The soft power Games

Posted by Dr Max Nathan, SERC and LSE Cities

The Economist Intelligence Unit has published Legacy 2012, a collection of essays on the economic effects of the London Olympics. You can download it here. I’ve got the lead piece, written pre-Games, which (post-Games) now seems a bit grumpy. Here are the headlines, and some reflections with the benefit of hindsight: 

First, the direct economic benefits of 2012 to London are pretty small. This is the overwhelming message from the economic evidence, and the experience of past Games. Predictions of a hit to local retail and tourism also turned out to be correct. 

Second, the major hard gain is the physical regeneration of the Olympic site. We can argue about whether winning the Games ‘created’ this, or just accelerated it. But some Londoners (homeowners, certainly) got more out of it than others. It’s telling that the Centre for Cities suggests a ‘separate’ employment and skills strategy is needed for East London – so what positive effect did the Games have on local people’s employment chances? 

Third, the indirect economic effects on the UK may be pretty big – as they have been for Korea, China and Spain. Hosting the Olympics is a massively powerful policy signal, and the Games are a platform from which to tell a story about the UK’s place in the world. Work by Rose and Spiegel, published in the Economic Journal, suggests that on average, Olympic host countries get a whopping 20% trade boost. (Amazingly, even losing bidders pick up some positive trade effect.) The host city stands in for the nation at Games time, so that London effectively was the UK for foreign viewers. Boris clearly understood this before David Cameron.

More prescient than he knew, Tony Blair is fumbling for the political economy argument in this Vanity Fair interview (thanks to Will Davies for the spot): 

For a country like Britain, it’s a great thing for us to have the Olympics here. We can afford to do the Olympics. We’re Britain. We’re not some Third World country.

For countries like Korea and China the message is ‘we’re arrived’. For Britain, perhaps – ‘we’ve still got it’?

So perhaps we’ve been looking for legacy in the wrong place. If it's all about messaging, the biggest economic impacts of 2012 may be the long term boost to British soft power.

The other takeaway  is that economists vastly under-estimated the intangible benefits from the Games. Pre-Games analysis suggested the ‘willingness to pay’ was dwarfed by the £9.3bn budget, but our medal hauls in both Games have clearly changed the calculus. Perhaps we should have spotted this coming – Goldman Sachs suggest that host countries typically win 54% more medals than usual. That sporting success doesn’t come for free, as Will points out here. But Team GB’s glorious performances are likely worth several billions in – fleeting? – goodwill. 

This post originally appeared on the squareglasses blog.

 

Helping young people buy more housing

What is it about politicians and the housing market? Sure, understanding housing markets is sometimes tricky (I still struggle) but why is it that so many announcements in this area don't stand up to even the most basic scrutiny? The most recent example comes with Nick Clegg's suggestion that parents should be allowed to use their pension to help younger people buy property.

Here's my two step assessment (which can, of course, be applied to many other housing policy initiatives)

1. How many people are likely to be affected? This can be tricky to work out precisely, but often easy to ball-park. For Nick Clegg's announcement - as with a number of recent schemes - the conclusion seems to be 'not many'.

2. If the policy affects relatively large numbers of people, what's the likely impact on the housing market? This step is slightly, but not much, trickier because it involves applying some basic insights from supply and demand. There are essentially two ways to help young people in the housing market. First, increase the supply of (suitable) housing. Second, redistribute some of the existing housing stock from older people to younger people. Nick Clegg's proposal does neither of these things so even if it 'works' it won't 'help'.

Evaluation and self-report additionality.

As I have written before, I like the idea of making information about policy interventions more freely available. Partly because I think it's an important principle of open government but also because it allows for better policy evaluation.

I have been reminded of this in the past couple of months because, together with colleagues, I've been looking through quite a lot of government evaluation reports. One thing that has struck me as I have read through those reports is the willingness of people to rely on self-reported 'guesstimates' of additionality (i.e. what 'extra' happened as a result of the policy intervention). These are usually provided either by recipients of the money or by people directly involved in handing out the money.

Like many economists, I tend to take these with a pinch of salt. Partly this is because I have the economists natural distrust about asking people to evaluate the counterfactual - i.e. what would have happened in the absence of the grant. This is a very difficult thought experiment at the best of times and one that is surely made more difficult with policy evaluation because the people being asked are often receiving money (or some kind of benefit in kind) from the operation of the policy.

