SERC: Spatial Economics Research Centre

Inexpensive Progress: Two steps forward, one step back ...

2012-02-16T12:16:00.004Z

I have been reading that National Trust 'Inexpensive Progress' report on the planning system.

It's a little hard to know what to make of it (for reasons discussed below). But let me be generous and suggest that overall I think it represents two steps forward, one step back.

I summarised my overall position on the planning system in a post on the proposed reforms in March 2011: "Planning delivers many benefits, but it is also costly (in terms of resources to implement, the way in which it affects costs of living, its negative impact on economic growth). Many would argue, myself included, that we need a serious debate about whether these costs now outweigh the benefits and whether reform is needed. Depressingly, I am deeply skeptical about whether or not we are going to get that serious debate."

This scepticism was well placed. As the debate has proceeded people continue to imply that we have no evidence on the costs of the planning system. This is simply not true as Max Nathan and I explained in our policy paper on 'What we know (and don't know) about the links between planning and economic performance'. The National Trust's 'inexpensive progress' report considers a number of these costs in detail and doesn't strongly refute the evidence that we suggested underpinned them. Overall, then, I take the report as recognising many of the costs that we argued were being ignored in the debate. This feels like progress - hence two steps forward.

So, what's not to like about the report? Let's set aside the fact that it underplays some of these costs (for example in the discussion about the benefits of bigger places which focuses on static benefits to existing residents). The much bigger problem is that while the report acknowledges all of these costs the National Trust continues to suggest that the many benefits of the planning system likely outweigh them. Note, by the way, that I don't have a problem with the idea that the planning system delivers benefits and that these could outweigh the costs. Campaigners are perfectly entitled to argue that these are prices worth paying to 'protect the countryside' or achieve other policy objectives.

So, it's not claims about the existence of these benefits that troubles me. Rather, it is the assertion that we don't have much evidence on them and that, therefore we shouldn't reform the planning system until we have such evidence. Just as with costs, we have plenty of evidence on the benefits of the planning system. For example, economists have performed many 'hedonic studies' using house prices to figure out the value of many things delivered by the planning system. Further to this, the government has just spent many millions of pounds on the National Ecosystem Assessment that tries to get at the non-economic value of undeveloped land.

So, in terms of the aspect of the planning system in which the National Trust is most interested - the non-economic value of undeveloped land - we have a signficant body of evidence (collected at far greater expense than the evidence on costs). The National Trust report does mention these studies, but downplays their significance in terms of informing us about the cost and benefit tradeoff of building on more undeveloped land. Why is that, I wonder? Could it be because for a lot of undeveloped land those measured non-economic costs are just way too small to justify the decision to prevent development?

I am all for a planning system which compares the broad social value of preserving undeveloped land to the broad social value of building on that land and makes decisions accordingly. On the balance of the evidence that we have available that would lead to lots more development on low social value agricultural land at the fringes of our cities. It would also preserve lots of beautiful English countryside that has high social value.

There is certainly an argument to be had on whether or not the government's planning reforms achieve that balance. But the case for the reform remains compelling when the evidence (on both costs and benefits) suggests that the current system is too restrictive to achieve that balance.

The labour market impact of public sector employment

2012-02-14T10:22:00.003Z

I have been doing some research (with my colleague Giulia Faggio) looking at the impact of public sector employment on local labour markets.

Looking at changes in Local Authority public sector employment from 2003-2007 suggests two things. First, at least during that period, we don't find much evidence of crowding out in terms of overall private sector employment. Second, public sector employment appears to have a multiplier effect on local service sector employment but an offsetting crowding out effect on manufacturing employment.

In some ways, this isn't that surprising. Public sector employment creates demand for local goods and services. At the same time, public sector employment creates a supply distortion that hits local firms (and is more pronounced the bigger the public sector wage premium). For services, the demand effect appears to outweigh the supply effect. The demand effects for local manufacturing are much smaller (because the public sector and its workers don't demand much from local manufactruing firms). As a result, for local manufacturing, the supply distortion dominates.

As I said, the result isn't that surprising but what is surprising is that it doesn't appear to have been carefully documented before. This raises a question about existing research on the impact of the public sector on local labour markets. So far, we have tracked down the following: some material from the states looking at the impact of specific pieces of public sector employment (particularly the closure of military bases); UK research from LSE colleagues and others on the impact of national pay on public sector service quality (negative); UK research from IFS and others on the extent of the public sector pay premium (pretty big except for males in the south east). We would be very grateful for any pointers on additional material. For various reasons, this kind of question isn't considered much in the huge literature on regional input-output models. There's also some broadly descriptive stuff on previous government relocation. However, what we are after is references to research that tries to get at the causal impact of public sector on local labour markets. Very grateful for any suggestions (either as comments below or email to my usual address).

From High Street to Bond Street

2012-02-09T14:18:00.008Z

Posted by Dr Tim Leunig, LSE and CentreForum

Recessions mean bankruptcies, and bankruptcies in the retail sector mean boarded up high streets. Between 2008 and 2010 the number of empty shops has gone up five fold. Only one shop in 40 was empty in 2008, but the rate is now one in seven. It is higher still in some places - one in five in the North West as a whole, one in four in Blackburn, Grimsby, and Walsall, and one in three in Margate.

Does this mean that we should 'let the high street die', as a comment piece in this week's FT suggested? It's true that both cyclical and structural factors are stacking up against retail premises. But just as Portas pilots won't solve the problem alone, a laissez-faire response would not be helpful either.

In a market economy prices adjust: rents fall until shops are cheap enough that new businesses become economic. That is happening a bit: the FT states that rents on renewed leases in struggling regional cities typically fall 30 percent . This has been sufficient to stabilise vacancy rates since October 2010. One landlord interviewed said: "The common cry from retailers is halve the rent, or we're off". The market is working, if slowly and sluggishly.

In many ways the retail market mirrors the job market. Unemployment rose initially, but has broadly stabilised since. What is worrying is that, like unemployment, there may be structural factors which mean that some shopping areas will never come back.

The last 50 years have seen a big shift in labour demand away from the low skilled, and towards the highly skilled. The wages of manual workers have fallen relative to graduates and footballers, but we are still left with a lot of people who are out of work even in good economic times.

The same seems to be happening in retail. On the same day that the Financial Times reported that high streets in poorer areas were struggling, it also reported that Ferragamo agreed a new record high rent - almost £1,000 per square foot per year - for its shop in Bond Street. Bond Street is Champions League retail. Margate and Grimsby are not.

Policymakers need to be realistic. I bought a set of Tefal pans from Amazon recently. I could have bought them from Argos, or John Lewis. I expect that they were cheaper from Amazon, but I didn't check, because the convenience of Amazon outweighed any likely saving. That part of the high street is all but dead.

In contrast I imagine that people who buy Ferragamo leather goods want to see them before they buy them. They sell wallets for £725, and handbags for over £1,000. Retailers selling these items need retail space, and it needs to be near the people with money.

The answers in labour market policy are clear: we need to increase skill levels, so that there are fewer unskilled workers who find it hard to get work, however determined they are, and more graduates who find it relatively easier to be employed.

For retail, we can draw similar conclusions. Prices adjust in a market economy to give a signal to entrepreneurs about what to do more of, and what to do less of. The signals are clear: we need to provide more shopping space in high end venues, primarily in London, and less space in places where there is little demand.

Tim Leunig is chief economist at CentreForum, the liberal think tank, and a reader in economic history at LSE.

A version of this post originally appeared on the CentreForum blog.

Portas Pilots

2012-02-08T09:28:00.008Z

I am not sure what to make of the Portas Pilots. The government competition will see 12 "winners benefiting from a share of £1 million to help turn around their unloved and unused high streets." The amount of money is fairly small, but the scheme does seek to implement some of the better recommendations from the Portas Review (those concerned with the management of high streets).

Given the small amount of money available it's presumably important that government learns the maximum amount possible from the pilot. According to Grant Shapps we need to "try new things, experiment [to learn] lessons and help communities across the country breathe new life into their own towns." The issue, of course, is that we don't know what, if anything will work.

As I have discussed before, most government evaluations don't allow us to learn lessons about whether policy works, because we don't know what would have happened in the absence of the policy. The Portas Pilots are likely to provide another example if government officials use a whole lot of criteria to select 'the very best bids'. If high streets in the pilot area then do better how do we know if this is anything to do with the Portas process? Perhaps these areas were doing a good job on lots of other policy areas (remember they were capable of writing the 'best bids') and the high streets happened to benefit as a result of that and not the Portas process. Alternatively, perhaps they would have done many of these things anyhow, without the government providing them money. In addition, to these concerns about assessing the impact of the pilots, it is worrying that centralised rankings of bids may have a tendency to kill the very experimentation that government says they want to create.

If government wants to be truly innovative on Portas pilots then there is a way to solve this problem. Assuming that the government gets lots of good bids why does it need to try to pick 'the very best'? Why not, instead, just pick a random selection of 12 bids from all of those that seem good enough to get funding? Randomness helps solve the selection problem so that we can learn more from the pilot (by comparing the lucky winners to the unlucky losers). It will encourage creativity because bidders will not be trying to guess exactly how officials will rank bids. It will also save on central government resources in having to produce those rankings (which is a pretty difficult task anyhow given that we don't know what works). There's a cost, of course - ministers will feel like they have less 'control'. But given the uncertainties about what works this 'control' is an illusion anyhow (at least in terms of the economic impact). In short, in keeping with the overall philosophy, some experimentation in the selection process might help us learn a lot from the 'Portas Pilots'.

Northern Assembly Needed?

2012-02-06T12:10:00.003Z

Interesting to see the call for a new 'northern assembly' to help tackle the north-south divide, partly inspired by the observation that the recession appears to be increasing that divide.

Here's my blog post from a couple of months ago talking about why the divide is increasing. In short, a lot of it is to do with the fact that the lower skilled workers are getting hit hard everywhere. The north has a higher proportion of lower skilled workers, so it's getting hit harder than the south. But lower skilled workers in the south are doing pretty (equally?) badly too.

Against this backdrop, would decentralisation in the form of an elected northern assembly help? As I have said before, there's precious little evidence to back up this assertion. If you are interested in reading further, Max Nathan discussed some of this a couple of weeks ago in a post on city deals (and you can find more details on the evidence in this older policy piece).

Government grants to small firms

2012-02-02T10:49:00.003Z

I wrote yesterday about our research showing that government grants to smaller firms in economically disadvantaged areas of Great Britain can increase employment, but that grants to larger firms are wasted.

I confess to being surprised by this result. My starting position was that all this money was wasted because firms would have gone ahead and done the investment even if they hadn't received the money. Our results suggest that this is not the case, at least for smaller firms.

Does this mean the government should be providing much more support to smaller firms in disadvantaged areas? Personally, I don't think our results should be interpreted in that way. The programme that we studied, RSA, was targeted at firms that served national or international markets. I suspect that this is one of the reasons why we do not detect much displacement (where jobs at supported firms just replace jobs at nearby unsupported firms). However, many smaller firms serve local markets and I would expect support to those firms to mostly generate displacement. Findings from preliminary work on another government scheme (Local Enterprise Growth Initiative) support this assertion. Specifically, we are finding that support from LEGI, which mostly went to small firms serving the local economy, only generated displacement (and that over quite small distances). There appears to have been no impact on overall activity so money to both small and large firms was 'wasted'.

Further, as discussed yesterday, RSA didn't seem to have much effect on productivity, so it increases the employment share of weaker firms. Such firms are vulnerable to future shocks so its not clear whether this represents a long term solution. Our analysis also ignores the impact that taxation to fund the scheme might have on firms located outside of eligible areas.

In short, as usual, careful empirical evaluation cannot necessarily answer all the questions about a policy and more research is needed. But one central message does emerge: If the government is to have these type of investment subsidies, it seems clear that targeting smaller firms would be much more cost-effective.

The impact of government grants: employment up, productivity down

2012-02-01T10:24:00.005Z

[aka: 'Grants to large firms a waste of money']

The Great Recession has brought industrial policy back into fashion. Huge subsidies have been granted by governments around the world to private firms most dramatically in financial services, but also in other sectors like autos. Despite the ubiquity and cost of such schemes, rigorous evaluations of the causal effect of these “industrial policies” are rare.

In a recent paper, (co-authored with Chiara Criscuolo, Ralf Martin and John Van Reenen of the CEP) we provide some of the most rigorous evidence to date on the impact of one such policy – Regional Selective Assistance.

Our research suggests that government grants to smaller firms in economically disadvantaged areas of Great Britain can increase employment, but that grants to larger firms have no effect. These positive impacts on firms translate in to wider area benefits. However, the resulting increases in local manufacturing employment and reductions in unemployment come at a cost in terms of productivity. Specifically, because RSA grants support employment in lower productivity firms while having no impact on firm level productivity, RSA lowers measured aggregate productivity by increasing the employment share of low productivity firms

Our research analysed the impact of expenditure on the Regional Selective Assistance programme over a 20-year period. We had access to every grant and examined every manufacturing plant in England, Wales and Scotland – over 2.3 million observations – before and after receiving government support. The main factor holding back credible evaluations of industrial policies is the absence of a clear identification strategy (i.e. a way to figure out what would have happened in the absence of policy). However, because European Union law changed over this 20-year period, some parts of Britain became eligible for subsidies and others saw their grants disappear. This enabled us to work out the impact of investment subsidies on firm performance by comparing similar firms that only differ in terms of their changing eligibility for treatment. We were able to assess the impact of RSA on investment, employment and productivity.

Our findings suggest a large effect of grants on recipient firms: a 10% investment subsidy causes about a 7% increase in employment with about half of this (3.6%) arising from growth in existing firms and half from firm entry. These effects are underestimated if analysis ignores the fact that the participants in the scheme are firms and areas who would otherwise perform badly. As I highlighted above, these positive employment effects are confined to smaller firms (e.g. with under 150 workers) possibly because larger firms are more able to “game” the system and take the subsidy without changing their investment and employment levels. Another possible explanation is that grants help remove the financial constraints faced by smaller firms.

The wider impacts on employment and unemployment at the area level suggest that positive effects at the firm level aren’t just about a shuffling of jobs from nearby firms who don’t receive financial support. In fact, the new jobs created appear to come mostly from the pool of unemployed workers in the area, which is encouraging in terms of welfare (the cost per job is around $6,330).

So grants to firms in disadvantaged areas can support local employment. The policy is not costless, however, as there appear to be no additional effects on productivity after controlling for investment effects. Since less productive plants receive more subsidies, this implies that the program lowers measured aggregate productivity because it increases the employment share of low productivity firms. [We also don't consider the negative effect of the taxes need to fund this investment]

Overall, then, our results are mixed news for advocates of firm level grants to turn around disadvantaged areas. While these policies can increase area level employment, they have no impact on productivity, leaving firms in this area vulnerable in the future (which may partly explain why firms and areas keep coming back for more support). As always with these types of policies, careful economic analysis suggests there is no free lunch – firm grants can raise employment, but at a cost in terms of productivity which goes beyond the purely financial implications of supporting investment in the first place.

[Further information: Paper; Press Release]

Cities and Economic Growth

2012-01-26T10:42:00.007Z

Yesterday's depressing economic growth figures, Tuesday's announcement by Greg Clark on city mayors and Monday's City Outlook from Centre for Cities have got me thinking again about urban economic policy and the role of cities in UK economic growth.

For some time now it has seemed to me that there is a fundamental, but unresolved, tension concerning the economic objectives for UK cities. On the one hand, government wants to maximise their economic potential. On the other government wants rebalancing both in terms of a shift away from financial services and geographically (from south to north). Of course, some will argue that these policy objectives are not in conflict. Most urban economists would disagree. If we do need to choose (at least in the sense of prioritising one over the other) what should we do? Overall, at least for the UK, I think the evidence points towards prioritising growth in our more successful cities even if this leads to more uneven spatial development. Let me explain why.

Disparities across local areas in Britain are pronounced and very persistent but much of these disparities are driven by ‘people’ rather than ‘place’

Let's start with the underlying drivers of spatial disparities. In recent SERC research we assess the extent of and persistence in wage disparities across labour market areas in Britain. We examine to what extent these area differences arise because of differences in the characteristics of people who live in different places – ‘sorting’ – versus different outcomes for the same types of people living in different places – ‘area effects’. We also consider the extent to which these differences across areas contribute to overall individual wage disparities. Our research finds that between 1998 and 2008 there were few changes in area disparities, despite many policy interventions. It also turns out that who you are is much more important than where you live in determining earnings (and other outcomes). Area effects only play a small role in the overall wage dispersion.

