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

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)

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?

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

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

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

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

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

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

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)

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

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

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

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

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

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

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

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

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

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.