I get even more worried, however, when these self-reported additionality figures are used as the basis for comparisons across different policy areas or different types of recipients. Why should we expect a young unemployed worker assessing the additionality of a training scheme to give us numbers that can meaningfully be compared to those from a scheme supporting R&D? More subtly, even within schemes, why should we expect the answers to such questions to be the same across, say, small and large firms? Of course, one reason why the answers might differ is because the policy actually differs in terms of additionality for the different types of interventions etc. But more worrying is that the answers might differ depending on characteristics of the policy that have nothing to do with whether the policy has any impact on behaviour.

There doesn't seem to be a big literature unpacking this problem. I have a vague recollection of one paper (possibly by Heckman) which suggested that self-reported additionality tended to be positively correlated with things that were, somewhat worrying, negatively correlated with econometrically estimated additionality (based on what people do, not on what they say). But I don't know of many other references (and would be happy to receive some pointers).

In light of these concerns, it is a little depressing that such self-reported additionality appears to remain remarkably popular with many in the policy making community.

Talking about Building on the Greenbelt

A couple of week's ago, I was writing about CPRE's report highlighting a renewed 'threat' to the greenbelt.

The report identifies projects "amounting to the development of a new town greater than the size of Slough over the next twenty years". At the time, I commented on the fact that this seemed an odd unit of measurement.

One might argue that it's a simple way of communicating the threat. However, Daniel Kahneman's Thinking, Fast and Slow provides an alternative explanation - that CEPR are suffering from 'denominator neglect' (or attempting to make use of it). Denominator neglect in this cases means that your attention is drawn to the new development, but you ignore all of the greenbelt land left untouched. Denominator neglect is the effect that causes people to over-weight low probability events.

A number of other biases are at work when it comes to assessing statements about the greenbelt. I'm not sure that I completely understand all of these, but I think I've understood enough to know that I will henceforth discuss proposals for the greenbelt as follows: 'Over the next twenty years we plan to build 1 million more homes, helping address housing affordability for our poorest families; our plans safeguard the countryside ensuring that 99.5% of our currently undeveloped land will remain undeveloped.'

When I get a moment, I'll do the exact maths in terms of 1 million houses and the amount of land left undeveloped - but I'm hoping the re-framing might help regardless.

Knowledge exchange

I am all for academics engaging with popular debate (or 'knowledge exchange' according to our funders). Indeed, it's one of the main reasons why I write posts for this blog.

One of the things less enthusiastic colleagues struggle with is that often your research ends up getting misinterpreted. I've experienced this on many occasions - most recently when my research on the effect of public sector employment on private sector employment was interpreted by some as saying something about the impact of a move to local pay. Generally speaking, I think academics need to be fairly relaxed about this. After all, reaching broader conclusions from rather specific research findings is something a lot of us do when faced with big issues where the underlying research is indicative at best.

That said, I am surprised when people use my research to reach a conclusion that goes specifically against the findings of the research in question. Today's FT provides a nice example. Talking about the findings of our research on the impact of Regional Selective Assistance the article says "research by the LSE shows grants to small UK businesses help increase productivity." In fact, our research shows the exact opposite, as you can read for yourself in the abstract of the paper (kindly linked to by the FT article): "we find that the program has had a positive effect on both employment and investment [...]. There is no statistically significant effect on total factor productivity."

Still, it's good to know that people out there read your research (even if you might wish they read it a little more carefully).

Is the Regional Growth Fund (still) rubbish?

Much coverage this morning for the Commons Public Accounts Committee's criticisms of the Regional Growth Fund: 'It's slow to spend money and some of the jobs 'created' come at a high cost per job'. Time for a re-post of something from earlier this year, written in response to similar criticism from the National Audit Office:

"Reporting of the NAO report on the Regional Growth Fund has highlighted the fact that the 'scheme may cost up to £200,000 per job'.  A senior labour MP tells the BBC that they find these figures 'shocking'.

But before we get carried away, it's worth noting two things. First, the average cost per job isn't that different from similar schemes with comparable objectives (NAO is very clear on this). Second, before concluding that the £200k per job maximum is 'shocking' we might usefully look back at the maximum cost per job achieved by the RDAs. Upon quickly flicking through the PWC report (vol 2) I see that EEDA's innovation capital project was estimated to cost 213k per job (table 40); EMDA's tourism marketing managed an impressive £1m per job (table 71); the LDAs Centre for Fashion Enterprise cost £259k per job while its pre-commercial fund cost £217k per job (table 101).