Earnings disparities are uninformative about differences in people’s overall wellbeing unless we take account of differences in the cost of living and the availability of amenities

Such disparities between different cities and different labour markets concern policymakers because they seem to imply differences in standards of living and economic welfare. In fact, however, this is not the case. Our research shows that across Britain increased living costs (particularly of housing) tend to offset completely increased wages for the average household. In terms of real earnings (conditional on skill) it doesn't make that much difference where you live in Britain.

In short, looking at area differences greatly exaggerates the importance of place in determining individual wellbeing. Of course, the evidence says that place does play some role in determining wages so there is a question about whether or not we should try to address these area effects. If, say, Hull's economy is doing relatively badly because of the combination of lower skilled workers and bad area effects, shouldn't we try to address both?

It is very hard for policy to change area effects

Unfortunately, evaluation of specific policies suggests that it is very hard to change area effects. Details on that will have to wait for another day, but for the purposes of this post let me simply point to the fact that our research suggests that a decade of fairly significant intervention left underlying area effects essentially unchanged. It's asking a lot for the current government to achieve any bigger impact with much less money.

It is very easy for policy to drive up the cost of living

In contrast to the difficulties in reducing area effects it is very easy for government to do things that drive up the cost of living in our more successful places. The most obvious way in which we do this is through constraints imposed by the land use planning system (SERC's Max Nathan explains the evidence here) but transport and other policies all play a part. If you can't do much to tackle underlying area effects, then an alternative is to allow people to move to areas where they will do better. Of course, you might think that this is a second best option. But the evidence suggests that it is likely to be the first best feasible option.

The need to focus spending

But what should government do in terms of the limited amount of expenditure that it is able/willing to make? Given the difficulties in addressing area effects, as discussed above, there's a strong case for trying to build on success. Of course, success can be relative so this might call for focusing investment in, say, Birmingham, Leeds, London and Manchester. Again this is a matter of prioritising, rather than a call for all expenditure to go to a select set of places.

More uneven spatial development: good economics, bad politics?

Investing in more successful cities to either enhance the economy or reduce cost of living clearly exacerbates uneven spatial development. But I have tried to argue that this may make for good economic policy in a world where who you are matters more than where you are and the government can't do much to offset the market forces that make some places perform worse than others. Of course, adopting such a course, and prioritising growth over rebalancing makes for very difficult politics for constituency based politicians.

If you are interested in hearing more on these issues, I'll be considering them and some concrete policy issues in my LSE London seminar. The seminar takes place this Monday at LSE on 'What should urban economic policy do? Lessons for London'. Details on time and location available here.

City Mayors

2012-01-25T13:16:00.002Z

Greg Clark has announced 15 November as the date for the first round of mayoral elections (at least for those cities that say 'yes' in the 3 May referendums).

While broadly supportive of the government's localism efforts I am sceptical about the claims that this will drive economic growth. I outlined the details of my arguments last June. In short, I don't think there is much evidence that mayors increase economic growth. That said, there is not much evidence against this proposition either and I am in favour of experimentation when it comes to government policy in this area.

For some of these mayors, the success of negotiations on city deals will be crucial in determining their power. For those of you that are interested in this particular aspect, SERC's Max Nathan discusses some of the central issue surrounding city deals here.

Cities Outlook 2012

2012-01-24T11:22:00.003Z

Centre for Cities published their latest City Outlook yesterday. As usual, it make for an interesting read. The headline finding is the way in which the recession is reinforcing existing disparities: successful cities continue to do relatively well, less successful cities do worse (all of this, of course, is relative against a background of poor economic growth).

As I have discussed before, much of this can be understood by looking at the underlying structure of places - particularly in terms of skills. Centre for Cities like to argue that this makes for a more complex picture than a north-south divide. I see the point, and there is some variation within regions (e.g. York does relatively well) but I still think the broad north-south divide is pretty clear. You can judge for yourself by taking a look at the very useful maps provided in the report.

The marked difference in city's youth unemployment rates identified in the report are a little more of a puzzle - although it's not clear to me the extent to which these persist if one were to control for underlying differences in skill levels. If city differences are not just structural, Centre for Cities argues that this makes the case for local variation in labour market policy. While supportive of much of the localism agenda, I have to say that I remain to be convinced on this particular aspect of it. It's not clear to me why individual level interventions are not the appropriate level at which to conduct most labour market policy. Centre for Cities suggest, for example, that in some places language might be a specific barrier. But presumably this is only because of a concentration of people with language problems. Individual level policies address that (and have the benefit of still addressing language issues for people who have those difficulties but in areas where others don't). I guess there might be some scale aspects on the provision side resulting from concentration of workers with specific characteristics, but it's not clear the extent to which that benefit of localising policy would offset the other disadvantages. As I say, I remain to be convinced.

There's plenty more in there to digest, but that will have to wait for a later date.

Cities: regular, large, and supersize

2012-01-23T15:27:00.007Z

Posted by Dr Max Nathan, SERC and LSE Cities

Yesterday’s Observer ran a great piece on megacities and city growth in China and India. Both countries are urbanising rapidly: China has just become majority-urban, and India’s population is predicted to be 40% urban by 2030. The authors also make great play of two countries’ urbanising trajectories: top-down and massively resourced in China, slower and more organic / chaotic for India.

Despite the rather misleading headline, the piece also correctly points out that megacities will be the exception, not the norm. This is a crucial point for policymakers. Rather than a world of super-size cities, large and regular-size places will be far more common.

Some numbers. The count of megacities (with 10m people or more) is rising – from two in 1950, three in 1975 to 19 in 2007. By 2025, the UN predicts there’ll be 27. But the number of ‘large cities’ – five to 10m people – is already bigger, and growing faster. In 2007 there were 30: the UN suggests there’ll be at least 48 by 2025. More importantly, half the world’s urban population live in much smaller cities, of around 500,000 people. These may be the most common of all. So in fifteen years’ time we’ll see far more Liverpools (around 400,000 people) and Londons (8m people) than Tokyos (26m people).

Paradoxically, the very biggest urban settlements are now hard to recognise as cities at all. Across the world cities are merging into mega-regions: notably China’s Pearl River Delta, the US Eastern seaboard, even the Greater South East.

Some of these numbers are difficult to take in. An estimated 120m people live in the Pearl River Delta, the largest urban zone on the planet – China is now planning to merge nine cities in the Delta to create a single sprawl of 42m people. The Tokyo-Nagoya-Osaka-Kyoto-Kobe region may comprise 60m people by 2015, almost the entire population of the UK.

All this may suggest that urbanisation is accelerating. In fact the opposite is true. Globally, cities grew fastest in the 1950s and early 60s: growth rates have been slowing ever since, from 4.1 percent to 2.5 percent today, and a predicted 1.8 percent by 2030. Developing countries are also on the same downward trend.

Urbanisation runs in parallel with economic development, and so as developing countries industrialise, their urban systems tend towards steady state. Of course there is a lot of city by city variation. For example, the UN predicts Dhaka will keep growing – from 15.9m in 2007 to 22.8m in 2025. But Lagos, which has grown from less than half a million people in 1950 to over 13m in 2007, is predicted to reach just 16m in the next fifteen years.

Like many researchers, the Observer piece spends some time on the growth of urban slums. Again, the picture is complex. Over the past decade the share of urban slum dwellers has actually fallen from 39 to 32 percent, due to economic growth and policy interventions. But as people are flowing into cities faster than infrastructure can keep up, the absolute number of people in informal settlements is growing, and will keep growing. Ed Glaeser describes slum neighbourhoods as ‘private energy, public failure’: the development challenges of poor public health, chaotic infrastructure and urbanised poverty remain considerable.

Finally, we need to factor in the geography of climate change. Many megacities are coastal, and will be threatened by rising sea levels. Many will also be increasingly water-stressed in the years to come.

In his excellent book The New North, Laurence Smith explores the economic rise of the NORCS – cooler, resource-rich regions stretching across Canada, Scandinavia and parts of the US, Russia and China. He predicts new ‘hydrocarbon cities’ appearing across Canada and Russia, and new mega-regions like Cascadia – spanning Portland, Seattle, Vancouver and parts of NorCal.

Megacities are a great symbol of the global urban shift. But our urban future is going to be much richer and more complex than this. The sooner we recognise that, the better we’ll be able to plan for it.

A version of the piece first appeared on the squareglasses blog.

Local Public Sector Pay

2012-01-19T13:37:00.002Z

Interesting piece from Chris Giles at the FT on the debate around local public sector pay. The big issues here are around what we mean by fairness, the impact on public sector services and the wider spatial impacts.

On fairness, as I've explained before, I prefer to think of equal reward for equal work, rather than equal pay. The difference is that the former takes in to account local differences in the cost of living.

Chris Giles suggests that the main argument in favour of reforming public sector pay concerns the second of these issues - the impact on public sector services. As he says: "There is little reason why Britain should tolerate that a nurse, teacher or police officer should live towards the top of the local income distribution in the north-east or south-west of England, but be stuck well down the pay scale in London and the south-east." In the low real wage areas, equal pay translates in to low reward with subsequent consequences for public services (at the extreme, this difference kills people as explained by CEP colleagues investigating the impact of national pay in the NHS).

The FT is more dismissive of the impact on the wider spatial economy: "The simple argument deployed by Mr Osborne, that high public sector pay in poorer regions crowds out private sector enterprise, is also suspect." This is a bold claim given the lack of evidence in this area. The crucial issue here is whether the demand stimulus provided by higher public sector pay offsets the supply distortion in the labour market. Very little is known about either of these effects.

Preliminary finding from ongoing research suggests that there is some evidence of distortion in the labour market - at least from public sector jobs (we haven't yet looked at pay). Specifically, we seem to be finding that areas receiving more public sector jobs see no obvious effect on overall total employment, but do see lower manufacturing employment. This would be consistent with a story where public sector jobs crowd out 'tradeable' manufacturing while providing a demand stimulus to local services. A little more work to do till we are more confident on this finding, but suggestive of the fact that it might be a little early to completely rule out such labour market distortions.

Helping the Elderly Downsize

2012-01-17T14:24:00.002Z

I was pretty critical when the Intergenerational Foundation called for the government to adopt measures to stop the 'hoarding' of housing by older people. More recent efforts by Grant Shapps to get councils to help the elderly move if they want to have a better feel to them.

The BBC describes the new voluntary scheme as working as follows:"Under the scheme, the council will arrange for elderly people to move into rented accommodation, and then take responsibility for maintaining and letting their property at an affordable rate. The rental income is then passed back to them [...]" Providing the scheme is truly voluntary, then lowering transaction costs in this way may be a relatively cheap way to increase the supply of space (a pilot in Redbridge suggests that this is indeed the case).

But, and it's a big but, this is likely only to lead to a small increase in effective supply. Why? Because it turns out that not that many people appear to be 'trapped' by moving costs - according to the Telegraph "Government analysis of the Redbridge project suggested that 200 people in the borough were considering moving, but felt that they could not afford to." And this presumably represents the 'stock' of people who feel trapped rather than the annual flow. If so, the scheme may be helpful, but doesn't offer a radical solution to the housing crisis. My preferred radical solution remains to build more housing.

Skyscrapers and financial crashes

2012-01-11T12:31:00.002Z

I see that the Barclay's Capital Report suggesting that skyscrapers are linked with financial crashes has attraced a lot of coverage. Just as with city rankings it's a little hard to know what to make of these type of reports. Being generous, they at least provide food for thought.

Conceptually, it seems quite possible that there is something in this for the simple reason that most financial crashes follow booms and booms are generally associated with over investment in capital assets - factories, inventories, housing, so why not building height? That said, if someone wanted to seriously assess this claim, they could do worse than start with this wikipedia list of the worlds 250 tallest buildings. The correlation with financial crashes was far less obvious to me as I looked down that list.

Even if there tall building booms do precede financial crashes, it's important to remember that serious research tells us they play an important economic role - in helping make the best use of a scarce resource (land) and in generating agglomeration economies which help make firms more productive. These longer term benefits are likely to outweigh any short run effects so I remain convinced that UK cities (and London especially) could do with more tall buildings not less.

High Speed Round Up

2012-01-09T11:29:00.006Z

Just back from annual leave and slowly getting my brain back into gear. Given that we are told the HS2 decision is coming soon, I thought it might be useful to pull together some of my previous blogs on the issue:

Extra tunneling costs, the finance black hole and the problems with predicting demand growth from 6th December 2011.
Why it's OK to support some large infrastructure projects but not others (following criticism of the ASI's position as purely ideological)
HS2 and NIMBYism (some findings from related academic research)
HS2 and the North-South divide
Benefits and costs both highly uncertain.
Environmental benefits limited.
People are in favour of high speed rail, providing they don't have to pay for it.
The opportunity costs of the project are large (i.e. we could better spend the money on other things)

[Disclosure: I sit on the HS2 Analytical Challenge Panel]

CLG select committee report on planning:The good, the bad, the ugly

2011-12-21T11:15:00.006Z

An early Christmas present from the CLG select committee - it's report on the national planning framework. My assessment - part good, part bad, part ugly.

The good(ish):

Parts of the NPPF could be clarified, either by making the document longer or cross referencing to other things
Importance of local plans and a presumption in favour of sustainable development consistent with the plan (I always assumed that was the intention of the draft)
Transition should allow a little more time for LAs to get their act together and current planning guidance to continue to apply until new guidance in place (something we suggested in our recent assessment)
Clarify what is meant by affordable housing
NPPF is placeless, allow local variation where there is evidence to support this
Local authorities to set own targets for brownfield first (again, something we called for in our recent assessment)

The bad:

The committee's suggestion that NPPF makes the economic dimension appear predominant. For too long the planning system has essentially ignored the economic dimension. It says a lot that NPPF tries to partially redress this balance and is immediately accused of going too far.

The ugly:

The unwritten assumption underlying the select committee report that the problem with the planning system is the process rather than huge constraints imposed on the use of greenfield sites. In keeping with this implicit assumption, the select committee wants to strengthen brownfield targets and reinforce town centre first. These are exactly the policies that tie us to our existing urban footprint and create many of the problems we experience in adjusting to the structural changes occurring in the UK.
The continued insistence that constraining us to our existing urban footprint is somehow costless. The committee claims to have 'found no conclusive research, however, that planning policy or guidance is a particular constraint on economic development'. This is misleading because it relies on a very narrow definition of 'economic development' (oh the irony). As SERC has documented, there is evidence that the UK planning system:
- Increases house prices (with a regressive impact on low to middle income families)
- Increases housing market volatility
- Increases office rents
- Lowers retail productivity
- Lowers employment in small independent retailers
- May not properly assess the true social costs of brownfield versus greenfield development.

I certainly accept that this evidence is not 'conclusive', but neither is it irrelevant. Taking proper account of it should be central to striking the right balance between the costs and benefits of our planning system. The fact that the committee chooses to ignore it and focus instead on reforming the NPPF to perpetuate the status quo - at least in terms of outcomes, if not process - is a deeply depressing reminder of just how biased is the debate on the future of our planning system.

Business Rate Retention Proposals (the X factor)

2011-12-19T16:10:00.006Z

The government has published its response to the consultation on allowing Local Authorities to retain some of their business rate growth. CLG's website provides both mind numbing details and a plain English guide. Unless you have a very specific interest in the details of local government finance, I'd recommend a quick read through the latter.

As I wrote in July last year, the key tension here is the tradeoff of equity versus growth: the scheme will give incentives for growth at the cost of some equality in funding across councils. Some aspects of the announcement today (10 year fixed terms for resets, no cap on the amounts that can be retained) favour growth incentives, others (the system of tariffs and top-ups, uprating of baseline by RPI, levys for highly 'geared' councils) favour equity.

Of course, the final balance in terms of the strength of the growth incentive will depend crucially on the share of business rates growth that local authorities are allowed to retain. According to CLG "In addition to retaining the local share of their business rates baseline, councils will also be able to keep the local share (x percent) of all their business rates growth. This means that the more an authority grows its business rates base the better off it will become."

What is X? To be determined in Spring 2012 we are told. So a little longer till we get to figure out how exactly where the balance lies.

City Deals: what next?

2011-12-15T09:06:00.002Z

Posted by Dr. Max Nathan, SERC and LSE

Last Thursday’s Cabinet Office paper ‘Unlocking Growth in Cities’ got rather swamped by what happened in Brussels the following night. That's a shame. Nick Clegg and Greg Clark laid out some important, potentially profound shifts in the way local and central government work together. This is very clear from the obvious buzz in the room as Ministers delivered their speeches in Leeds, and the flurry of comment since.

As Tim Leunig has explained, Ministers hope that by granting cities more powers urban economic performance will improve. SERC's evidence (here, here and here) tells us that devolution’s direct effects on economic growth aren’t clear-cut. However, the indirect effects are likely to be more important, as new ways of working emerge and local challenges tackled. In theory, that could trickle through to better economic outcomes.

