Should we build on the Green Belt?

Enjoyed our British Government at LSE debate on whether we should build on the greenbelt (at some point, podcast should be available here). For those of you that are interested, I've reproduced my contribution below. But first, two observations about the debate.

Let me start with the broader point. I was expecting to be in a small minority favouring building on the greenbelt (certainly my experience in the past). But this time felt different because there were a number of younger people in the room who were pretty vocal and very articulate about problems they faced paying for housing. Don't get me wrong, there have been problems in the housing market for many poor and young people for a long time. But - much to our shame - these people don't have much of a voice at the kind of events that debate housing markets. A new generation of young university students who find themselves really struggling do take part in such debates. I wonder if that could be a 'game changer' in terms of the direction of the debate?

My other point is a little more technical. If you do listen to the podcast you'll hear a number of people claiming that we have no housing supply problem in the UK, that the problem is all down to demand. I certainly think that demand plays a role (I'd like to see the issue of VAT on newbuild and impact fees properly addressed, for example) but I think the evidence is clear that it can't all be demand. There are then two ways of interpreting what people mean when they assert the opposite, neither of which I much like. The first is that people should stop aspiring to live in reasonable size flats and houses (possibly with some out door space). That is, we are 'wrong' to demand so much housing. Second, is that housing is the only free to enter market where demand and supply for some reason do NOT jointly determine price. I say that, because if housing supply really is flat (so that the problem is all demand) then house prices should ONLY change to reflect the cost of house building excluding land. It's impossible for this to explain 4% real price growth in the UK since 1970! It also can't explain why land with planning permission sells for £3-4m per hectare as opposed to £10k. A third possibility is that there is enough land in our existing cities but 'for some reason' this land isn't being developed (vague accusations are made against Local Authorities and developers). But it's almost impossible to explain this kind of behaviour without distortions on the supply side (taking us back to where we started - how can the ONLY problems be on the demand side).

Anyhow, an interesting debate, and I was grateful to Government at LSE for organising it. My contribution to the debate follows below:

Should we (ever) build on the green belt?

There are plenty of people who think we should not. For simplicity, I will characterise them as belonging to one of two groups: Dark green and light green defenders of the Greenbelt.

Dark green defenders ask us to focus on the beautiful English countryside. They play up the environmental and amenity value of that countryside and make the case that we must preserve it for future generations. 

Light green defenders ask us to look instead to our towns and cities. They play up the environmental and social benefits of building at density. Better more walk able communities, more public transport use, better public good provision. For this group, preserving the countryside is just a happy side effect of achieving higher densities that must be good for all.

I find the dark green defenders difficult to argue with. Not, I hasten to add because I think they are right. Rather because they are so one sided, so willing to overstate the social benefits of the countryside and so willing to ignore the large social costs that come from restricting development.

In contrast, the light green argument has merit. My disagreements with its proponents more nuanced. In short I think they over play the benefits of density, overstate our ability to deliver enough housing at higher densities and underestimate the costs of failing to deliver enough housing. There will be time to cover many of these issues in more detail, so I will limit my opening remarks to focus on six key points:

Green belts (and the planning system more generally) restrict supply and increase house prices (with a regressive impact on low to middle income families). Hilber and Vermeulen suggest that an area moving from an average to the lowest level of restrictiveness would see house prices fall by around 30%.

Green belts increase housing market volatility. At least until the recession, average house price volatility in the UK was higher than the most volatile single market in the US (Los Angeles). Hilber and Vermeulen

Green belts increases office rents. Cheshire and Hilber (2008) carefully document how planning restrictions in England impose a 'tax' on office developments that varies from around 250% (of development costs) in Birmingham, to 400-800% in London. In contrast, New York imposes a 'tax' of around 0-50%, Amsterdam around 200% and central Paris around 300%.

Green belt lowers retail productivity and the employment of small independent retailers. Cheshire et al (2011) demonstrate that planning rules reduced productivity in a leading supermarket chain by at least 20% while Sadun and Haskel show that small and independent shops have been hurt by town centre first policies.

A strict green belt policy may not allow for the true social costs of brownfield versus greenfield development. Alex will / talked about this in more depth. By 2005, 70% of new development was on brownfield land. We don’t know what this did to the pattern of development within cities, or on the overall effects for the city as a whole. Could skewing development towards city centres have come at the expense of manufacturing and less overall growth? Brownfield land is expensive to build on – how much does this explain current low levels of building? Was garden grabbing a good idea? (the  the share of new homes built on previously residential land rose from 11 percent to 23 percent between 1997 and 2008; according to the Guardian, the waiting list for allotments currently stands at 86,000 people). Green belts,  brownfield targets and density standards have also tended to produce large numbers of small flats in urban areas – although there is a clear need for larger, family homes in these places.