As I have explained before, I take all of these figures with a pinch of salt. But it's simply not helpful to compare the maximum from the RGF to the average from other programmes and reach any conclusion about the effectiveness of the RGF. I am sympathetic with the NAO argument that one might question why policy doesn't pick the highest value for money projects - but this argument would appear to apply as much to RDAs as it does to RGF.

I am not a massive fan of the RGF. I have always argued that RGF should have (1) had money ring-fenced for skills and focused on people; (2) handed money to LAs (or LEPs) to do with it what they want; (3) spent the rest on projects that delivered highest value for money. I continue to think that this would be a better set up for the fund. But I don't buy the argument that these figures tell us that RGF is somehow worse than RDAs.

Of course it depresses me that governments invest in schemes that represent bad value for money - but that's politics for you."

Relaxing Planning Laws

Lots of discussion this morning about whether relaxing planning laws will help kick start construction. My feeling is that they'll help a little but not necessarily a lot.

Temporarily removing the need to reach agreement on section 106, e.g. to provide affordable housing, will lower the cost of development. To the extent this raises profitability some currently marginal sites may end up getting developed. The fact that the lifting of restrictions is temporary may also have some effect in shifting foward projects that would otherwise have occurred later.

In the short run, however, critics are surely right that the effects are likely to be limited if problems are more to do with demand conditions and the availability of financing.

That said, I find myself increasingly irritated by people pointing to the number of sites with permissions (enough for 400,000 homes we are told) as if this somehow proves that the planning system is not part of the longer term problem. First, many of these sites will be in areas that always had low demand. Remember , the UK planning system is incredibly unresponsive to price signals. So no surprise that these sites aren't being developed now demand has tanked. Second, when those sites are in relatively high demand areas, developers still have strong incentives to hold on to sites, because they know that the long term trajectory of house (and hence land) prices in those areas is upwards. In other words, holding sites becomes more sensible as the gap between current price and future expected price increases. And why do developers expect prices to increase more in the long run? Partly because demand will recover, but partly because the planning system continues to restrict the supply of land in places where demand is highest.

So critics are right that these reforms may do little in the short run. But they are wrong to suggest that the availability of sites with planning permissions somehow suggests that supply is no longer the major issue in the medium to long term.

(More) Planning Rule Reform

So, reports suggest that the government is going to come back and have another go at planning rule reform, possibly to make it easier to 'build on the greenbelt'.

This is clearly risky territory for the coalition. It's widely recognised that the politics are bad, but the economics aren't that great either. Sorting out the supply side of the market is fundamentally important long term, but it won't do much short term unless the government can come up with an effective way to boost demand. Underwriting £10bn of construction might help, although this is only a 25% increases on the £40bn already announced earlier this year. Clearly we are not yet feeling big positive effects from that much larger announcement.

In addition, it's a little depressing, although not necessarily surprising, that the government needs a second take on this so soon after it's previous reforms. There were a number of us who welcomed the direction of the reforms (particularly in providing incentives for local communities to say yes to development) but worried that the supply effects were more likely to be negative than positive - particularly given the decision to maintain so many constraints on development. Indeed, from my post on the NPPF in March this year:

"So much for the positives, what about the things it gets wrong? I think a fundamental problem is that the planning framework is backward not forward looking. We have a growing population and changing industrial structure and yet the draft framework works to limit us to living and working within an urban footprint that we inherited from the 1940s (if not before). This is particularly evident in terms of policy towards the Greenbelt. Towns expand in to cities by building on countryside and merging with outlying towns and villages. We are told that the Greenbelt policy is specifically intended to prevent this. In other words, the urban system we have now is what we have to work with. This severely hampers the ability of our set of cities to adjust to fundamental structural changes. It assumes that growing cities can expand by recycling old land, but many of the places that have strong growth potential are not existing cities, but larger towns. In short it makes the planning system about redevelopment more than new development. I understand the politics behind this (c.f. the natural trust) but the restrictions come at a cost in terms of economic growth."

If reports are true, it will be interesting to see if 'planning reform part II' does any better.