Thus City Deals. The deal-making process has already begun, with the eight core cities submitting draft asks, and an ‘illustrative menu ‘ in the paper showing what’s up for negotiation. Ministers recognise, rightly, that deals should look different in different places: an annex highlights the very different challenges the big conurbations face.

This round of deals is also just the beginning. Further down the line, Ministers are likely to broker further talks with ‘free-standing cities’ such as Derby or Chester.

So how’s it likely to go? Here are three critical points, and some constructive suggestions.

First, this is a long game. If city deals are the real deal, they’re a major shift in centre-local ways of working. In the jargon, they will trigger fundamental changes within Whitehall and local government institutions and institutional cultures, as well as in their working relationships with each other.

These deep shifts will take time to work through. In France – which adopted a big bang approach to devolution – it took 10 years for the system to fully bed down. There’s no reason to suppose England will be any faster.

So it’s essential that Ministers are in this for the long haul. City Deals may be delivering real benefits by 2015, but it’s unlikely they will achieve full potential until some years after.

Second, there are some reservations from cities themselves. To succeed, City Deals need vertical co-ordination (between cities and the centre) and horizontal co-ordination (between Departments). We don’t yet know whether Ministers can deliver the latter. The DPM’s Ministerial working group is broad, but some Departments – notably DWP – are known sceptics on the devolution agenda.

Whitehall capacity is another issue. The Cities Policy Unit is full of very smart people but there are only 15 or so of them. Do they have the capacity to handle the kind of complex, tricksy bargaining / monitoring that’s going to be needed? Greg Clark’s immediate ambition – to have eight city deals locked down by Budget 2012 – certainly looks ambitious (especially if those deals are to be substantive).

Third, there are some worries from the Whitehall side. There’s been some official grumbling about a lack of local ambition in core cities’ draft deals (I suspect city leaders would vigorously dispute this). In part this may reflect tangled local governance. LEPs have emerged as key players in the bargaining process – but of course of they lack a direct democratic mandate. Ministers would like to see big city Mayors in place soon – but by passing up the option of Metro Mayors, the Coalition may have dug a hole for itself. It’s possible none of the planned referenda will pass; alternatively, the Leeds city region might end up with three Mayors – covering Leeds, Bradford and Wakefield.

All of which suggests four pointers for the coming months.

First, as Henry and I have pointed out before, localising economic development requires strong, clear local incentives. Ministers are starting to put some of these in place. That process now needs to accelerate, starting with a decision on Tax Increment Financing and some rapid prototyping on the ground.

Second, some institution-boosting may be needed. City Deals have transformed the position of LEPs. From being close to written off six months ago, LEPs are now at the heart of localism. They now have core funding through the Growing Places fund, most will have EZs and many RGF money. But as expected, a gap is opening up between big city LEPs and the rest. If city deals are to be rolled out beyond the Big Eight, Whitehall will need to think about laying on further resources.

Third, some Deals will work out faster than others. The Government’s ambition to oversee eight front runners at once may need to be revisited in a year or so, with some cities paused and others accelerated. By emphasising the need for cities to ‘show real progress’, Ministers have given useful themselves room for manoeuvre.

Finally, civil servants should get out more. City deals need to accelerate the pace of devolution from its glacial tempo under Gordon Brown. For Whitehall officials, an important part of the process will be building trust and demonstrating empathy – not easy to do from Whitehall, especially now that Government Offices are being wound up. Embedding staff in town halls may sound corny, but it would be instructive for officials to see how cities are run at street level – and to see what their own policies look like from the sharp end.

The Portas Review

2011-12-13T11:28:00.009Z

The Portas review has published its 28 recommendations for saving the high street. The report's a mixed bag - some of it innovative, some of it marginal and some of it (a couple of great big sticks aimed at out of town developments) pretty depressing.

There is a serious issue to consider here - arguably high streets generate 'externalities' that individual shoppers do not take in to account when making their decisions. Some of these externalities are positive (e.g. the sense of community generated) while some are negative (e.g. extra congestion from having people drive in to the centre of town). Market forces don't deal well with externalities so it's possible that policy makers should intervene. A number of Portas' recommendations - e.g. town teams and business improvement districts - are about managing those externalities.

Part of the problem, of course, is that managing these externalities is difficult. Indeed, high streets are already highly regulated. In fact, the Portas review suggests that in some areas they are over-regulated - hence the call for the removal of unneccesary regulation, for the reform of the use class system (which governs change of use) and for the freeing up of redtape. But at the same time the review also calls for the introduction of a whole lot of new red-tape - betting shops in their own use class, large retailers forced to support local businesses and report on their activities, landlords to have new responsibilities for contract of care, new restrictions on vacant units, banks forced to sell assets, a public register of high street landlords. It's hard to see whether this leaves the high street more or less regulated. I guess one could argue that this would leave the high street better regulated, but you'll have to forgive me some scepticism on this (given the speed with which the report has been pulled together).

Finally, of course, we come to the policy recommendation which is most likely to have real bite - the NPPF to make explicit the presumption in favour of town centre first policy and the need for the secretary of state to sign off all new out-of-town developments. I struggle to express how depressed this makes me, so let me simply repeat my arguments from May this year:

"What worries me, however, is how incredibly one sided debates about this issue have become. Reading much of the commentary you would think that intervening was essentially costless and that everyone agrees out of town shopping and clone towns are bad.

Clearly, however, this is not the case and there will be substantial costs to pay to further support the high street. Supermarkets [and out of town developments more generally] offer cheaper prices, more diversity and convenience. So regulating them further will increase costs of living and reduce choice. Indeed, SERC research estimates that existing planning restrictions may already reduce supermarket productivity by 20%. If saving the high street requires further restrictions these costs will rise. High grocery prices hit the poor harder than the rich so the impact of this may also be regressive. Tax subsidies to support the high street (as proposed by some [including Portas]) are not costless either. What expenditure should we cut (or which taxes raise) to fund this? If the proposal is to somehow pass these costs on to supermarkets then that raises prices with the regressive impact just highlighted.

These costs may be worth paying. But the public debate too often ignores them. I am no media expert, but my major worry is that the commentary around this issue mainly reflects the concerns of the better off who have strong preferences for independent retailers (and disposable income to take advantage of them) . Let's hope the review takes a more balanced approach to identifying the costs and benefits so that we can properly decide whether the latter outweigh the former."

With the report in front of us, it appears that my final piece of optimism was, as usual, misplaced. I am still hopeful, however, that the government will see how massively these two recommendations conflict with their localism agenda. Much better, for many reasons, to allow local authorites to decide on their own priorities for town centres. First, we would get more experimentation and a better idea of what works. Second, we would hopefully find out whether local communities think the costs of these policies (assuming they actually work) are worth paying for the benefits of livelier high streets.

Read more:

Protectionism and the high street (why existing retailers like to restrict entry)
Be careful what you wish for (why town centre first policies might have hurt independent retailers)
More supermarket bashing (on the costs and benefits of further restrictions on supermarkets)

More housing please

2011-12-12T12:49:00.004Z

In all the debate around the government's planning reforms, we are in danger of losing sight of the fundamental problem - the current system has failed to deliver enough houses, of the kind people want, in the places where they want to live. Solving this fundamental problem requires us to build more housing. Every other 'radical' solution so far proposed is either insufficiently radical to make much difference (empty homes) or sufficiently radical that it's hard to believe it represents a good solution (empty bedrooms).

For those who would like more detail:

My post outlining the problems with proposed radical solutions.
Some reflections on the recent housing strategy.
SERC's Max Nathan on the government's planning reforms.
A criticism of the alternative planning proposals from the National Trust.
Joseph Rowntree Task Force on the Housing Crisis.
Martin Durkin's enjoyable rant against the Telegraph's 'Hand's off our land' campaign.

Enjoy.

Unlocking Growth in Cities

2011-12-09T10:16:00.001Z

Posted by Tim Leunig (LSE, SERC and CentreForum)

Deputy Prime Minister Nick Clegg and Minister for Cities Greg Clark today launched the Cabinet Office paper Unlocking growth in cities. This is the evidence base for the proposed city-led transfer of powers from London to England’s largest cities.

Clegg was passionate and Middlesbrough-born Clark as cerebral as an LSE PhD should be. Labour’s Chuka Umanna was supportive, so in short, it will happen.

Unlocking growth is concise, readable and contains a high ratio of evidence to blather. The team who wrote it deserve praise.

The startling fact is that only 1 of the 8 largest places outside London has an income above the national average. In Spain it is 2 places, in France 3, in Italy 6 and in Germany 8 out of 8. Noting that cities elsewhere have much more power, the government rightly proposes to extend more powers to our cities.

Whether this will deliver growth is another matter. Unlocking growth also tells us that places with more skills than their national average have higher incomes than their national average, and vice versa. This is true for 28 of the 32 places across Europe listed, including all 8 UK cities. Bristol is the only top-8 city with more graduates than the UK average, and is the only top-8 city with a higher income. Birmingham is poorer than Bristol primarily because people in Birmingham have fewer skills and therefore earn less.

In this context the new cities agenda looks weak. It is sensible to give cities unified capital budgets – how could it not be? But if what really matters is education then this is not a game changer.

Education is already controlled locally. National government is not holding schools back in Manchester and Newcastle, although locally determined pay may allow smaller class sizes in many lower cost regions.

Schools in England’s big cities fail far too often. Across the country 32% of kids whose parents are in the bottom 20% by income get 5 good GCSEs including English and Maths. London does much better, at 44%, with excellent performances in a range of boroughs including Hammersmith, Hackney and Redbridge.

All other big cities do much worse. The equivalent figures are 29% in Liverpool and Manchester, 26% in Sunderland, 24% in Bradford, Leeds and Sheffield and 22% in Newcastle. These figures take into account ethnicity, place of birth and other characteristics. If every Borough in London can beat the national average, these cities have no excuse: they are failing their kids, and destroying their long term economic potential.

If our cities are serious about improving their position they need to concentrate on making sure that they educate their students much more effectively than at present. Skills attract higher value added companies, and provide local residents with more options in downturns. Education is not a perfect answer, but it is the best one we have.

Unlocking Growth in Cities was launched at an IPPR North conference on 8th December at which the author was a speaker. This blog is based on my speech to that conference.

SERC at City Hall

2011-12-08T10:42:00.004Z

Posted by Dr Max Nathan, SERC and LSE Cities

Earlier in the week I gave evidence to the London Assembly's Economy, Culture and Sport Committee, which was holding a session on the Tech City initiative.

On the panel with me were Eric van der Kleij (Tech City UK), Kulveer Ranger from the Mayor's office, Theo Bertram (Google), Georg Ell (Yammer) and Jeff Lynn (Seedrs).

You can see the whole thing on this 'webcast' (very web 1.0). There's some entertaining political to-and-fro between Ranger and some of the Labour members for the first 20 minutes or so, then a good hour of discussion after that.

A version of this post originally appeared on the squareglasses blog.

Local Government Finance and the Glencore IPO

2011-12-08T09:16:00.005Z

The FT reports that the Glencore IPO has resulted in an unexpected 'bonanaza' for the small Swiss village that is home to a number of Glencore executives. The payouts to these executives, as a result of the IPO, have been sufficiently large that residents have been able to vote to reduce the local income tax rate.

Contrast this with the UK where, as things currently stand, growing local incomes have essentially no effect on local revenue. Likewise, increasing the number of businesses. For new homes, councils do see some increased revenue from additional council tax (doubled for six years with the New Homes Bonus). The government consultation on business rate retention, which closes soon, is also looking to provide incentives on business rate retention, although it's not yet clear how strong these will be.

I can only assume that the Glencore story makes Local Authorities in the UK (who want greater tax raising powers) green with envy.

High Speed Rail Delays

2011-12-06T08:50:00.011Z

The debate on high speed rail rumbles on. The latest round of arguments has been partly inspired by the Transport Secretary's decision to delay a decision until early next year so that she can decide whether to spend an extra £500m on another tunnel under the Chilterns. To put that figure in perspective, note that it's three times the amount announced in the Autumn spending review for local transport projects once again raising the issue of priorities. Another way to think about it is as a 3% increase on the £17bn budget. That makes the already quite weak cost benefit just that little bit worse.

At the same time as the tunnel decision was announced, a new report suggested that ministers will be left with an £8.5bn black hole if they go ahead with the route. I haven't had time to read the report itself and it was commissioned by 17 councils along the route, so comes with a health warning. According to the Telegraph the report reveals 'that the benefits of the scheme to the taxpayer could be as little as half the costs'. This seems an odd point to emphasise, because the fact that the costs exceed revenues has been known for a long time (for example, in March 2010, I noted 'the second certainty is that any new route will not be commercially viable and will need large government subsidies'). It's also the case that lots of government expenditure fails this test because it's standard to take in to account the benefits to tax payers as well as the revenues that go to the exchequer. The fact that total benefits are likely to exceed costs is not in (that much) doubt for HS2. The point is that these total benefits don't add up to much compared to other things the government could spend money on.

The other point central point raised by the report directly addresses the issue of total benefits and concerns the government's projections about the level of demand. Figuring out the level of demand involves making predictions about growth and predictions about how quickly rail demand will increase as the economy grows. The first of these numbers is certainly open to debate (DfT claims that the figures it uses - the 'elasticity' - are conservative; this is certainly not an opinion shared by all experts in this area). You would imagine that the second number - the growth rate of the economy over the period - might also usefully be revisited (given the Autumn statement last week) but I haven't yet seen anyone do this.

The growth rate in passenger numbers matters because HS2 makes journeys faster and relieves capacity constraints on the existing network. The benefits from higher speed depend on the number of passengers that will use the service, if you project smaller numbers you get smaller benefits. The capacity constraint depends on how fast passenger numbers grow relative to capacity. Figures released this week have thrown some doubts on that problem as well, suggesting that peak time trains are only a little over half full. Again, these figures come from opponents so are subject to the usual health warning but they do raise the issue of whether other options (e.g. pricing structures, existing capacity) could be used to deal with this problem. In addition, in the Eddington study there were capacity constraints all over the transport network (road and rail) by 2025 so the case for HS2 is not unique in that sense. Finally, note that the easing of capacity constraints is also well captured in the traditional cost benefit analysis (providing that passenger numbers aren't over estimated) and as I have said before that case looks weak relative to alternative transport investments.

Is the New Homes Bonus Working? (Part 2)

2011-12-01T15:51:00.005Z

DCLG have just announced that this year's New Homes Bonus payment will be £430m. As DCLG point out 'this is more than double the first year's payment'.

At first, this sounds like great news, until you remember that the bonus is paid for 6 years on any new build, so this year's figures include the second year of payments for last year's house building. According to DCLG: "This year's larger payment includes £210 million for new and empty homes delivered in 2010 -11, a second instalment of almost £200 million for homes built in 2009 -10, and the first premium for affordable homes totalling £20 million"

A better comparison comes from looking at the actual housing numbers. The first year's payments were for a 150,000 increase in the effective housing stock. This year's are for a 159,000 increase in the effective housing stock.

Several things help put those numbers in to perspective. First, as I have discussed before last year's increase of 150,000 in effective housing stock included the worst net addition figures for the last 5 years. So the 159,000 increase this year makes for the second worst figures in six years. Second, the NHB was announced sufficiently late last year that it was hard to imagine that it would have had much impact on the numbers to October 2010. One way to view the 159,000 number therefore is that the NHB resulted in 9,000 additional completions (because this was the first year that it had bite on decisions). That doesn't sound like very many. Two caveats. One is that starts might be a better measure for tracking the impact of NHB than completions (because its those decisions that will have been made since the NHB was introduced). But according to DCLG: "Annual housing starts reached 96,070 in the 12 months to September 2011, down by 7 per cent compared with the 12 months to September 2010". The other far more significant factor is, of course, the dire economic situation. If we could net out the effect of that, the impact would look better than 9,000 additional completions, although it's hard to figure out how much better. [If anyone has seen an attempt to do that I would be very happy for any pointers.]

In short, it remains difficult to tell how much impact NHB is having on the willingness of local communites to allow more building.

Rebalancing versus Growth

2011-11-30T11:58:00.004Z

As regular readers will know I tend to steer away from commenting extensively on the overall macroeconomic position. This reflects the fact that I know my limitations. Or, if you prefer David Ricardo to Dirty Harry, my comparative advantage is in the economics of cities and regions.

For what it's worth, I came away from yesterday depressed by both the economics and the politics. The economics is self explanatory (for anyone that was listening). In terms of politics, and at the danger of stating the obvious, it seems this crisis is capable of bringing out the worst in everyone. The Labour Party continue to imply that this is all Osborne's fault for pursuing austerity. But as Evan Davis argued so coherently on the Today Programme, is Ed Balls really claiming that a 1% extra stimulus last year would have had such a large effect on medium term growth rates? The OBR certainly doesn't appear to agree with this assessment (blaming revisions to forecasts on price inflation and the eurozone). On the other side, Osborne's absolute insistence that we are currently at the limit of bond market tolerance (with no wriggle room) certainly deserves closer scrutiny in the light of changed circumstances.