In short, strong greenbelts don’t deliver the kind of development people want in the places where they want to live. These costs need to be offset against the benefits of preserving undeveloped land. Undeveloped land does deliver benefits, but research suggests that – particularly for high intensity agricultural land at the edges of our towns and cities – these benefits are often not as large as claimed (Gibbons et al 2011).

Time, perhaps, to start building on (some of) the greenbelt after all?

Regional Benefits

David Cameron may have been right to axe his regional benefit announcement (and not just because of the politics). As I have argued before, I find the case for more localised pay in the public sector reasonably compelling. But the case for local benefit rates is far trickier.

First, there's the issue of how you would actually do this? With public sector pay you can look at the difficulty in recruiting public sector staff and adjust by place of employment. Localising benefits requires adjustment by place of residence with no obvious way of figuring out when benefits are 'too high' or 'too low'. If you want to see how complicated this can get, then look at Housing Benefit - which is (indirectly) adjusted to take account of cost of living.

Indeed, housing benefit, is a second reason to think that localised benefits are trickier. We already adjust benefits for local housing costs - the component of cost of living that varies most across areas. As a result, the 'residual' adjustment - and hence any gains from localising - might be relatively small.

Of course, that still leaves the issue of distortion of local labour markets. It seems reasonable that national benefits may decrease the incentive to work in lower wage areas. The problem, however, is that we don't have much evidence that these effects are large. What evidence we do have, looking at the national minimum wage for example, suggests that the effects don't differ very significantly across regions. I'm willing to be convinced, but I don't think there is yet evidence out there which would be particularly compelling.

With localised pay, the strongest arguments are around improving the provision of local public goods (which argue for paying more in high cost areas). Removing distortions in local labour markets, assuming this occurs, is simply an added bonus. In contrast, for benefits, the central arguments revolve around the fiscal benefits and the benefits from removing labour market distortions. Given that HB already does a lot of the adjustment on the cost side, the arguments about distortions from the income component of benefits are weaker (especially given the huge costs and complications of implementing such a change).

Public sector pay and local employment

Our work published last week suggests that public sector employment is good for local services, bad for local manufacturing. In the short run, these effects balance out so that total private sector employment is left unchanged. In the longer run, the effect on local manufacturing appears to be stronger, the effect on local services weaker and total private sector employment decreases offsetting any additional employment from the public sector.

What does this tell us about the impact of public sector pay? Not much, I'm afraid, contrary to the case made by some commentators. Public sector pay differentials are ONE of the channels that might explain our results (particularly the negative effect on manufacturing). But public sector employment could have the same sort of effects even in the absence of any public sector pay differential (because of general pressures on wages and house prices that come from higher labour demand in the area).

My best guess, based on our results, is that removing public sector pay would be bad for local services (who benefit from the extra demand that comes with higher public sector pay) but would remove some of the distortionary effect on manufacturing. I suspect you could figure out how large the first effect might be (looking at how much of their income people spend locally and what sort of changes to pay are planned - although getting to employment trickier). No one knows how large the second effect would be nor whether the benefits to manufacturing would offset the loses to local manufacturing.

In short, no one knows whether moving to more localised public sector pay would be a significant step in rebalancing the economy. Our results suggest that it might help with sectorial rebalancing (towards tradables away from non-tradables). We have no idea what it would do to with geographical rebalancing.

But, I have to say, that all this argument around rebalancing rather misses the point. The fundamental reason to care about local pay is because of the implications for the quality of public good provision in high cost areas. And on that front, what evidence we have, strongly favours more localised pay.

Public Sector Employment: Bad for Local Manufacturing, Good for Local Services

For a while now, I have been looking at what happened to local authority employment in the early to mid-2000's to figure out what, if any, impact public sector employment has on private sector employment. We've just published our first set of results from this work and the results are pretty interesting.

When we look at a relatively short period of time (2003-07) growing public sector employment has little impact on overall private sector employment. BUT this doesn't mean public sector employment has no effects. Our estimates suggest that each 100 extra public sector jobs in a local authority 'creates' 50 additional jobs in (non-tradable) services, but 'destroys' 40 jobs in manufacturing. In short, increasing public sector employment is bad for local manufacturing, good for local services.

This difference makes sense. Local restaurants and shops benefit from the spending of public sector workers, local cleaning firms benefit from demand from organisations that employ those workers. What about manufacturing? It's easy to see why it doesn't benefit - neither public sector workers nor organisations buy much from local manufacturing firms. But how to explain the negative effect? There are at least two possible channels. First, increasing local public sector employment pushes up wages and house prices. This is bad news if you are a local manufacturing firm trying to compete with China. Second, higher public sector pay attracts away good administrators, accountants and entrepreneurs who would otherwise work in the private sector. Again, this is bad news for local manufacturing. We aren't able to say which of those channels are at work, but anecdotal evidence suggests that both probably play some role.

