Tuesday, 30 August 2011
The Homes 'Crisis'
I certainly share their concerns over the lack of supply, with recent figures making for very gloomy reading. However, I confess to being less worried by the effect on home ownership rates and much more worried about the first order issue of the effect on both house prices and rents. In particular, with rents, there is some evidence that the effect may be being felt more uniformly across the country (compared to the strong regional variations in house prices).
The government has a real problem here 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 I continue to worry that the government may live to regret the immediate abolition of regional plans. Uncertainty creates problems for developers who tend to respond by postponing investment until that uncertainty is resolved. Add to this the effect of the recession and you have the two underlying reasons for concern about the housing supply.
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, this Observer Editorial). 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. I am less impressed with actions on the demand side. 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.
Friday, 26 August 2011
Stadium 1, Neighbourhood 0?
Imagine some wealthy developer wants to use their millions to build a new stadium. Is this good or bad for local residents? When is the right time to buy into the neighbourhood - or cash in if you already live there? These are the questions many East London homeowners, and potential buyers, are asking as we approach the 2012 Olympics. Of course, others might be wondering if new sports arenas might price them out of the neighbourhood.
So what do stadium developments do to house prices? SERC has just published research that tries to answer the question. My coauthors and I took a detailed look at two of the UK's most impressive recent stadium projects: the reborn Wembley Arena and Arsenal's new Emirates Stadium.
These are interesting cases as they allow us to observe what happens to house prices if a) only the external appearance of a stadium changes (Wembley) or b) a stadium moves within the neighbourhood but doesn't involve particularly ground-breaking architecture (Emirates).
A number of nice results emerge. 'New Wembley' - with its iconic Foster-designed arch - raised local house prices by up to 15%, with effects diminishing with distance and disappearing after about 4-5km. Given that theprevious stadium provided identical basic facilities, and the surrounding infrastructure didn't change much, it's likely that these house price shifts are at least partly a visual amenity effect (just as people pay for scenic views). Significantly, prices peaked in 2004, exactly when the iconic arch was raised and illuminated.
The Emirates story is a little different. House prices went up around the new site, and down around the old Arsenal stadium. Price rises also kicked when the plans for Emirates were announced, not at completion. But in streets used by spectators to get to the old stadium, house prices went up by about 30% after it closed.
So what does this tell us? First, as Henry's suggested, for homeowners there is an economic downside to a nearby stadium if your street fills with football fans every Saturday afternoon. There's also a surprisingly big upside if the stadium moves somewhere else. Second, if you want to cash in on the Olympics, it's probably too late already - anticipation effects do most of the work.
That takes us back to regeneration. Property effects of stadia accrue mainly to landowners, homeowners and landlords. But one person's gentrification is another's displacement. And wider economic effects of big sports projects for the local community aren't always easy to see. That means local policymakers need to be very clear-eyed about all this before offering to help pay for it.
Wednesday, 24 August 2011
Shout if you don't want to go faster
NIMBYism is one of the major concerns in transport planning. Airports, motorways or high speed rail lines may be desirable nationally, but are heavily opposed locally. The typical argument is that the local population would be exposed to unjustifiable levels of noise, pollution or congestion.
NIMBYism often feels like a British speciality. When the consultation for the UK's High Speed Two line closed last month, DFT officials had a whopping 40,000 responses to wade through, the majority of which are - apparently - objections. Conservative Party donors living near the proposed route have threatened to withdraw funding if the coalition pushes forward with the project. Even the Queen has apparently joined the protest, worrying that the trains will scare the horses at Stoneleigh Park, an important equestrian centre.
For policymakers the obvious question is: how to weigh the (long term) interests of broader society against the (short term) costs incurred by locals? This is a difficult choice, made harder by the fact that some communities and interest groups are much better than others at organising and pushing their points.
To see the problem, let's take a closer look at high speed rail. My own research suggests that high speed rail lines have the potential to bring jobs and economic wealth to the regions they serve. Others are more sceptical. The public economics literature suggests that material, as well as intangible interests are also in play. The home voter hypothesis has argued that property owners will generally support projects they expect to increase the value of their properties (and vice versa). Thus they have a strong incentive to organise their interests and influence political decisions.
Some new SERC research on airports confirms this, showing property owners are much more concerned about aircraft noise than renters. In 2008 Berlin ran a public referendum on closing the city's historic Templehof airport. Passenger numbers at Templehof were low, so noise was a marginal issue. Support for keeping Templehof open was more than twice the city average - in neighbourhoods close to where the replacement terminal was due to open in 2012. Not surprisingly, these are areas dominated by owner-occupied single-family housing.
What do we take from this? NIMBYism is a complex melange of various interests, and complaints about environmental stress may partly mask vested capital interests. Balancing costs and benefits of transport projects between society and locality is a challenging task. We certainly don't want to leave the decision to those who shout the loudest.
Monday, 22 August 2011
The economics of skyscrapers
Posted by Max Nathan, SERC and LSE Cities
Like many cities, London is having a skyscraper phase at the moment. As The Shard rises over the capital, the Helter-Skelter, Cheesegrater and Walkie-Talkie are not far behind.
And London isn't alone. According to the Council on Tall Buildings and Urban Habitat, there were 602 buildings higher than 200 metres around the world in Spring 2011, compared with 258 in 2000 and just 146 a decade before.