Turning to my more usual remit, what about the urban and regional elements of the statement? Here, my fundamental question remains one about priorities. In a world where it would be good to have growth coming from anywhere how much emphasis should the government place on 'regional rebalancing'? The (as yet untested) regional growth fund receives another 1bn to help the areas most affected by public sector job cuts. Why not focus on the people most affected by job cuts which helps focus on the fact that other areas might best be placed to generate new jobs for those people? On broadband we will see ten ‘super-connected cities’ across the UK. I think it's reasonable to ask whether (for example) Belfast should be a priority for this kind of investment? More generally, the national infrastructure plan will 'invest in all parts of the UK'. Again, does this make sense in terms of priorities? To take just one example (although one of my favourites) is now the moment to halve tolls on the Humber Bridge through a debt write down of £150m? At the same time, local transport projects only receive an extra £170m. And then there's the tricky issue of billions on HS2.

Even in better times, SERC argued that it might make sense to focus investments so that government was working with market forces at least within regions. A discussion around these issues appears more important than ever, if we want policy to be as effective as possible in helping those worst hit by the downturn. Of course, the politics of this are awful, so I am realistic about the likelihood of any serious discussion. That's a pity, because politics aside, it's possible (although unlikely) that the economics of this could be awful as well and you would hope that some free and frank debate might help figure out if this was the case.

Infrastructure Options

2011-11-28T14:45:00.003Z

The government hopes to invest money (from the Chinese and others) in 'shovel-ready' infrastructure projects. The FT tells us that tomorrow's announcement will be 'long on good intentions, but short on signed contracts'. Translating intentions in to money will thus depend on the portfolio of projects that are shovel-ready. The quality of this portfolio will depend, in turn, on how effective DfT and others have been in generating project options.

Unfortunately, when Eddington looked at this issue, it was clear that the system in the UK was better at generating options for some types of schemes than for others. Indeed, if I remember correctly, for some types of intra-urban schemes, there were so few schemes on the books that it was hard to assess the spread of possible returns (these are the numbers that I have used in the past to make comparisons to HS2).

One concern here is the political difficulties about the location and nature of projects. Following Nick Clegg's LSE speech earlier this year, I discussed the new focus on infrastructure: "This will start with the regional growth fund, where round 2 will, we are told, prioritise infrastructure projects. I don't think this is necessarily a great place to start because much of the economic literature is generally sceptical about the role of infrastructure in boosting local economic activity in struggling areas. After all, as population in these places is historically declining, they likely have plenty of infrastructure relative to people. How is adding more going to help? [...] Delivering transport infrastructure investment on time and on budget (another commitment) is generally a good thing, although unrelated, as far as I can tell, to fiscal stimulus. After all, overspends and overruns still involve government expenditure. I would welcome a genuine move to prioritise transport projects in terms of bang-for-buck (how about dropping HS2 in favour of the kind of smaller high benefit schemes that Clegg highlighted in his speech today)? I might even welcome more infrastructure spending. But with net capital expenditure set to fall dramatically (even if plans are in line with Labour's projections) this prioritisation will take place within a significantly smaller pot.

These worries remain. At least, post-Eddington, DfT put a considerable amount of effort in to improving option generation. Let's just hope that work had some impact in generating the current portfolio so that we don't end up funding lots of schemes like the one discussed in detail here.

Immigration Up, Housing Starts Down

2011-11-24T12:51:00.002Z

The latest immigration figures suggest that 2010 saw the highest net entry on record (252,000). Meanwhile housing starts are at their lowest level since the 1920s (at a little under 100,000). Indeed, those figures look set to worsen given the widely reported 454 affordable housings starts last quarter.

Coming so close to one another, these figures made me thing of Steve Nickell's lecture on immigration and housing from earlier in the year. In that lecture he suggested that we need to build around 150,000 houses per year to cope with the increase in demand that comes from real income growth and another 120,000 per year to cope with changing patterns of household formation. These kind of rates would be needed for price houses to real income ratios to stabilise even if net immigration was zero.

Somewhat ironic then that the (unlikely to be met) short term aim of government is to stimulate demand for new build in the hope that this creates employment in the construction industry, while in the long run the problem remains that the growth in demand will continue to exceed the expansion in supply.

The economics of planning

2011-11-22T15:03:00.009Z

Posted by Dr Max Nathan, SERC and LSE

Yesterday's launch of the Government's Housing Strategy - and some of the reaction to it - have turned the spotlight back on to the planning system. As Henry Overman points out here, planning factors are one of the three factors influencing levels of housebuilding.

Here [pdf] and here [pdf] are two new papers on the economics of planning, written by Henry and I. Versions were also submitted to the National Planning Policy Framework (NPPF) consultation last month. (For those outside the UK, the NPPF, subject of furious public debate during the summer, is part of Ministers' attempt to speed up the English planning system.)

The papers pull together SERC research on planning (paper 1) and assess the Government's proposals for planning reform (paper 2). Henry and I don't agree on all of this - I'm certainly more pro-brownfield than he is - but we both felt that important pieces have been missing from the recent public conversation.

The key messages are:

1) The job of planning is to balance environmental, social and economic welfare. This means tradeoffs, so all planning systems have costs and benefits.

2) Planning's economic effects, especially the costs of the status quo, have been underplayed in recent debates. We summarise evidence strongly showing current rules increase house prices and volatility, increase office rents, probably lower retail productivity and lower employment in small independent shops.

3) Paradoxically, land restrictions in the most popular areas have led to some truly unsustainable development - such as selling off school playing fields for housing. Similarly, brownfield-first policies have delivered some positive benefits for cities like Manchester, but aren't a panacea.

4) The draft NPPF needs to be much clearer about sustainable development, potential tradeoffs and how practical decisions might be made (for example, using the National Ecosystem Assessment).

5) We agree with the National Trust and others that there's a basic tension between Government's desire for localism and some important national objectives. Ministers need to be clearer about what trumps what, or (more in keeping with localism) provide stronger incentives to align interests.

6) The presumption in favour of sustainable development that is consistent with the plan should be retained. But local authorities need time to adjust to the new rules, and the Government should introduce the change gradually.

7) Current incentives to ramp up housebuilding, such as the New Homes Bonus, are probably too weak and need to be strengthened. And one-size land restriction policies (such as town centre and brownfield first) don't work well in practice. Rather, we suggest Whitehall sets the appropriate framework to try to encourage particular patterns of development but then allows local authorities to develop their own land use restriction policies.

This piece was originally posted on the squareglasses blog on 6 November 2011.

Housing Strategy

2011-11-21T16:06:00.002Z

Some initial commentary on the government's housing strategy suggests that there is little coherent vision. Unless you think that the government could be spending lots more money than it is on housing, I think this criticism is a little unfair.

The government has two problems. One is short term. (At least) three things are combining to make current building figures look very bad. First, the recession makes things very uncertain for housebuilders. Second, the debate around the National Planning Framework is reinforcing that uncertainty. Third, the lack of mortgage finance is compounding the problems stemming from this increased uncertainty. There's not much that can now be done about the first two of these (although I did suggest some time ago that the government might regret the haste with which it abolished regional plans in the absence of something to replace it). The new build indemnity scheme will do something to tackle the third problem of mortgage finance - at least for new build. This will have some positive effects on supply, but it is possible they might be quite limited. Not least, because developers with schemes that are not started may be better off exercising the option value of holding on to undeveloped land until the market outlook improves.

On schemes that are stalled, the government has announced a Get Britain Building investment fund. Apart from the more boring description, and the smaller amount of money available, its not clear that this is massively different from the labour government's 'kickstart' programme. As a results, and as with the new build indemnity, the effects are likely to be positive but limited.

Longer term, I think the fundamental problems remain and my take on this is little changed from earlier in the year. The government has a real problem and one that is mostly not of its own making. The under-supply of housing has been a long term problem which the previous government were unable to tackle effectively. Labour were slow to recognise that something needed to be done about the planning system. Once they realised there was a problem they introduced top-down regional plans that tried to force local authorities to build more housing. These were incredibly unpopular with local authorities in parts of the country that needed more housing and were quickly abolished by the coalition. The national planning framework intends to replace this top down system with more localism and a set of incentives to encourage development. For a number of reasons I think these reforms should be welcomed but worry about the short term as discussed above.

In addition to these short term issues, there is the longer term issue of what the government will do if its package of financial incentives are insufficient to encourage more development. With the new system yet to bed in it could be a number of years before the government is able to assess whether the system is working (the recession compounds the problems here). That brings us close to an election where a change in government could see a change in policy. Cue more uncertainty for developers. This suggests that the government might have been better going for stronger initial incentives (e.g. on NHB and local business rate retention) which could then have been scaled back.

Another area which Labour struggled with, was the insistence on high brownfield targets. I have discussed the problems with these targets before but they remain incredibly popular (see, for example, the recent National Trust proposals on the NPPF). There is a real danger here that the coalition will not be able to resist calls to strengthen constraints on building on greenfield land in the national planning framework. They have already committed to maintaining green belts, but there are many other categories of 'protected land' where policy remains uncertain.

So much for some of the problems on the supply side where, as I have said, many of the problems are long term and not of the government's making. As already discussed, I think the short run effect on the demand side will be limited. In the long run, I just don't think policies on the demand side will help and may well create more problems than they solve. Setting aside the big demand side issue (the fiscal stimulus) the government continues to spend money on policies that try to 'help people on to the housing ladder'. Such policies to boost demand exacerbate the price problems caused by supply constraints and only help those lucky enough to get assistance from a scheme. This will always be at the expense of someone similar who doesn't benefit from the scheme and does nothing much to address the fundamental problem. The politics of this are tricky because it allows the government to say they are 'doing something to help' but the money would be much better spent on increasing incentives on the supply side. The government should certainly resist calls for further measures on the demand side.

In short, today's announcements might do something (although likely not much) to help in the short run but the longer run problems remain. Worse for the government, those long run problems (particularly around uncertainty and the resulting option values for developers) may well dampen any response to the short run policies.

De-industrial revolution

2011-11-17T12:15:00.003Z

BIS have launched their 'Make it in Great Britain' campaign highlighting the best in British Manufacturing (presumably with a view to getting more of it). Aditya Chakrabortty also had an interesting piece on the Guardian yesterday on the de-industrial revolution asking why Britain doesn't make anything anymore. Both of these things had me reflecting on what, if anything, policy can do about this.

Let's start with what caused the decline in British manufacturing. The economists explanation of this is pretty simple - Britain's comparative advantage lies in services rather than manufacturing so as the world globalised, we shifted towards services away from manufacturing. Of course, comparative advantages are generally created, rather than god-given, so it's reasonable to ask whether there are things policy could do to change this. For example, two popular prescriptions are that we could introduce more apprenticeships or different ways of funding businesses. In short, we could be more like the Germans. Unfortunately, these kinds of explanations muddle cause and effect. Who says that these parts of the system haven't developed in response to the fact that manufacturing in Germany got big because of some other comparative advantage - e.g. the fact that Germany is more centrally located in the EU than the UK (which makes it a better place to manufacture heavy machine parts that need shipping around). In short, we have no idea if replicating bits of the German system would make any difference.

Similar problems apply for calls to spend 'more on innovation'. We already have an R&D tax credit and various other BIS run schemes that try to do exactly that. Perhaps we should 'invest more in manufacturing'? Trouble is, the Regional Selective Assistance scheme has been making big investments directly in manufacturing firms since the 1970s. In short, even if the government had the money, spending more of it wouldn't necessarily shift our comparative advantage that much. At the end of the day, the UK is relatively good at services for many reasons.

Of course, there is always the argument that the structure of our economy is 'distorted' because of what happens in the financial sector. I have some sympathy with these arguments and have considered them in more detail in a previous post. But even if we removed some of these distortions - e.g. by changing the pay structure in financial services - why think that the rebalancing is towards manufacturing over other service activities that the UK is good at?

The issues are further complicated by the fact that the debate often assumes that these changes would benefit lower skilled workers or declining places. Both of these assumptions are highly questionable. Even if we did manage to improve our manufacturing share, lower skilled workers would still be hit by the double whammy of competition from China and technological change. For a long while, research suggest that the latter had actually been far more important than the former in explaining the widening pay gap. More recent evidence suggests that intense competition from China may now also play a role, especially for the lowest paid. Unless people are seriously willing to consider much more trade protection (or some sort of ban on technologies) then 'more manufacturing' is likely to be able to do relatively little for the lower skilled. If restrictions on trade are out, we either need to increase skill levels, or get the lower skilled to provide non-traded goods. But when economists say 'non-traded' goods they often mean services (cleaners, builders etc) so that doesn't necessarily equate to more manufacturing either. Of course, in non-traded goods lower skilled workers often face intense competition from immigrants, but suggestions of restrictions there run in to both political and practical difficulties (lots of this competition is from EU workers). Again, evidence on the magnitudes of these effects on wages and employment are mixed, although moving towards finding larger effects in periods when immigration has been larger.

Similar arguments apply to whether a move towards manufacturing would help declining places. Who knows where these new manufacturing jobs would be created. In addition, here, I share Aditya Chakrabortty's intense scepticism about calls to change the skill composition of places (get more high tech jobs) as a means of indirectly helping the lower skilled.

It should be clear that I do not think this is an area where there are any easy answers. My gut feeling is that there is no reason to think that the UK is going to generate lots of additional manufacturing jobs anytime soon. In fact, I worry that this continued focus on the structural composition of the UK economy is a considerable distraction from the tasks at hand. In the short term this is all about finding sources of demand. The longer run issue may be even trickier. How do we improve the labour market outcomes for lower skilled workers? 'More manufacturing' is simply not an answer to this question.

Displacement Zones

2011-11-15T09:57:00.002Z

Back from the Urban Economics Association sessions that are organised as part of the annual NARSC meetings. As well as the session on cities and the public sector that I described last week, there were also a couple of great sessions on policy evaluation of Enterprise Zones. Covering US, French and UK experience, one common theme was that these schemes appear to need to be expensive to have much impact and, even then, the impact comes mainly in the form of displacement from nearby areas.

Matt Freedman (Cornell) looked at the effect of the New Market Tax Credit in the US. This scheme mostly provided support for commercial development and involved billions of dollars of expenditure, mostly spent on commercial development. Matt's paper gets at the effect by comparing eligible to non-eligible areas (what's known as a discontinuity design). My take on Matt's results is that the scheme (at least around the threshold) had no effect on home values, median income, unemployment rate or employment. There does seem to be some effect in reducing the poverty rate, but household turnover is up so this may well just be a composition effect. It's also not clear where this effect is coming from given the absence of effects on employment or house prices (which might conceivably drive this effect)

Matt's paper didn't explicitly consider the issue of displacement, but this is considered by Andrew Hanson and Shawn Rohlin. Their paper looks at areas just outside successful enterprise zones and compares them to areas just outside unsuccessful zones and find substantial evidence of displacement (areas just outside unsuccessful zones do relatively better because they don't experience the displacement). In preliminary work, Elias Einio and I show that the only effect of the UK Local Enterprise Growth Initiative was to move employment from an area approximately 1km outside the boundary of the scheme to 1km inside the boundary. Aside from this displacement we can (so far) detect no other net effects.

Florian Mayneris and co-authors look at the French EZ scheme which spends a big amount of money (something over 300 euro's per person if I remember correctly). They find that this scheme can have a significant effect on firms tendencies to locate inside scheme boundary, but no effect at the level of the municipality as a whole. That is, the scheme shuffles firms from the non-eligible to the eligible part of the municipality.

Of course, policy makers may want to claim that all this displacement of jobs is what they are trying to achieve -but it is certainly not consistent with the rhetoric that is usually used (which usually talks about 'creation' rather than displacement).

One final thought, the French paper is part of a series of four projects due to report early 2012 to help inform the French government's decision whether or not to renew the scheme. The problem? The scheme was already extended for five years in 2011. Another depressing example of evidence based policy making in action?

Beaches, Sunshine and Public Sector Pay

2011-11-10T20:15:00.002Z

I'm in Miami for the Urban Economics Association sessions that are organised as part of the annual NARSC meetings. Interesting session first thing this morning on Cities and the Public Sector.

Given the location (we're about a mile from Miami Beach) it seemed appropriate that the session started with Jan Brueckner's great paper on beaches, sunshine and public sector pay. Jan's research looks at whether or not public sector workers are able to get higher pay (relative to private sector workers) in high amenity cities. Jan's research shows that this is indeed the case, with the effect being particularly strong for unionized public sector workers. Jan's NBER paper gives more details.