This isn't the end of the story, however. Using different data we look at changes over a longer time period (1999-2007). This data isn't quite as good, so the results need to be interpreted more carefully, but the results are interesting. Over the longer time period, those negative effects on manufacturing are even stronger (they lose about 80 jobs for every additional 100 public sector workers). Again, this makes sense - the channels through which manufacturing gets hurt take time to work through. What about local services? Over the longer period, this loss of local manufacturing employment offsets the increase in public sector employment so there's no longer a beneficial effect on local services. In short, over longer time periods public sector employment crowds out private sector employment.

There are, of course, some caveats. In particular, we have to use econometric techniques to allow for the fact that manufacturing has been declining and that public sector employment may be moving to offset this. The details are in the paper, but the effects I talk about above shouldn't be driven by that general decline. Also, the effect of public sector cuts may not exactly mirror that of the public sector increases that occurred during the period of our study. That said, there's no strong argument to think that the overall effect should be different on the way down as opposed to on the way up (even if the timing might differ).

In terms of politics, there is something in this for everyone. Labour can point to the short run effects of public sector job cuts (they will be bad for total employment in affected areas). The coalition can point to crowding out of manufacturing and the longer run crowding out of total private sector employment. As ever, our research can't tell us which of these is more important - this depends on what policy makers want to achieve. But it does give us a feeling for what the short and long run changes might look like and suggests that for areas experiencing large public sector job cuts, things are likely to get worse before they get better.

Should Romney Marsh be a Nuclear Waste Dump

I've been traveling without much time to keep up on the UK news (or blogging).

A colleague pointed me to the story that Romney Marsh might become a nuclear waste dump and asked whether there was a spatial aspect to the story. I confess to a personal interest - I grew up in Folkestone and I remember trips out to the Marsh (including a school trip to the nuclear power station currently sited there). Personal interest aside, my colleague is right that there is a spatial aspect.

Setting up a new nuclear facility generates negative externalities for people living near to the site. These kind of negative externalities tend to get capitalised in to house prices. In plain English - building a new nuclear facility will tend to drive down local house prices. But the interesting thing about the Romney Marsh proposal is that this is a new facility that would replace an existing nuclear power station (or two, depending on how you want to count them).

Given that Dungeness A was connected the grid in 1965, most local residents will have moved there (or chosen to stay there) after the power station was commissioned. In short, very few people are likely to be 'suprised' to find themselves living next to a nuclear facility and those that do are already 'compensated' by low house prices. So, setting aside technical considerations about the suitability of the site, Romney Marsh is a pretty good location for a new nuclear facility because it already has an old nuclear facility. This is exactly the same argument for why it may make more sense to expand Heathrow rather than to create a completely new airport in a different part of London.

Two further factors help further understand the story. First, people living near the power station are more likely to work there (or in businesses that indirectly rely on demand generated by the power station or it's employees). Second, if waste is being shipped to the facility this may generated negative externalities in the wider area (e.g. on train routes that will be used) that are not yet capitalised into prices. For these reasons, local residents are more likely to be in favour of a new facility than residents living further away. From the news stories this would appear to be the case.

You have to suspect that a Kent wide referendum (as suggested by the county council - which is opposed to the scheme) will almost certainly go against it. Large numbers of people experiencing small negative effects (but possibly scared in to thinking they will experience very large negative effects) are always going to outvote the much smaller number of people that might get very large benefits from replacing the existing power station. And a Kent wide vote ignores the wider benefits that might go the UK as a whole from switching to deep storage. This is one of the reasons why siting of key infrastructure projects needs to remain a central, rather than local, government decision.

Not a conclusion, I realise, that would necessarily be popular with the residents of my home town.

Parties and parking

Two completely unrelated stories: (1) the reintroduction of traffic wardens to a town suffering 'parking chaos' for the last year; (2) lots of street parties organised to celebrate the Diamond Jubilee.

In both situations individual actions generate large externalities. In the first, individuals parking badly create chaos for others. In the second, individuals organise street parties for their neighbours. In both cases, there are private gains (easy parking, the fun of the party) being traded off against private costs (time, money) and social costs and benefits. Economists like thinking about mechanisms that generate collaborative behaviour in these circumstances, without the need for further regulation. Repeated interaction and a lack of anonymity help encourage such collaboration (because behaving well is more likely to generate reciprocal good behaviour now or in the future). Geographical proximity raises the chances of repeated interactions and reduces anonymity. Hence street parties get organised, but for the town as a whole no traffic wardens leads to parking chaos.

Understanding these kind of collaborative behaviours has implications far beyond parties and parking. For example, some researchers looking at the cluster of firms in the third Italy have argued that such considerations play an important role in explaining the collaboration that underpins success. As always, however, it's far harder to move from an explanation as to why such collaboration might occur to the success of individual firms. It's equally possible that more successful firms may simply choose to be more cooperative and that most of the success is explained by other factors.

In short, the role of space in facilitating collaboration tells us something about clusters, parties and parking. Personally, that eclecticism is one of the main reasons why I find spatial economics so interesting.