is that, given the existing evidence, discussion on these issues should focus on the implications for public sector delivery. Controversy enough there without getting in to wider speculation on the North-South divide.

An anatomy of economic inequality

The report of the National Equality Panel received a lot of coverage over the last couple of days. Aside from the message on overall UK inequality (high and persistent; between group differences matter but within group differences are much larger) it also provides evidence on differences based on region and area deprivation.

On regions, I think the most striking finding concerns the reason why inequality in London is wider than in any other region and the implications of that: "London is by far the most unequal region [because] the highest incomes in London are much higher than in all the other regions apart from the South East, but the lowest incomes in London are little different from elsewhere. [T]his implies that allowing for cost of living differences [...] those with the lowest incomes in London would be shown as poorer than those with low incomes in other regions."

Interestingly, this means that regional policy based on average income will not target the poorest people in England - a nice example of the problem of focusing on places rather than people.

On area deprivation the report points to 'startling differences' between average outcomes. This isn't surprising because there are very strong forces that lead to sorting within regions so that the most deprived end up in certain areas (which then get classed as deprived). The crucial issue remains whether area based policies are a more or less effective way of dealing with these spatial concentrations of deprivation.

UK Cities: From recession to recovery

Centre for Cities has published its Cities Outlook 2010. As in previous years, the report provides plenty of interesting facts and figures and there is much to agree with:

• Recession has reinforced disparities between places
• Places with lots of skilled workers have been least hard hit and will bounce back quickest

More open to debate are the assertions that:

• Giving cities greater flexibility will allow them to respond to local conditions (probably true) and drive growth (highly debatable)
• The next government needs to fix the basics - like improving schools (probably true) and public transport (debatable) - so they can attract new business and jobs (highly debatable)

Sorry to be skeptical, but I remain unconvinced that devolution plus fixing the basics will be sufficient to reverse long term decline. We need to face that reality if we are to develop urban policy which stops failing people who happen to live in "failing places".

BTW - a minor niggle, but this picture does not show regional growth rate differences are widening:

Empty Homes

Someone pointed out to me that the Lib Dems have been talking about empty homes: "There are over 760,000 empty properties across England which are no longer used as homes but can be brought back into use with some investment."

According to CLG, only around a third of these homes (c300,000) are empty for more than six months. The government target is for 240,000 new homes to be built per year.

The detailed figures are available here. They show that only 28,000 of these long term empty homes are in London, with another 36,000 in the South East. That is, in high demand areas, very few houses are empty.

Using empty homes will (sometimes) make sense. But it will not do much to solve Britain's housing problem.

Frozen Britain

Given the recent cold weather, it's interesting to ask whether climate has a role to play in explaining the UK's spatial disparities.

Within countries, urban economists argue that bad weather tends to be offset by high real wages (so either high wages or low costs of living). In the US, where spatial differences in temperature and precipitation can be very large, this is potentially very bad news for cold places like Detroit. While they had auto manufacturers they could pay high real wages to compensate for bad weather. With that industry's decline it's hard to see what could replace it that could pay suitable compensation for the bad weather - and this is reflected in the large outflows of population.

In Britain, climatic disparities are far smaller and so weather should play less of a role. Still, my colleague Paul Cheshire has some evidence that even within European Union countries (including Britain) places with nicer weather (i.e. warm, but not hot) grow faster. These effects aren't necessarily that large but within Britain are another factor (mildly) favouring the Southern over the Northern regions.

More Affordable Housing?

According to reports "Property is now affordable for first time buyers in nearly four out of 10 areas of the UK".

Unfortunately, as the BBC notes, this isn't the case if
- you want to live in London ("unaffordable [...] in all local authority areas")
- you need to borrow money ("many first time borrowers have been unable take advantage [...] because of tighter lending criteria")

Further, first time buyers are usually young which means that they tend to have lower than average incomes (because incomes rise over time). They are also increasingly likely to be unemployed.

Finally, house prices are already picking up while income growth is likely to remain relatively flat.

In short, the temporary downward price adjustment as the result of recession is not going to solve Britain's long term housing problems.