In the same session, Giulia Faggio presented some of our work on the impact of public sector employment on private sector employment. Those results are still a little preliminary for a proper public airing. But one thing that did strike me is the fact that in the US the major controversy appears to be around pay, while in the UK the current concern is much more about employment. More to come on our substantive findings for the UK in a few weeks time.

[PS: For those of you based in London, Jan Brueckner will be presenting his work on Sub-Prime Mortgages and the Housing Bubble at the LSE on Monday 5th December.]

Economic Impacts of HS2

2011-11-08T13:30:00.005Z

I haven't had time to go through the transport select committee report on HS2 in much detail. The committee has chosen to focus mostly on the capacity issue as making the case for HS2 (as the wider environmental and other benefits are widely disputed). One thing that immediately strikes me, however, is that the 'capacity constraint' argument that they use may not be as strong as the report makes out.

The capacity constraint arguments revolve around the BCR, which the report gives as follows:

Appraisal date:	March 2010	February 2011
	London-West Midlands	London-West Midlands	Y network
BCR without WEI	2.4	1.6	2.2
BCR with WEI	2.7	2.0	2.6

On the basis of these numbers, the select committee conclude that HS2 represents "high" value for money because HMT classifies BCRs above 1.5 as good, above 2.0 as high.

But this is a little misleading, because the BCR for transport projects tends to be higher than for other investments (part of the reason why some people argue that we tend to underinvest in transport in the UK). Here's the picture for a bunch of DfT projects taken from Eddington's 2006 report (figure 3.1):

These figures include some wider benefits (Eddington doesn't have a figure for the traditional CBA) so you need to compare to the second row of the transport select committee table. To read these 'box and whisker' plots notice that the box captures the 25%-75% range of project BCRs with the big horizontal line capturing the average. On my reading, a wider BCR for HS2 of 2.0-2.6 puts it, at best, in the bottom 10-15% of projects that DfT had on its books at the time of the Eddington report. I am not sure that these numbers are 100% comparable, but I think that they are roughly right. If so, that suggests that the case for HS2 remains weak when compared to many other transport projects.

The Beginnings of the US Housing Boom

2011-11-07T10:22:00.002Z

Posted by Dr Christian Hilber, SERC and LSE

Joe Gyourko, (from the Wharton School) gave a great SERC seminar on Friday. The NBER paper - An Anatomy of the Beginning of the Housing Boom: US Neighbourhoods and Metropolitan Areas - attempts to figure out when the boom began in different US cities and neighbourhoods and whether any fundamentals were moving in the ‘right direction’ to help explain timing and magnitudes.

The research provides pretty convincing evidence -- using some amazing data -- that housing markets are 'local' (i.e., metro area) phenomena and are to a large extent driven by income as the main fundamental on the demand side and by regulatory and physical/geographical constraints on the supply side. Supply constrained cities boomed earlier and the research explains pretty convincingly that strong income growth occurred at the same time and offers a plausible explanation of house price booms in those cities. This is essentially ‘Economics 101’. Even more interesting, however, are the places that experienced substantial house price booms that were not explained by high income growth and tight supply; those in places such as Las Vegas or Phoenix. In these places Joe finds no evidence of the boom coinciding with a positive income shock nor is supply very tight. One further thing we know from Joe’s paper: The housing booms (or bubbles) in Las Vegas and Phoenix emerged much later and both the boom phase and the bust phase were very steep. So how can these phenomena be explained?

As Joe was careful to emphasize; the paper he presented does not provide an answer and at this point we can only speculate (although he is promising much more research to come). One plausible explanation to me is the following: Irrational exuberance needs some sort of ‘convincing story’ to emerge. Strong house price growth in places such as SF, NYC, Boston, LA etc. – that were supply constrained and at had good fundamentals – coupled with the extremely low interest rates created the “story” that the house price boom was being driven by historically low interest rates (or other changes in the economy). People started believing in this story. I would imagine that there may have been some spatial contagion effect. This is at least what the ‘spatial history’ of the US boom suggests – and is consistent with some maps on timing that Joe showed during his seminar. Essentially the belief in ever growing house prices may have spread from places such as SF and LA to places such as LV or Phoenix, even though the fundamentals in those places - apart from the interest rates - were extremely different. Now, in the places where it is easy to build (e.g., in Las Vegas or Phoenix) developers started to build like crazy. In places such as SF or NYC perhaps irrational exuberance started to contribute to the price increases originally driven by fundamentals. But how can prices increase at all in LV or Phoenix if supply is elastic? Perhaps the explanation is that supply is only very elastic in the long-run but not in the very short run; this is due to various planning, development and construction lags. So in the very short run if price growth expectations are (too) high this may encourage developers to add a lot of new housing stock. This pushes up house prices in the short-run but once supply adjusts in the medium and long-term prices come back to the pre-boom levels or may even fall below those. Because overbuilding can easily happen in LV or Phoenix but not in Los Angeles or SF, this can explain why the house price levels in SF and LA are still significantly higher than before the boom started, whereas this is not the case in LV and Phoenix. The downward adjustment was much steeper in LV and Phoenix.

Again, Joe’s research doesn’t yet prove any of this – so this is only informed speculation on my behalf. But SERC research shows that elements of this story – e.g. that planning constraints and physical/geographical constraints in conjunction with strong income growth explain the strong increase in prices – are certainly consistent with UK data. There are likely other explanations and the above may be too simplistic to explain everything. After all, on our Real Estate masters we spend several lectures on the fundamentals of housing markets and house price dynamics and there are numerous factors that contribute. Still the above may be a rough explanation of the fascinating picture Joe painted about the timing of the boom across different US metro areas.

Falling house prices and the planning system

2011-11-03T11:08:00.015Z

Posted by Philippe Bracke, LSE and SERC

In periods of economic distress it is natural to think in terms of cycles. Reaching the bottom of the cycle is a painful experience but at least gives some hope: from that point onward, things can only get better. UK house prices, however, look still far from their bottom.

In a recent research project for the IMF, I have studied the house price expansions and contractions of 19 OECD countries since the first quarter of 1970, and identified 55 expansions (of which 6 are ongoing) and 62 contractions (of which 13 are ongoing). On average, expansions last 6 years and produce a 60% house price increase in real terms; contractions last 4 and a half years and produce a 30% real price decline.

These numbers give the impression that real house prices are increasing in the long run, because expansions are longer than contractions and entail bigger absolute price changes. If one removes the most recent house price boom from the sample, however, this impression largely disappears. Other studies, which have a more restricted geographical focus but a broader temporal window, show that over the centuries real house prices are fundamentally flat. (Piet Eicholtz, for instance, has studied three centuries of house price data for the Herengracht canal in Amsterdam and has found their average real annual growth has been fairly low, at about 0.5%).

If there is such a thing as a pattern for house prices in the long term, it is not that they are increasing; it is that they are cyclical. All the countries I examine in my research have gone through multiple expansions and contractions of national house prices. These fluctuations are not just due to randomness – in the paper I show that the probability of ending a house price expansion increases with its duration. In other words, longer expansions are more likely to terminate: what goes up has to come down.

What does this mean for the UK? The figure below shows the real house price index and the corresponding peaks and troughs for three countries of my sample: Germany, the UK, and the US.

A couple of things stand out from the chart. First, the last house price boom did not involve all countries. There are a few cases of advanced nations, like Germany (or Japan), which did not experience any substantial price increase. For Germany in particular, over the last 40 years real house prices have stayed constant or declined slightly. Once again this is proof that real house price growth should not be taken for granted, even in productive and well-functioning economies.

Second, if history is any guide, countries like the UK and the US will continue experiencing real house price declines for some time. This adjustment process is already under way. According to the Land Registry, nominal house prices in England and Wales are down 2.6% on a year-on-year basis. Taking into account an inflation rate of 5%, real house prices have fallen by almost 8% in the last 12 months. However, there is surely potential for more substantial drops, especially considering that US house prices (which have grown less than in the UK during the boom) have already fallen by more than 30% from their peak.

Third, and most importantly, while some degree of up-and-down in house prices is unavoidable, the range of these oscillations should be carefully monitored. Ups and downs are an intrinsic feature of all economic series but booms and busts are not, and this is where the UK compares unfavourably with other countries. Even by US standards, UK house prices look like a rollercoaster: they more than doubled in real terms since the mid nineties; before that, they fell by almost 40% from 1989 to 1995.

For prices to vary so much, quantities must be very sticky. Indeed, a recent OECD working paper shows that the number of new housing units built in the UK is low compared to other nations. A report by the Department of Communities and Local Government suggests that strict planning regulations hold back housing supply and make prices more volatile. Let’s hope therefore that the current debate on planning reform will provide solutions that go in the right direction.

It might seem strange to advocate more house building in a period where house prices are falling. However, the current decline in house prices represents a cyclical adjustment that is not due to abundance of housing units. If this were the case, we wouldn’t see the current rent increases.

This post first appeared on the LSE's British Politics and Policy blog on 1 November. Follow them on twitter @LSEpoliticsblog

London's (shocking?) growth performance

2011-11-02T10:03:00.005Z

Writing about the RGF earlier in the week, I noted "if growth is the absolute priority then you begin to wonder whether the government might be better off dropping the 'R' from the Regional Growth Fund. The economics of that are difficult. On the minus side it might be more difficult to find projects in the 'south' where employment generation is genuinely additional. Offsetting this is the fact that a Growth Fund would expect to be generating those jobs at relatively more productive firms. Of course, while the economics might be difficult, the politics of such a change are far trickier."

I was somewhat surprised, therefore to see Ed Balls making a similar argument in the Evening Standard: "the Government must also act with extra care to safeguard the London economy. For a start, that means making sure London is not excluded from action to support jobs." (He was writing about the National Insurance Holiday, but the same logic could apply to the RGF)

According to Mr Balls, London needs help because "a report last week found London is no longer the fastest growing part of the country and in the past year it has seen the biggest rise in unemployment of any region." Somehow, this manages to make things sound considerably worse in London than is the case. For some period now, London's relative performance (both compared to other regions and to predictions) has been pretty good. I don't think the position has changed that much. Assuming that Mr Balls was referring to the latest BRES numbers they show London as the second fastest growing region after the South East. Anyhow, according to my colleague Ian Gordon, "June-June annual comparisons show London as having the fastest growth rate of any region in just 4 of the last 15 years. More than any other, but hardly a shock when it’s not in the top spot."

What about the unemployment numbers? Again, these are not that surprising because London has large numbers of people (young, lower skilled) who are doing very badly in this recession. In the aggregate, better outcomes for 'higher skilled' workers tend to outweigh the poor performance of 'lower skilled'. There is nothing much new here - those kind of polarised outcomes have characterised London for a long time.

So the relative economic performance of London doesn't actually provide that strong a case for further intervention. Instead, the arguments depend on the extent to which policy in London is actually able to generate additional jobs and what are the ultimate objectives of policy.

Regional Growth Fund (Round II)

2011-10-31T11:12:00.004Z

The government's has announced the next round of projects receiving £950m from the Regional Growth Fund. We are told that this will directly create 37,000 jobs with a further 164,000 created indirectly ('in the supply chain').

As with round 1, with the details provided (severely curtailed by confidentiality requirements) it is impossible to provide any analysis of whether it will achieve this on the basis of the list of schemes agreed. Writing in 2005, SERC affiliate Colin Wren reviewed the available evidence on the impact of Regional Selective Assistance (a competitive scheme for allocating money to firms in depressed areas). The estimated cost per job ranged from £8,000-£21,000 (in 1995 prices). If the RGF of £950 million delivers 201,000 additional jobs that suggests a cost per job ‘created’ by the government of just over £4,700 (the same calculation for round 1 suggested 3,500 per job). In short, if these numbers played out, this would be a pretty effective intervention relative to existing schemes.

There are a number of reasons to think that these figures may be optimistic. First, with incomplete monitoring it is highly likely some of the 'leveraged' private sector funds ('£5 for every £1 of public money') would have been spent anyhow. To the extent that monitoring is imperfect, the RGF will only create additional jobs if it is being given to organisations that are credit constrained. Research that I have done with colleagues at the CEP suggests that this may only be true for smaller firms. We suspect this is because larger firms are better able to game the system (so monitoring is not as good) and are less likely to be genuinely credit constrained.

All of this suggests monitoring will be important for delivering additionality. Here, if I understood Nick Clegg correctly, the RGF is doing something different from the RSA. Specifically, when defending the amounts of money distributed so far he suggested that organisations that know they have the money coming have started activities. With RSA, my understanding was that usually firms need to receive the money first to demonstrate that public money is crucial to the project going ahead. This might suggest that additionality will be less for the RGF.

A separate issue is whether RGF will be more efficient than the Regional Development Agencies. Of course, it is impossible to tell at this stage. The RGF uses a different (competitive) mechanism for deciding on projects. This may lead to better decision making (or it may not). I would expect RGF to be more efficient per pound spent simply because it is spending less money. Civil servants may not be able to perfectly rank projects, but I don't believe that their selection is completely random, so the fact that the fund is smaller means it should achieve higher returns.

A final note of caution on the employment numbers - if all of government truly believed these numbers you might expect to see a lot more spending on RGF (unless they think that the smaller size of the scheme drives the high returns - as discussed above).

What about growth? Here I think there are further reasons to be cautious. In our work on RSA, we were able to find a causal effect of government money in increasing employment and investment, but not productivity. In addition, assisted firms are on average less productive, so RSA expands employment in less productive firms. This is still a 'growth' effect to the extent that these workers would have been unemployed (and we find some evidence, for RSA, that this might have been the case). But increasing the employment share of less productive firms may not be a good long run strategy for driving growth.

Indeed, if growth is the absolute priority then you begin to wonder whether the government might be better off dropping the 'R' from the Regional Growth Fund. The economics of that are difficult. On the minus side it might be more difficult to find projects in the 'south' where employment generation is genuinely additional. Offsetting this is the fact that a Growth Fund would expect to be generating those jobs at relatively more productive firms. Of course, while the economics might be difficult, the politics of such a change are far trickier.

Crime Maps

2011-10-28T10:15:00.002+01:00

The government has added more crimes to its online crime maps.

The discussion on the Today programme centred around the extent to which the maps, together with new police commissioners might skew decisions on how to use police resources. Back in July, the worry was around whether this would skew incentives to report crimes.

The magnitude of both these effects is unknown. One thing that is certain, however, is that reported crimes have a big effect on house prices. To the extent that this is valuing the costs of crimes (at least to residents) then you would think it should have some bearing on the allocation of resources (independent of the mechanism through which this is achieved). Steve Gibbons interesting post from July has more details.

High Speed Fail

2011-10-26T10:48:00.004+01:00

The Adam Smith Institute's 'high speed fail', represents the latest effort outlining the anti-side of the HS2 argument.

The Campaign for High Speed Rail has already responded: According to the FT the Campaign portrays the ASI's opposition to HS2 is “purely ideological, as they are fundamentally opposed to large-scale infrastructure investment [... begging] the question as to why such groups failed to also dismantle the case for projects such as Crossrail and the Jubilee Line extension, which were based on far lower financial returns.”

My overall position on HS2 remains unchanged - the costs of the project are large and I think that the money could be better spent. I am not, however, ideologically opposed to large-scale infrastructure investment. Indeed, I am more sympathetic to the case for Cross-Rail (and previously for the Jubilee Line extension). This is partly because I think that the (narrow) user benefit case for these latter two projects relies on less extreme assumptions about the growth in passenger numbers (and I don't remember them having 'far lower' CBA figures). But I am also more sympathetic because I think that the wider economic benefits (not captured by traditional analysis) are likely to be larger for schemes freeing up bottlenecks within our more successful cities. In contrast, I am not convinced that the wider economic benefits of HS2 will be large (and consistent with this I would prefer to see the money spent on within city transport schemes with better benefit-cost ratios).

In short, while I am sure that the ASI are perfectly capable of defending their own position, it is not contradictory to be supportive of some transport schemes and not others.

Radical Solutions to the Housing Crisis

2011-10-25T13:49:00.010+01:00

The BBC News Magazine suggests eight radical solutions to the housing crisis. Here are previous SERC blog posts on some of them (or other closely related issues):

My preferred 'radical' solution - build more houses.

Millennium Villages and the Analysis of Place-Based Policies

2011-10-24T10:22:00.004+01:00

Interesting to see the arguments about whether or not the Millennium Villages Project could have been better evaluated (either through random placement, or through careful attempts to identify suitable control villages). Part of the problem, according to those defending the project's approach, is that the use of more rigorous evaluation approaches is not possible for place-based policies. I agree with others that this argument is wrong. Evaluation of place-based policies using these approaches might be harder, but it is still feasible.

