Friday 29 August 2008

Building Bridges

What role might a new Thames Gateway Bridge play in the regeneration of that area? GLA Economics' latest research to answer this question looks back to the building of bridges across the Thames in the medieval period. The report makes for an interesting read and reminds us that the impacts of infrastructure projects are complex and long term. But I'm not sure that it brings us much closer to providing an answer to the specific policy question. [An observation that could be made about much academic work - so no particular criticism implied.]

Generally speaking, the economics literature is pretty 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).

Thames Gateway might be a little different given that growth in employment and population are projected if regeneration is successful. But even if this happens, standard cost benefit analysis (which would look at the gains in travel time) almost certainly wouldn't justify building. So supporters of the bridge need to point to the wider economic (regeneration) benefits that might materialise.

The problem is, that we have very little idea how important these are in practice. DfT is about to propose some guidance on how these might be incorporated in appraisal but these will be based on best estimates of what the gains might be. What is needed is some evaluation of projects to see what actually happened. SERC is hoping to undertake some of these shortly, although I think we'll be looking at projects from the 1990's not the 1290's.

Thursday 21 August 2008

House building and affordability

I was never much good at "up-and-down" economics and couldn't tell you what today's house building statistics mean for next quarter's house prices.

But the fact that completions in the year to June 2008 were 4% lower than in the previous year doesn't bode well for long term affordability.

Also, its interesting to see that, in keeping with historical trends house building in England is only marginally biased towards the south (my back of the envelope calculation had 44% of housing completions in London, the South East and East regions as opposed to about 42% of the stock). That certainly puts all the fuss over policy exchange's "move to the south" suggestions in to perspective.

Thursday 14 August 2008

Are Policy Exchange Insane?

Policy exchange have caused controversy with their report on urban regeneration. [I should declare an interest - one of the reports co-authors, Tim Leunig, is a SERC affiliate]

The report actually contains a lot of thought provoking material. So, why the extreme reaction? Because, to stylize grossly, it suggests that some places have lost their reason d'etre, that economic regeneration isn't working and that we should build houses so that people can move to places with more economic opportunities. A stylized reaction then goes: I am from [insert name of place]. It's a lovely place to live because [insert something nice about the place / the cost of living is low]. Also, if you want to see the future just look at the development of [insert name of nice new buildings].

These reactions are important because they remind us that people and places are different and that amenities and cost of living matter as well as economic opportunities. Many policy discussions and proposals forget this, but it will be central to SERC's research on spatial disparities.

What is lost in the storm that has been created, however, is a focus on the much more serious question: what should society do if the economy works in such a way that jobs are created in places different from where people live? The traditional response is to bring jobs to the people. This has been government policy for a long (i.e. decades) time. Policy exchange claim that this isn't working and suggest that instead we should help people move to jobs. Getting the answer to this question right matters a lot more than whether I think my town is better than yours.

Tuesday 12 August 2008

The case for abolishing Regional Development Authorities?

The TaxPayers Alliance thinks that Regional Development Agencies should be abolished.

RDA's were established in 1999 to help raise the growth rates of all regions and to narrow the gap in growth rates between the richest and poorest regions (so that the richest regions didn't keep pulling further ahead). The Tax Payers Alliance argue that regions did better between 1995 and 1999 than they have done since and that RDA's should thus be abolished. If only things were that simple.

To consider whether RDA's should be abolished we need to know what would have happened if they didn't exist. If we assume that regions would have carried on growing post-1999 as they had between 1995 and 1999 then RDA's have been bad for growth. But whose to say this would have happened? Perhaps regions would have grown much slower if it weren't for the efforts of RDA's. After all, the UK's recent economic growth performance is generally considered as comparing pretty favourably to other similar nations. In this scenario, RDA's have been quite good for growth.

What about the gap between the growth rates of rich and poor regions? Again, it depends what we think would have happened without RDA's. Perhaps London and the South East would have pulled even further ahead?

A deeper question relates to whether these two goals, greater growth everywhere and narrowing the gap in growth rates between rich and poor, are mutually compatible (SERC's first policy paper has more on this). For example, the TPA's alternative policy recommendation is a cut in the small business rate of corporation tax. I see that this might do something for growth everywhere, but how, exactly, would this help with the gap in growth rates between the regions?

Personally, I am agnostic on RDA's. There is a serious debate to be had about policy objectives. There is a need for more evaluation of their net impacts (what things have RDA's made happen that wouldn't have happened otherwise) and a comparison to the opportunity costs. There is also much more evidence needed on which policies, if any, need regional coordination. If only answering all these questions was as simple as a before and after comparison of regional growth rates ...

Monday 4 August 2008

Rural Housing

What, if anything, should be done about the fact that rural housing is increasingly expensive relative to rural earnings?

The Taylor Review suggests a shake up of planning and affordable housing policy as the solution. Central to this is the need to deliver new rural housing by overcoming local objections. In market towns, this would be achieved through “master plans” which would stop the growth of bland housing estates and, instead, deliver popular “neighbourhood extensions”. In smaller rural areas, community led affordable housing initiatives would do this, by delivering local homes for local people.

I have three observations on all of this.

First, developers get a lot of stick for the kind of housing that gets built in the UK. But, blandness aside, it’s unclear that they shoulder all the responsibility for the lack of commercial development on the outskirts of our towns and cities. After all, the “town centre first policies” of both this and previous administrations, set out to achieve this very objective. SERC is undertaking research to increase our understanding of the costs and benefits of these policies. But for the moment, these objectives look set to stay.

Second, providing “local homes for local people” is fraught with difficulties. In effect, such a policy enshrines the right to live where you are born (residency criteria) or where you work (employment criteria). Putting aside the issue of whether these are rights that we should provide for (current policy mostly focuses on housing need), they certainly clash with the desire to maintain the positive externalities of the countryside. Thus someone will have to allocate the small amount of desirable housing that gets built in desirable communities. Experience suggests this is very hard to do fairly.

Finally, it is unclear whether these changes would actually decrease local objections to increased housing supply. After all, while some of these concern the ugliness of housing that gets built, the primary objection arises for the simple economic reason that new houses reduce the prices of existing properties. Solving this problem requires us to find mechanisms to compensate the owners of those existing properties. My LSE colleague Tim Leunig has proposed one such solution. As SERC’s research progresses, we hope to develop others.