As a reminder - the major problem in evaluating the causal impact of these kind of schemes is what would have happened in the absence of the intervention. Random placement helps get round this because villages that are not chosen then provide a suitable comparison (this is the idea underlying many medical trials). Governments find random selection difficult because many policy makers assume that their interventions will be effective. Starting from that assumption, randomly selecting individuals to receive treatment is difficult because you have to deny treatment to others. If, in contrast, you start with the assumption that policy will be ineffective, then you are much more sanguine about allocating it randomly. In addition to this standard problem, it appears that place-based policy makers have even more trouble with randomisation of place-based policy.

But even in the absence of random allocation, place-based policies can still be evaluated by looking for suitable comparision groups (so that treatment is as good as random). For example, the UK government recently ran a competition to see which locations should get enterprise zones. In the first round of the competition 29 sites competed to host the final 10 enterprise zones. For those of us that like to think about the causal impact of urban policies this could be good news. As just discussed, when trying to figure out whether a policy has any impact, part of the problem is figuring out what would have happened in the absence of intervention. With these new EZs, the 19 sites that lose in the competition may provide a reasonable control group for the 10 that win. Comparing outcomes for the two groups may then tell us whether those that won EZs actually do better. We could also compare those that entered the competition to areas that appear to be similar but didn't enter the competition (to see whether those that entered the competition somehow differ from those that don't). The timing of EZs gives another avenue to explore. Those given money in the first round should start improving before those given money in the second. If they don't, that raises questions about whether EZ caused any improvement or instead whether this was caused by some other factor (say a strenghthing economy).

EZs are certainly not unique in this regard. The UK's Regional Growth Fund will not fund all projects that are submitted. Depending on how the decisions are made access to, say, the rankings of projects would allow researchers to compare outcomes for otherwise similar areas that were just above or below the bar when it came to getting funded. The Local Enterprise Growth Initiative had two rounds of funding (allows for the strategy of using the second round as a control group for the first) as well as a discrete cut-off for eligibility (so we can use areas that are 'just' ineligible as a possible control group). In addition, some LEGI applicants weren't funded. Finally, LEGI applied to discrete areas (local authorities) which are somewhat arbitrary in terms of the way the economy works - suggesting that comparisons across LEGI boundaries may provide useful information on the causal impact of LEGI (including whether or not there is displacement or positive spillovers - a worry in the Millennium Villages project). To take another example, the Single Regeneration Budget had multiple stages, successful and unsuccessful bids and some projects that targeted specific areas.

Official evaluations of place-based policies make little, if any, use of these programme features to help identify the causal impact of the policies. I can think of many reasons why governments may not like their policies to be effectively evaluated but how depressing is it to see economists making it easier for them to avoid being held to account by suggesting that rigorous evaluation of place-based policies is not possible.

NHS evidence: seriously flawed?

2011-10-21T12:04:00.003+01:00

Posted by Steve Gibbons, SERC and LSE

You know your research has hit a nerve when it gets described as 'seriously flawed'. The last time this happened to me was when the Church of England complained about my finding that the apparent performance gap between faith and secular primary schools is due simply to the fact that they enrol higher-ability children. This time, it's some medical/public health researchers and campaigners complaining about my research on the effects of the 2006 policy to expand choice and improve competition between NHS providers in England (Cooper, Gibbons, Jones and McGuire 2011, an earlier version of which was published by SERC here). A letter appeared in the Lancet last week, and there have been previous rounds of lambasting in the media.

This research (and a related body of evidence from other teams) has been cited a lot by politicians to justify the current round of NHS reforms. This use of the evidence is what has motivated the quite vitriolic attacks to which the research has been subjected. These criticisms generally arise from ideological positions, prior beliefs, and dislike of the findings - not on any alternative evidence that the findings are wrong, nor on a serious evaluation of the methods we used or the evidence we have provided. The criticisms amount to assertions and opinions, based on a misreading or misunderstanding of the research. This is a pretty sad state of affairs, and disappointing for those of us who value scientific evidence and the importance of evidence-based policy making.

A more balanced reading of the research and serious engagement with what we actually did and wrote would, I hope, lead the reader to a more interesting finding. Allowing patients more choice over where they received elective treatment for hip replacements, cataracts and the like, had consequences for quality of care more generally – in our study, evidenced by improvements from survival rates from heart attacks. Our conjecture (drawing on other theoretical and empirical literature in the field) is that these effects occurred through general improvements in hospital management, for which there were sharper incentives in more competitive places.

Of course no empirical study is perfect, or can incontrovertibly establish causality – although we go a lot further than most to try to demonstrate causality. It is also quite right that our evidence should be subject to scrutiny, and we support peer review and open science. However, for those who don't believe our findings, the way forward should be to objectively look to see what is driving those findings, rather than dismissing our results out of hand.

For those interested we have published a detailed response to the criticisms in the Lancet article here.

Empty Bedrooms and the Housing Crisis

2011-10-19T11:08:00.005+01:00

The Intergenerational Foundation are calling for the government to adopt measures to stop the 'hoarding' of housing by older people. I have some sympathy with parts of their argument, but strongly disagree on other parts.

Let's start with the point of agreement - constraints on housing supply have generated a large redistribution of wealth towards home owners. As home owners tend to be older this has resulted in a large intergenerational transfer from young to old. This is one of the many reasons why I strongly support government proposals to reform the planning system to increase housing supply.

I find the arguments that follow much less convincing. Based on an assessment of housing 'need' the report argues that we should take bedrooms from the people who currently underoccupy their house and give them to those who live in overcrowded conditions. In practice, of course, this means getting people to move from large houses to small.

Ironically, the fact that planning decisions are made on the basis of 'need' but housing allocated through the market is one of the reasons why the housing market in the UK is in such a mess. Markets seeks to balance supply and demand (rather than need) and it turns out that, unsurprisingly, as societies get more wealthy they tend to demand more space, not less.

One response would be to switch to a 'needs' based mechanism for allocating housing. As my colleague Paul Cheshire puts it: one option "would be rigorously to follow the logic of 1947 state planning. If we are intent on allocating land for each use without regard to price then logically we need to introduce space rationing. If price does not determine the supply of land then price must not determine its consumption. Each adult could, for example, have a ration of say 40 sq metres with dependent children having, say, another 20 sq metres each. We could, if we wanted, even introduce a trading system so young adults or those willing to live in more cramped conditions could sell some of their space ration perhaps buying back space in later life." This is not a serious suggestion, although others appear not to get the joke.

The Intergenerational Foundation suggests something that appears less extreme - a raft of government measures that would encourage homeowners to consume less space. These would be of two kinds. The first would strongly penalize people who 'over' consume space. Such penalties build up from a logic of housing need and are problematic for all the reasons that space rationing would be. Who gets to decide how much space is enough?

The second approach is to remove barriers and distortions that encourage people to 'over consuming' housing. I have no problems with these kind of measures apart from the fact that I think they will be highly costly and remarkably ineffective. Take, for example, the idea of removing stamp duty on people downsizing. At the moment, the huge wealth gain that they would get by moving to something smaller is insufficient to offset the benefits of staying put. Removing stamp duty changes this balance for a small number of people at the margin but at a huge cost to the exchequer. Removing single person allowances on council tax or removal of universal benefits for those in valuable houses will have similarly small impact on the number of people willing to downsize but imposes high costs on a small number of people who are income poor but don't want to move for some reason. For the more wealthy this will essentially be an irrelevance. Changing the treatment of capital gains tax would provide a disincentive for ownership (which may or may not be a good thing) but dampens the incentives to downsize. An annual capital gains tax is a punishment based on arbitrary decisions on how much space is enough and which I object to for the reasons outlined above.

Just as with empty homes, reallocating empty bedrooms do not represent a long run solution to the housing crisis. The best way to improve the outlook for younger generations? Build more housing.

Planning Policy Roundtable

2011-10-18T09:36:00.013+01:00

The consultation period for the government’s draft National Planning Policy Framework ended yesterday. LSE London recently held a planning roundtable discussion of 15 academics from a range of social science disciplines to discuss the reforms and try to clarify its objectives. While broadly agreeing with the objectives of the reform, the planning roundtable found that the incentives they provide may often not be enough to overcome local concerns and to reflect differing benefits in certain areas.

Our objectives

The reform of planning legislation and particularly its impact on housing has been an epic controversy for decades. At one extreme, many argue that planning is the core reason why so few homes have been built particularly since the 1990s. At the other, it is seen as saving our green and pleasant land from being overrun by sprawling and environmentally inefficient development. The current National Planning Policy Framework (NPPF) proposals by the coalition government have again brought these irreconcilable views to the fore and generated an aggressive debate based more on anecdote and attitude than evidence.

It was in this context that LSE London brought together some fifteen academics from a range of social science disciplines, mainly but not exclusively from LSE. The group included members with vastly different views along the spectrum set out above. The objective was not to build a consensus – this would have been impossible – but rather, given our different starting points, to clarify both the objectives of reform and the potential means of achieving these objectives. The discussion concentrated mainly on housing, but it was recognised that many of the issues relate as much to other forms of development – with equally important implications for economic growth and social welfare.

There were three main areas of consensus, which were around:

The starting point – the problem and the need for change
Objectives of the government reforms
Elements of the reform process

The starting point

There was clear agreement that there is a problem for at least 30 per cent of households, who have low or modest incomes and need more reasonably priced housing.

The whole housing market is too tight and the housing balance is getting worse with declining output. The Barker Review of Housing Supply showed long-term relative house price increases against our international competitors. Employers regard housing costs as one of the most important constraints on new building and investment– at all levels, not just for the 40 per cent on the lowest incomes.

The source of the problem is far more than just tight planning legislation. But it is an important part of the story – and we can move forward without full consensus on all the reasons.

We are in favour of change – the top-down system did not work well and inhibited valuable development. It is fundamental that decisions should reflect local wishes. The proposals on the table are more positive – and make a strong case for the development of local plans within the NPPF.

Government reforms

Those who took part in the LSE exercise want broadly the same thing from government reforms: to increase housing supply and economic activity, while balancing other social and environmental objectives. To achieve this it is necessary to address market failures in the allocation and use of land. The most important of these failures relate to spatial and intergenerational externalities – i.e., the costs and benefits to those not directly involved in decisions. The main objective of planning constraints should be to offset these failures.

The core objective is therefore to support development in places where the benefits to individuals and the economy outweigh the costs. Decisions should be based on benefit-cost analysis of a wide range of impacts rather than simply based on designation.

As we have already stated, housing should be a local decision – but there must be incentives to develop because any negative impacts of development usually affect the local community while benefits are more widespread. These incentives should ideally reflect the extent of pressure for increased housing and other development – i.e., the benefit to the economy of enabling that development to take place. The local government Resource Review and the New Homes Bonus both move towards providing such incentives and are therefore steps in the right direction.

Local decision-making should be based on effective local plans that reflect the identified, evidence-based needs of communities. Within these clearly defined plans, we agree that the system needs to be more permissive than it has been since the early 1990s. In other words there should indeed be a presumption in favour of sustainable development based on benefit-cost analysis.

There are many myths that are being repeated as part of the debate – in particular, there have been some exaggerated estimates of how much land might be affected by increasing development, which have led some to question whether England can remain ‘green and pleasant’. But this reform should not be seen as a move towards a US-style sprawl model. Rather it involves identifying areas where additional housing and development more generally is required and can be achieved while taking careful account of losses in amenity value.

There are also myths about the relative costs of development on both green and brownfield sites in both directions–again, evidence-based decisions should take full account of both direct and indirect costs and benefits. This requires the use of an accepted and consistently applied methodology for assessment.

The main concern about the current proposals must be that the incentives are not enough to overcome local concerns and to reflect differential benefits. Indeed in some cases the New Homes Bonus could produce perverse results because it is defined in terms of numbers. So it may prove easier to build in areas where there are relatively low costs to the community – but the benefits of development are equally limited.

Linked to this is the issue of who benefits from the incentives. The money flows to the local authority, although it is intended that this should generate compensation at the neighbourhood level. But even if this does happen in the end, there will be long delays – and reasonable concerns that communities in the immediate vicinity of developments will suffer in the short to medium term while benefits will be spread more widely. The proposal is a lot better than the current system of no such compensation – but it could mean less development especially in richer areas

The reform process

Our most immediate concern is that the government’s planning reform proposals are unclear. Brevity is not the same as clarity and at the moment the NPPF only achieves the first. The core positive messages could easily get mired in confusion/legal challenge, which will lose the impetus for change. In particular, there is no adequate definition of many important terms, notably the presumption in favour of development, sustainability in the context of land use, the lack of a completed local plan and the requirement to consult with neighbouring authorities. A great deal of ill-informed debate has been generated, often based on anecdote or intuition unrelated to the objectives and processes of the NPPF. This means that many of the positive aspects are likely to be lost – or held up for years.

There is also a concern that, if there is not more clarity, a Secretary of State with different objectives would be able to use the system in very different ways than currently envisaged. Ideally the approach would be piloted in a range of different areas. However this would almost certainly slow the process of change and let the once-in-a-lifetime opportunity slip. Implementation must therefore be carefully monitored across a range of localities to clarify process, outputs and outcomes.

Another important issue which remains unclear is how cross-boundary relationships are expected to operate – particularly at the city-region level. This is also an area where incentives are likely to be necessary to encourage more effective collaborative actions which take careful account of necessary mobility.

What is needed now?

A clearer statement of the objectives of the planning reform
An agreed factual background about the existing development of urban, rural and suburban settlements
More concrete language about what local authorities need to do to make local plans that are consistent with the NPPF and robust to appeal.
Similarly concrete proposals about how to incentivise brownfield/greenfield decisions to take account of both direct and indirect costs and benefits
An agreed pro-forma for assessing sustainability (i.e., costs and benefits of particular developments)
Greater clarity on how the incentive payments provided by the New Homes Bonus and non-domestic rates can be used to ensure that neighbourhoods which see developments benefit directly from the incentive payments
A real-time review of how these incentives are operating on the ground to generate housing required
A commitment to use the evidence of this monitoring to fine-tune reform over time
Development of incentives for city-regions and other groups of authorities to work collaboratively

The issue will remain controversial, but a war between extremes cannot lead to good decisions. However, there is a general acceptance of the need for additional housing as well as of the need for a more nuanced approach to the use of land. A better understanding of the reality of existing urban and rural settlements, coupled with wider benefit- cost analysis should deliver better decision-making

The planning roundtable

Michael Ball, University of Reading; Centre for Real Estate Research; International Centre for Housing and Urban Economics
Kate Barker, Author of ‘Housing Supply Review’
Paul Cheshire, LSE Department of Geography & Environment; SERC; European Institute; Greater London Group
Alan Evans, University of Reading, Centre for Spatial and Real Estate Economics
Melissa Fernandez, LSE London
Ian Gordon, LSE Department of Geography & Environment; SERC; LSE London
Nancy Holman, LSE Department of Geography & Environment; LSE London
Tim Leunig, LSE Department of Economic History; SERC
Alan Mace, LSE Department of Geography & Environment
Geoff Meen, University of Reading; Centre for Spatial and Real Estate Economics; International Centre for Housing and Urban Economics
Sarah Monk, Cambridge Centre for Housing and Planning Research
Henry Overman, LSE Department of Geography & Environment; SERC
Anne Power, LSE Social Policy Department; LSE Housing and Communities; STICERD; CASE
Kathleen Scanlon, LSE London
Phillipp Rode, LSE Cities
Fran Tonkiss, LSE Cities Programme; Sociology Department
Tony Travers, LSE Government Department; LSE London
Christine Whitehead, LSE Department of Economics; LSE London

[This post first appeared on the LSE's British Politics and Policy blog on 17th October; Follow them on twitter @LSEpoliticsblog]

House swaps to help the jobless?

2011-10-17T12:02:00.006+01:00

According to the Observer, the government are 'to launch a "house swap" programme [...] in an attempt to encourage people to move around the country to find work.'

The opposition suggest that this is somehow inconsistent with the changes in the housing benefits system (which will effectively force some poorer families to move out of more expensive housing). Remember, however, that those reforms are about (i) reducing the overall cost to the state of providing housing and (ii) increasing the incentives to work, by reducing the penalty that gets imposed as people move in to work (when moving in to work reduces benefits). It will also, by the way, have the effect of improving housing conditions for middle income families that work but don't receive housing benefit (something which no one seems to be pointing out in the debate over the squeezed middle). This is only inconsistent with the idea that housing swaps might help the jobless if you think that living in the expensive parts of a city are important for your job prospects. Once you control for individual characteristics, however, the evidence suggests where you live within a city has limited impact on your job prospects.

Unfortunately, this very same fact, offers cold comfort for the government about the likely impact of any house swap scheme on unemployment. As I wrote last week, when who you are matters much more than where you live, schemes that get people to move around don't have the large impacts that simple comparisons would suggest. That's not an argument against greater mobility (and, in particular of building more housing in relatively successful places) but it does urge caution when thinking about the magnitude of any impact. The overall impact of social housing swaps are likely to be smaller still, for reasons that I explain in more detail here.

In my opinion it really is hard to see why anyone should object to a swap scheme (because agreeing to the swap must mean that both sides of the deal benefit) but it may have relatively little impact on the problem.

Youth Unemployment

2011-10-14T12:51:00.003+01:00

A busy day today - politics in the morning (talking at HMT about planning reforms) and research all afternoon (SERC's weekly and work in progress seminars).

In between meetings, I was interested to see the Mayor of London's comments concerning the need to do something about youth unemployment in the capital.

First, I am not sure that pleas to landlords to retrofit properties is likely to do much to deal with the immediate problem. Second, and more substantively, it's striking that the young appear to be doing badly across the country. This reinforces my impression that spatial differences in unemployment outcomes are being driven mostly by compositional differences across places. Another case where who you are matters considerably more than where you are living?

(Return of) The North-South Divide

2011-10-12T10:12:00.004+01:00

The new unemployment figures certainly look grim. If you are clutching at straws, I guess that you could point to the fact that the rate of increase has slowed, but that provides cold comfort.

Centre for Cities has a great map highlighting the spatial differences. In my view, the North-South divide in terms of relative performance is pretty striking. With one or two exceptions, places seeing lowest increases are in the South, those seeing highest in the Midlands and the North.

This caused me to look back to my first post on the geographical impact of the recession, back in October 2008, which noted: "Although there is some academic debate on this, the south was probably unusually hard hit in the early 1990s recession as well. A different shock, may be, but it reminds us that we have been here before and that the south is very capable of bouncing back from recession."

By January 2009, the general pattern was already apparent: "Centre for Cities City Outlook received wide coverage yesterday of its finding that cities in the north are seeing the highest increases in JSA claimants [NB: they also point out that the north-south divide language I am using here hides some important details - sorry for that]" but some of my earlier optimism had vanished: "One final thing, the comment in my October post about "two quarters" now looks optimistic, but doesn't change my conclusion on the geographic impact. In short, it's grim everywhere."

The spending review in October 2010, clearly looked set to reinforce the overall spatial pattern: "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."

Finally, by January 2011, the spatial pattern was pretty well established, particularly for greater London: "First, in absolute terms and relative to expectations, London appears to have successfully gotten away with it." Although some commentators were still disagreeing with that overall assessment.

When I delivered a public lecture on how London 'got away with it' in January 2011, my broad explanation ran as follows: "The over-representation of the professional occupations partly explains this. The bailout may explain why these occupations did even better in London. But other explanations are possible. The shift in financial sector employment may be driven by the increased importance of timely information flows when things turn bad. Despite improvements in ICT, economists still think that spatial proximity play an important role in exchanging information. Alternatively, London may be benefiting from the depth and breadth of its labour market. Finally, Spatial Economics Research Centre research suggests that the most talented are highly concentrated in London." I suspect that these sort of reasons for the spatial differences remain valid.

In short, I don't find the spatial pattern of unemployment growth particularly surprising (there are a couple of idiosyncracies in terms of the performance of particular places - e.g Blackpool and Preston). Of course 'predicting' the general spatial pattern conditional on the overall performance is much easier than predicting that overall performance (as the government is finding it).

Smart growth failures

2011-10-10T11:04:00.002+01:00

Gerrit-Jan Knaap for the University of Maryland presented some of his work on using incentives to manage development at SERC on Friday. Gerrit-Jan is director of the National Center for Smart Growth Research and Education so I had expected him to be fairly pro, but his research findings make for fairly gloomy reading for smart growth proponents.

Amongst other things, smart growth Maryland style involves spatial concentration of government expenditure in locally identified priority areas. The idea being that developers would then prefer these areas even if they were free to develop anywhere in the state. Even from the off, you would worry about the ability to seriously exclude non-priority areas from accessing priority expenditure (e.g. roads or schools). If the amounts involved were small, you might expect this to weaken incentives further. This appears to have been the case, with the programme having essentially no effect on the amount of development occurring inside priority areas.

The second programme Gerrit-Jan talked about has even deeper conceptual problems. Rural priority areas involved the State providing money to protect certain parcels of rural land from development. But coverage was patchy, so you would expect this to increase incentives to develop on neighbouring parcels that were not being protected if the benefits of protected open space outweighed the benefits of higher density development around you (because you know that your beautiful view is not going to get built on). Again, this concern appears to have played out in practice, with the scheme making very little, if any, difference to development in rural priority areas.

Only the last scheme that Gerrit-Jan talked about (prioritising regeneration areas) appeared to have a measurable effect - but the actual impact on re-development rates was tiny.

More details on the papers and the talk are available here.

I am sure that these findings are contested by the pro-smart growth lobby, but all in all, quite a negative message.

The Globalization Paradox

2011-10-07T11:33:00.004+01:00

Have just finished Dani Rodrik's book on The Globalization Paradox. He argues that the world faces a trilemma in terms of nation states, democracy and (deep) globalization. In short, you can only pick two of the three. As Rodrik rules out global government and believes in democracy, he argues that deep globalization will have to go.

I'm not going to provide a review of the book, but wanted to pick up on two things that have interesting parrels to debates on urban economic policy.

First, Rodrik argues that future trade negotiations should focus on legitimising globalisation rather than seeking to deepen it. Can we come up with mechanisms that seek to maintain similar levels of globalisation but allow, e.g., the US to impose constraints where it doesn't like say the environmental or labour standards regimes of trading partners? I think this is an interesting argument even if there is a long way to go on how you might implement in practice (which is presumably why Rodrik calls for more effort to go in to thinking about it). It is premised on the idea that the removal of further tariff and other barriers to trade is unlikely to deliver very large gains (from trade) but will require lots of redistribution. I suspect many of my international trade colleagues would argue that Rodrik overplays his hand on this point - because he is mostly looking at the static gains compared to the redistribution. I have some sympathy with that counter argument.

The point on redistribution raises an interesting parallel with the rebalancing debate that is taking place in the UK. If we achieved spatial rebalancing by improving the economic performance of the North of the UK and having population shift, how big would be the economic gains relative to the amount of redistribution involved? We don't have a good answer for that for the UK - although in the US case Klaus Desmet and Esteban Rossi Hansberg are doing some fascinating research which suggests that the welfare effects from eliminating all efficiency and amenity differences across US cities would be tiny relative to the huge population movements that would result. Efficiency effects of between 0.2 to 1% (from eliminating all efficiency or amenity differences) require 40% of the population to move! Constrained systems (like the one in China) can see welfare gains that are order of magnitudes larger. But these come from movement towards the bigger places, not away from them. I have no idea where the UK would like on this spectrum, but found the parallel with the trade debate interesting.

The second (spatial) parallel that I would draw with Rodrik's argument is what government might do with it's newly negotiated powers that increase policy discretion. Rodrik makes the case for carefully designed industrial policy. Here I confess to being much less sympathetic. It's fine to point to examples of industrial policy where we might argue that the policy turned out well. But that doesn't pass my test for thinking about the average effects of introducing an industrial policy. To do that, you need to take into account all the industrial policies that fail and average out their effects with the successful policies. I am not at all convinced that the balance favours industrial policy. Rodrik might call for better design - but it is terribly hard to know what that might mean in practice. The obvious parallel in spatial policy is what, if anything, policy might do about clusters. As I argued recently, this is an incredibly hard question to answer.

Council Estates and the Riots

2011-10-05T09:37:00.003+01:00

Ian Duncan Smith's suggestion that ghettos of poor quality housing were a factor in the summer riots has reignited the debate over the causes of the London riots.

When I wrote about this in the summer, I said: "the economics literature tells us that separating out whether individual or community factors drive rioting is incredibly difficult. This suggests we should be very wary about believing anyone who claims to know otherwise." To be fair, Duncan Smith was suggesting only that poor quality housing might be one factor. This is one of many hypothesis worth considering. However, as many people who live in poor quality housing are poor it will be hard to know whether poor quality housing or poverty (or both) were responsible. In short, this is just a concrete example of the more general problem of distinguishing between individual and community factors as causes of the riots.

For those of you who want to read more here is the rather heroic effort of the Guardian to get to the bottom of this question in a single day and here is my discussion on some of the policy implications.

Cameron's Brownfield Plan

2011-10-03T10:27:00.004+01:00

David Cameron has announced a plan to release thousands of acres of publicly-owned brownfield land for housebuilding. It is hoped that the scheme will lead to the construction of 100,000 homes and create 200,000 jobs. Whether or not this will work will depend a lot on the location of sites.

If these brownfield sites happen to be in high demand spots and of reasonable quality then you might expect a supply response (particularly as the scheme will allow developers to pay for the land later).

If these brownfield sites are in low demand spots and of poor quality (so requiring lots of remediation costs) then expect the scheme to make very little difference. This is especially true given the current uncertainties about both the planning rules and the state of the economy (a factor that could dampen the effect for good sites too)

As I explained last week, the fact that many brownfield site are not in places where people want to live is the fundamental problem with 'brownfield first' solutions to the housing problem. Some of the sites that Cameron's scheme releases may not suffer from this problem, many will. As my colleague Tim Leunig put it when discussing plans to build in Bordon: "developing the Bordon army base for housing simply because the War Department decided it was a good place for army training in 1863 is not good spatial economics or good planning". The overall impact of the plan, will thus depend on the composition of sites that become available. Either way, the fundamental problem for brownfield policies remain the mismatch between the location of supply and demand.

Planning for People

2011-09-30T09:05:00.007+01:00

The National Trust have outlined their alternative vision for the planning system. As a reminder, at the heart of the government's reform proposal lies the idea of the local plan (drawn up subject to incentives via New Homes Bonus etc) and a 'presumption in favour of development' providing it is consistent with the plan. No up-to-date plan? Then the presumption in favour of development takes over.

The National Trust suggests several adjustments. First, local communities should be able to have more say in drawing up local plans and specifically to reduce the amount of development that is planned locally. This suggestion causes problems for the government precisely because the proposed reforms do appear asymmetric on the extent to which neighbourhoods have power to affect local development. Specifically, they can decide to allow more development, but not less. If the government had confidence in the power of its financial incentives to affect local community attitudes to development, this restriction would be unnecessary. The problem is, of course, that the incentives are at the local authority, not the local level, we don't know whether they will be large enough and, regardless, it's hard to see exactly how the financial benefits to allowing development will filter down to local neighbourhoods affected. In short, there is a potential conflict between the principle of localism and what the government wants to achieve.

I have less sympathy with the other proposals in the NT manifesto. For example, if the lack of a local plan removes the need to say yes to development, then how does NT suggest that we make sure that LAs have up-to-date local plans? With no local plan in place, we are back to decision-by-decision planning which is worse than the system we currently have (which most people, including the NT, agree doesn't work).

Much more seriously, is the presumption in favour of 'brownfield land first' that NT want imposed. Again, this would maintain the status quo, so it might be useful to remind ourselves of the fundamental problem here: we need more housing. There are alternatives to trying to achieve this by building more homes on greenfield land. For example, let's all agree it would be good to make more use of long term vacant properties (especially if neglected). Let's agree to disagree on second homes. But let's acknowledge that even if we tackled both these issues it wouldn't do much to tackle the overall problem (even if we knew how). Debates around the sale of council homes are another red herring because those homes still constitute part of the supply. There is, of course, a debate to be had about how much new housing the government (or local councils) should directly provide. However, I haven't seen any serious suggests as to how a large government home building programme would be funded if it was necessary.

And all of these alternatives still leave open the question of where these homes would be built. By opposing reforms because of the impact on the environment, NT are continuing to champion brownfield land policies. But these policies haven't delivered the kind of homes people want, in the place they want them, in the kind of numbers needed. The same profound problem applies to commercial land. In short, the problem with the NT manifesto is that they provide no concrete proposals for dealing with the fundamental problem that the government's reforms are trying to address!

Rewarding Good Firms

2011-09-28T11:06:00.004+01:00

Ed Miliband tells us he wants to reward good families and firms. Where there are details, they raise as many questions as answers. Allocating housing on the basis of criteria other than needs throws up big questions. It's not clear to me why we want people to do apprenticeships in firms that have government contracts, etc. Stepping back from the details, Ed Milliband says that what they will do is change the regulatory and tax framework to carefully reward good firms. Fine in principle, but in practice I worry that this sort of thing vastly overestimates the ability of government to intervene in a way that actually achieves it's objectives. Two analogies spring to mind - one concerns the role of the Basel regulations on capital requirements that sought to ensure good behaviour but ended up encouraging banks to hold mortgage backed assets (and derivatives of those assets). The second is a little more in line with my expertise and concerns what policy might do to 'reward innovative firms located in clusters'. For those of you that want the headline message - it turns out to be incredibly difficult to know what we should do (if anything) to reward innovative clusters of firms. For those of you that like the details, read on for a more careful analysis (based on my contribution to the Manchester Independent Economic Review)

There is an extensive policy literature on clusters that uses the existence of agglomeration economies to justify a whole range of policy interventions. Such an approach could be used to develop policy options for encouraging innovative clusters of firms. Policy makers like this approach because it argues for a strong role for active policy and usually involves the introduction of a range of ‘innovative’ policy measures. A significant number of academics like it too, for similar reasons. In contrast, most mainstream economists, and a number of leading economic geographers, are sceptical, if not hostile, to this approach and thus cautious about the policy conclusions that this literature reaches.

The first, well documented problem, is one of definition. Just what is meant by a cluster? The literature provides a large number of rather vague answers to this question. Even if this objection could be met by tightening the definition, much more significant problems remain. As noted by Gilles Duranton, “the [main] problem with the cluster policy literature is one of a lack of well-articulated theory: what is the ‘problem’ that cluster initiatives are trying to fix?” This problem lies at the heart of economist’s objections to this approach.

A common answer to the question about the role of cluster policy is that it aims to improve local “competitiveness” or productivity. The problem with this answer is that it does not clearly set out the source of any possible inefficiencies (or inequities) and thus cannot explain how to correct for them. Porter’s famous diamond attempts to map out the underlying sources of competitiveness. The resulting model appears to be complex with many different elements all feeding in to one another. But this complexity is actually rather superficial as all of the different elements feedback positively to other elements. A complex policy mix is called for, but fortunately, in Porter’s model, all policy actions on any component of the diamond will help strengthen the cluster.

Of course, in reality this will not be the case because of the presence of negative feedback. For example, in many cases, reducing barriers to entry in a sector which is already reasonably competitive, may hamper the development of new products (because firms offset the cost of innovating against the profits that they make once they innovate; entry drives down these profits and reduces incentives to innovate all else equal). Yet clusters policies often advocate increasing both entry and new product development as mutually reinforcing elements in strengthening a cluster. It would be possible to identify many other examples where carefully specified economic models and available empirical evidence actually point to a negative feedback between different elements of the diamond.

The second problem with the diamond model is that, despite its apparent complexity, it pays no attention to some fundamental drivers. For example, what is being assumed about labour mobility? If firms are mobile, but workers are not, how can one be sure that encouraging larger clusters in a particular place is a good idea? Similarly, what is being assumed about the functioning of the land market? It is quite possible that any surplus generated by increasing the size of the cluster just translates in to higher rents for owners of land. Models of urban economics show that the answers to such questions are fundamentally important in understanding the functioning of the spatial economy and in assessing the role, if any, for policy. Yet the diamond model is silent on these issues. This is particularly important in the UK context, where planning for housing and commercial land use is one of the key policy levers available at the sub-national level.

Finally, even if there is positive feedback between the different elements of the diamond model, this does not actually provide a justification for policy intervention. Such a justification needs to be based on carefully identifying reasons why the market ignores these positive feedbacks and produces an inefficient outcome. That is, we need to look for market failures and construct policy to address them accordingly. Unfortunately for the clusters policy approach, simple models that do this, suggest that market failures can lead to clusters being too big as well as too small. In other words, effective clusters policy might actually call for a reduction in the size of clusters.
The simplest way to think about the benefits of clustering is to assume that, because of the existence of agglomeration economies, the productivity of firms and thus the wages that they pay are increasing with cluster size. Offsetting this are rising costs (e.g. increased land prices) as the cluster increases in size. At small cluster sizes, we might expect increased benefits to outweigh increased costs as the size of the cluster increases. That is, the “competitiveness” of the cluster (as measured by the wages that its firms can pay to workers) is increasing in cluster size. At some size, however, the rate at which costs increase will begin to outweigh the rate at which benefits increase. That is, there is likely to be an optimal cluster size at which the wages that firms can pay are maximized. Encouraging expansion beyond this size will lead firms and workers to be worse off.

In the absence of government intervention would we expect cluster sizes to be above or below this optimal size? The answer depends on the mobility of workers and firms. If firms are reasonably mobile (which is likely to be the case) then clusters tend to be too large. This is because when firms enter the cluster they take account of the benefit to them (of being able to pay a higher wage as a result of agglomeration economies), but they ignore the increased costs to all the other firms. This is an example of a coordination failure. One way to solve this coordination problem is to have some large agent come along and help firms recognise the additional costs that they impose on other firms or else restrict the size of clusters. In other words, in this simple world, government should be working to decrease the size of clusters, not increase them.

Of course, this explanation is too simple, because there are externalities on both the benefit and cost side of cluster formation. Firms ignore both types of externalities when making their decisions. Cluster advocates focus on the unexploited benefits to argue that clusters will be smaller than optimal. In reality, there are cost externalities as well as agglomeration externalities which may make the social optimum for the cluster bigger or smaller than the private optimum. However, even if the social optimum is bigger than the private optimum this doesn’t necessarily mean government policy needs to expand the size of the cluster because private decisions may have already led to the cluster being too big relative to the private optimum.

In short, as is so often the case, the existence of several un-priced externalities make it very difficult to know what policy should be seeking to do in practice. Cluster advocates essentially only think about one of the three types of externalities present here (agglomeration externalities) while ignoring the other two (cost externalities and coordination failures). Oddly, when it comes to the overall size of our cities, advocates of strong land use controls do the opposite. They focus only on cost externalities and coordination failures, generally ignoring agglomeration benefits, to reach the conclusion that larger cities are too big relative to some optimum. As should be clear by now, both of these approaches only represent a very partial view of even the simplest models of cluster and city size formation. We would argue strongly that this is not a good basis for policy.

Of course, these conceptual issues might not matter at all if cluster advocates could point to a large number of cases where carefully designed public policies have had significant effect on both the size of clusters and their competitiveness. Unfortunately, a recent meta-survey of more than 750 clusters finds evidence that government policy does not do this. For example, van der Linde (2003, p.144) finds that “Random events or government influence […] are the least important determinants in competitive clusters, while they play a much more important role in uncompetitive clusters”. Cluster creation policies perform even worse. For the over 750 clusters that van der Linde (2003) studies, only one competitive cluster has been established as a result of a specific government policy to attract it. In short, even if we wanted to, simplistic implementation of cluster policies appears to do essentially nothing to create or increase the competitiveness of clusters.

As I said at the very beginning, Ed Milliband's idea may sound good in theory but it will certainly be very difficult to implement in practice.

Family Friendly Hotspots

2011-09-26T11:31:00.003+01:00

Lots of coverage in the UK press for a report claiming that Winkleigh in Devon is the 'best place [in England and Wales] to bring up children'. As I have explained before, in the context of similar city rankings, I find these kind of exercises fairly uninformative. To allow you to reach your own opinion let me repeat some of the issues.

Economists think of households as facing an earnings, cost of living, amenity tradeoff when they think about where to locate. In recent SERC research, we address this question, by considering the extent to which higher post-tax earnings are offset by higher housing costs. Across Britain, our research shows increased living costs (particularly of housing) tend to completely offset increased wages for the average household. In the lowest wage areas, which are mostly rural, differences in amenities drive the cost-of-living versus wage tradeoff. In (mostly urban) higher wage areas, differences in firm productivity drive the results.

Rankings of places based on one or two characteristics make for interesting stories, but they don't tell us much about the more complex tradeoffs facing households and firms. This report doesn't suffer from that problem, because it considers many different characteristics of places. But multivariate indices (that consider many characteristics) try to get round this by applying arbitrary weights to those different characteristics which likely makes the index not useful for anyone (except those who just happen to have the same weighting as used in the report).

In contrast, urban economists start from observed difference in wages and costs of living, assume that people are pretty mobile across space and then try to figure out from actual behaviour what amenities people appear to value. This approach doesn't always make for such nice stories, but it does make for a more consistent way of evaluating the wage-cost-amenity tradeoff that firms and households face when choosing their city. To this way of thinking if a place is 'best' on some dimensions that will then be offset by other factors.

In short, I have a conceptual problem with picking some place as being somehow 'best' for families. Even if, for some reason, Winkleigh currently held this honour - I wouldn't expect that to last for long because as families flood to move there house prices should change so that property is no longer affordable. The fact that they haven't yet makes me wonder about the validity of the claim. Perhaps the locals are very good at keeping secrets (unusual, in my experience) so this adjustment hasn't yet happened. More realistically, perhaps the houses are small (making them look cheap) or its full of highly skilled people who could earn similar salaries in some other place with much cheaper housing. Or perhaps there are amenities there that make this a bad place to live for parents (or for teenagers so that families have to move as their children get older).

Whatever the reason, while I am sure that Winkleigh is a nice place to live, I (along with many other families) will not be rushing to move there.

Higher local taxes a threat to jobs

2011-09-23T09:35:00.003+01:00

Writing about the UK government’s consultation on Local Government Finance reform a couple of months ago, SERC affiliate Teemu Lyytikäinen talked about the fact that government had no intention of allowing councils to set their own business tax rates. He argued that the problem was partly political, but that the bigger issue is that it’s not clear what the effects of full localisation would be. There are several main fears. One is a race to the bottom – local authorities undercutting their competitors and undermining tax basis. The other fears relate to the opposite scenario, a `race to the top'. Would some councils set very high tax rates and waste the revenues on useless programmes and bureaucracy? Would these very high tax rates bring more pain to firms already struggling in the face of the recession? Some of my recent research, published in the Economic Journal this week, provides evidence that this fear is to some extent justified.

This issue has been the focus of an extensive theoretical literature and our study is not the first one to consider these issues empirically. Evidence from the 1960s and 1970s suggested that there was no effect of taxes on firm location decisions. Work focusing on the 1980s suggested a negative relationship and a number of subsequent papers have confirmed that finding.

The existing literature, however, has failed to resolve a central problem when assessing this impact. Specifically, there are many things about firms and local authorities that we do not observe, so any correlation between taxes and firm growth needs to be interpreted cautiously because some third factor (e.g. the remoteness of the location) might explain both. In addition, tax setting may be driven by firm choices, rather than vice-versa. That is taxes may be high because employment is low.

Our methodology solves these problems by using firm level data and comparing changes over time for firms located on either side of local authority boundaries. Comparing sites close to local authority borders eliminates major differences (because we assume closely located sites are similar). Comparing firms over time allows us to identify ‘good’ and ‘bad’ firms and so eliminate the problems due to sorting of firms. That is, these techniques help eliminate things about local authorities and firms that we do not observe that may be responsible for the correlation between taxes and firm growth. Finally, we use the electoral make up of the local authority to predict local taxes (some parties consistently set higher taxes) so we can adjust our results to allow for the possibility that taxes might be high because employment is low.

We use our methodology to study the impact of the UK business rates between 1984 and 1989. We find a negative (statistically significant) relationship between employment and taxes. Higher local authority taxes lower employment in existing firms. In contrast, we find that local taxation has no effect on the entry of new establishments, probably because landlords have to lower rents in high tax local authorities to continue to attract tenants. In contrast, because existing firms are less likely to move away, landlords don’t necessarily change their rents, hence the negative effect on employment in existing firms.

Our methodology is applicable more widely, but results for the UK suggest that the government may be right to worry that local taxation can negatively affect local employment. One important caveat, however – our results can’t tell us whether local authorities would actually set such high taxes. They only provide a warning about the negative employment effects of doing so.

(If you are not in an academic institution and would like to see the full paper, please get in touch with my colleague Max Nathan: m dot a dot nathan [at] lse dot ac dot uk.)

Adapting to climate change

2011-09-21T10:28:00.003+01:00

Professor Matt Kahn (UCLA) talked at LSE yesterday on how cities adapt to climate change. It was a great talk, so if you missed it here's a broad outline of what he had to say. The text is from Matt's blog (which comes highly recommended if you are interested in environmental and urban economics). If you want more details, you should read his new book, Climatopolis.

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There's several different ways to approach the broad question of how will Europe adapt to climate change.

1. You can focus on geography and compare likely scenarios for northern versus southern nations and coastal versus inland nations and nations who have built up along rivers.

2. You can contrast likely outcomes for the richest nations in Europe versus poorer nations in Europe. You can also discuss across income groups the issue of how the rich will cope versus how the poor will cope.

3. You can contrast how urbanites will cope versus how agricultural interests will adapt.

4. You can discuss how the EU and its emphasis on free trade within the zone will help nations to adapt to changing conditions.

5. You can discuss which nations have the best institutions to allow them to be flexible to adapt to changing circumstances.

I see an important role for geographers here. There is a real need for specificity and in particular for detailed maps to be made concerning the geography of different European nations. Which of their cities are at greatest risk of flooding? Are their citizens aware of these evolving risks? What "insurance" have these nations purchased through where they locate housing and industry and what types of materials they build with?

A recent example of such specificity is a new paper about California's coastline and climate change adaptation. I will blog about that paper in the future.

As readers of this exciting blog know, I am an optimist. Human ingenuity is a key asset in helping us to cope with change. If we know that we face increased threats of extreme heat and cold and floods and other challenges, this "heads up" is a first step to making investments now that will reduce the damage caused by these events when they happen. My Climatopolis book was meant to start a discussion about how economists view investment under uncertainty. A surprising number of environmentalists view men and women as helpless doomed individuals who will be knocked out by Mother Nature. I don't believe that. We have many strategies available to us to adapt to the very real challenge of climate change and we have the right incentives to do so.
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[This outline originally posted on Matt Kahn's Environmental and Urban Economics blog on Thursday 16th September. Thanks to Matt for permission to reproduce it.]

Evidence on planning

2011-09-19T10:52:00.006+01:00

A group of leading businessmen have written to the Times supporting government reforms to the planning system.

The National Trust respond with their concerns about concrete, but the Council for the Protection of Rural England focus on the economic arguments. According to the Times, the CPRE claim there is no evidence planning undermines productivity and no evidence that planning system’s default answer was “No” because the vast majority of planning applications are approved. One of these statements is wrong, the other is misleading.

Evidence that planning reduces productivity.

On the first of these (productivity) CPRE is simply wrong. In a recent SERC report we provided evidence that planning reduced productivity in a leading supermarket chain by 20%.

Evidence that planning could hurt investment.

In a paper published in the Economic Journal in 2008, my colleagues Paul Cheshire and Christian Hilber 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. New York imposes a 'tax' of around 0-50%, central Paris around 300%.

Approval rates are misleading

As I have explained in more detail before: approval rates tell us nothing about whether planning holds back development because the rules affect both the submission and approval rates. If planning rules are so draconian that no one applies to build houses, approval rates would run at 100%. Would that mean planning was not a problem?

Planning increases house prices (substantially)

OK, CPRE don't mention house prices, but planning matters there too. SERC research suggests that an area moving from have an average level of restrictiveness to having the lowest level of housing restrictiveness would see house prices fall by around 30%. This is an underestimate because it ignores the effect on UK house prices overall, as well as any effects on the composition of housing (i.e. houses are smaller).

Planning may increase house price volatility

At least until this last recession, average volatility in the UK housing market was higher than volatility in the most volatile market in the US (LA). When house prices fall, supply is fixed in both the UK and US (unless you destroy houses). However when, as in the UK, housing supply is very unresponsive to increased demand, booms drive up prices rather than leading to more building. That means the UK sees more volatility on the up-side of the market and leads to move volatility overall.

The costs of planning

So, there is evidence that the planning system:

Lowers retail productivity
Increases office rents
Increases house prices and housing market volatility

Campaigners are perfectly entitled to argue that these are prices worth paying to 'protect the countryside'. But I strongly object to arguments that pretend that these costs do not exist.

Urban schools: more money, better outcomes?

2011-09-16T12:13:00.009+01:00

Posted by Steve Gibbons, SERC and LSE

The new school year has started, but with all the noise about Free Schools it's easy to lose sight of the bigger issue: how well pupils actually do.

Back in the spring, English schools with the poorest pupils received a small boost to their budgets through the coalition's flagship 'pupil premium' policy (£430 for each pupil registered for free school meals). It's still too early to say whether the extra money has had an effect on standards, but new research I've done with colleagues from CEE provides some grounds for optimism. It shows that urban primary schools in England that received more money performed better in subsequent years.

You might wonder why this is an interesting finding. Isn't it obvious that spending more produces better results? Look at richly-resourced private schools, compared to cash-strapped state schools, for example.

Surprisingly, however, a lot of evidence suggests that moderate resource disparities actually don't make much difference to children's achievement. And unlike private schools, state schools can't cherry-pick pupils. For some city schools, teaching is a lot tougher as a result. Simply injecting cash may not help.

In practice it's rare to see schools that teach similar children, but get dissimilar funding. It is, therefore, difficult to measure whether more money really makes a difference. But there are some situations in England where one school can get quite a lot more money than its neighbour: when two schools are on opposite sides of Local Authority boundaries.

Some odd geographical anomalies in the way central government pays money to Local Authorities ('Area Cost Adjustments', or ACAs) mean some councils end up with more money to spend per pupil than their neighbours. These differences filter down to neighbouring schools, even when these schools have similar pupils, and face similar teacher pay scales and prices for other resources.

These arrangements have raised a lot of local objections (for example, the Lib Dem 'Fair Deal for Haringay' campaign). These objections are understandable, since our data shows that differences in the order of £1000 per pupil are not uncommon. We should question the logic and equity of these quirks in funding formulae.

Fairness aside, ACAs do provide a nice experiment for studying the local effects of investing in schools. As it turns out, children in city primary schools that received an additional £1000 per pupil per year did much better (on average) in their Key Stage 2 tests at age 11. The estimated effect is equivalent to moving 19% of students currently achieving Level 4 in Maths (the target grade) to Level 5 (the top grade) and 31% of students currently at Level 3 maths to Level 4.

We can't answer the question of how the extra money is best spent (teachers, books, computers?), and that question is probably best left to those who actually teach. But importantly, our research confirms that those running city schools can significantly raise standards - when they have additional resources to work with.

The road to recovery - what can government do?

2011-09-14T11:49:00.007+01:00

Just back from Nick Clegg's lecture on the economy at the LSE. The plan A plus strategy continues - stay the course on the deficit (plan A) but also think about the demand side of the economy (the 'plus')

You will be able to read the general overview elsewhere, but quite a lot of what he said was of interest to those of use who think about city and regional economies.

The big push, it is claimed will come on infrastructure. This will start with the regional growth fund, where round 2 will, we are told, prioritise infrastructure projects. I don't think this is necessarily a great place to start because much of the economic literature is generally sceptical about the role of infrastructure in boosting local economic activity in struggling areas. After all, as population in these places is historically declining, they likely have plenty of infrastructure relative to people. How is adding more going to help? (You can make a similar argument about net increases in the supply of housing).

Next, confirmation of 'new' powers for local government to raise money to invest in infastructure (i.e. TIF). I support the principle of this, but in practice I worry about the cost of projects and about the possibility of more grand schemes with poor payoffs.

There will also be action on delays at the planning stage (broadly defined) and in making expenditures to which the government is already committed. The planning system raised as an problem, but also a suggestion that there are other barriers 'within Whitehall'. Clegg suggested that the 40 biggest infrastructure projects with the highest returns will be the recipients of particular attention from government ministers to make sure they proceed on time. Meanwhile, HMT will be going round government departments making sure that they are spending the money at their disposal.

Finally, we should see details soon of government plans to to try to stimulate house building (at its lowest levels since 1924).

I confess to being slightly underwhelmed. I find it hard to believe that bringing within year commitments forward can provide that much of a fiscal stimulus (although perhaps I am overly 'optimistic' about the government's ability to spend money). Delivering transport infrastructure investment on time and on budget (another commitment) is generally a good thing, although unrelated, as far as I can tell, to fiscal stimulus. After all, overspends and overruns still involve government expenditure. I would welcome a genuine move to prioritise transport projects in terms of bang-for-buck (how about dropping HS2 in favour of the kind of smaller high benefit schemes that Clegg highlighted in his speech today)? I might even welcome more infrastructure spending. But with net capital expenditure set to fall dramatically (even if plans are in line with Labour's projections) this prioritisation will take place within a significantly smaller pot.

As Clegg highlighted in his speech, government isn't powerless to act, but the fiscal position means that the options are increasingly limited. I am certainly of the opinion that a lot of this is in no sense 'the coalition's fault' and do not believe that the opposition have any better answers. But still a slightly depressing way to start the day ...