Very tall buildings thrust themselves into the public eye. Not surprisingly, therefore, skyscraper debates tend to be about the aesthetics or the psychology. The latest glass box is either a ghastly eyesore or a gleaming symbol of modernity and global ambition. Or it's a visible manifestation of the developer's ego/insecurities (think - anything built by Donald Trump).
We know rather less about the economics. Do firms pay to be in skyscrapers because very tall buildings make them more productive? Or just because they want the kudos of the hot address in town? As economists would say - is it an agglomeration effect or a reputation effect?
A new SERC discussion paper sheds useful light on these issues. Hans Koster and colleagues at VU University, Amsterdam take a detailed look at how building height affects office rents. Firms pay more to locate in skyscrapers. With some clever economterics, Koster and co untangle why.
In theory, there are two reasons for this 'rent premium'. First, workers may be more productive in skyscrapers. By clustering workers together, it's easier to meet face to face. Skyscrapers also have their own restaurants, gyms and cafes - all of which help people meet and exchange ideas, both within teams and between firms. Not surprisingly, the typical tenants in tall buildings are business service firms, for whom face to face contact and local knowledge spillovers are very important.
Second, managers may simply prefer the prestige of a landmark address - and even if it confers no direct productivity benefits, the reputation effects may bring clients in through the door, and help the firm hire from a bigger pool of talent.
The researchers test these ideas with data for buildings in three Dutch cities, Amsterdam, Rotterdam and Utrecht (average height 29 metres). They're able to control for a lot of other factors affecting rents, and make use of information on the local historic built fabric to identify the causal link from height to rent.
The results suggest that firms are willing to pay around four percent more to locate in a building that's 10 metres taller. The 1% of buildings 100 metres or more are 40% more expensive than the 40% of buildings less than 20 metres high. There's little effect for the majority of offices in between.
This non-linear relationship suggests that agglomeration benefits tend to diminish with height, but a reputation effect then kicks in for buildings 90 metres high or more. The researchers estimate this as 1.5-5.8% of rents for 100-meter skyscrapers, and 17.5-36.2% for 130 metre towers, among the very tallest.
In turn, I think this tells us something useful about skyscraper pyschology and aesthetics. Ego-driven as they may be, developers like Donald Trump are providing tenants with something that helps them perform better, as well as look better. And from the developers' point of view, maximum height restrictions - which are in effect in Holland - lead to the under-provision of skyscrapers. Of the dutch cities studied, Amsterdam has the highest 'regulatory tax' and - on an economic basis - would benefit from more tall buildings. Assessing whether the amenity and tourism benefits of the existing skyscape outweigh these height benefits is less straightforward, of course.
Wednesday, 17 August 2011
Location matters: putting people first in planning
Posted by Tim Leunig, SERC, LSE and CentreForum
I recently visited Bordon, a small town in North East Hampshire. It was one of Labour’s proposed eco-towns. The Conservatives opposed this in opposition, but are now keen. The proposed 5500 houses would double the town’s size.
I talked to a leading light of Bordon Area Action Group. He was a NIMBY, opposing all new housing. He favoured sending immigrants home (adding that this was not BAAG policy). He had many objections to housing – including that more people walking on local countryside footpaths would damage invertebrates’ habitats.
I am not mocking him. He was knowledgeable, and his views were heartfelt. He is correct on many things. He feels that the Tories nationally lied, and that the council – which covers a big area – have slanted consultations to get the answers they want. He likes his town the way it is.
I think we need much more housing in the South East. But not in Bordon. This has nothing to do with lizards, and everything to do with people. Put simply, people don’t want to live in Bordon if they can live elsewhere nearby.
We can see this in local house prices. The cheapest 3 bedroom house in Bordon is £140,000. The equivalent in the neighbouring towns of Alton, Liss, Liphook and Farnham are £188,000, £195,000, £215,000 and £224,000 respectively. People generally prefer to live in other towns in the area.
The other towns also have railway stations, and are on dual carriageway roads. They are better connected, and better placed to prosper in the future. It makes sense to build there, rather than in Bordon.
Both the previous and current government chose Bordon because the army is moving out, releasing brownfield land that can be redeveloped. Everyone says that building on brownfield land is a “Good Thing”.
This is not true unless the brownfield land is where people want to live. We should also consider land restoration, and building elsewhere.
I found that a house costs £80,000 more in Farnham than in Bordon. If we can restore the Borden army site for less than £80,000 per house space, we should do that, and build in Farnham.
Davis Langton [pdf] suggest that restoration costs about £1.75m per hectare, or around £60,000 per house space. These costs are very site specific. They assume, for example, 1.9 tonnes of waste per square metre of the site. This colossal figure is for dense inner city sites: the figure for a former army camp such as Bordon will be far lower.
Many of the costs have to be paid anyway, whether the land is used for housing, or returned to green space. If that is so, we might as well build the houses where people want to live.
Whether Bordon is the right place for development requires accurate, site specific estimates of the cost of remediating the land, for both development and greenfield uses. But the figures here make it overwhelmingly likely that cost-benefit analysis would not support redeveloping the Bordon army site for housing. Land auctions, an idea I've developed here would offer a sensible way through the decision-making process.
On thing is for sure, 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.
* Tim Leunig is a SERC Affiliate. He is a Reader in Economic History at LSE, and Chief Economist at CentreForum think thank.
Tuesday, 16 August 2011
What "FOREVER 21" means to spatial economists
Posted by Tim Leunig, SERC, LSE and CentreForum
Traditionally prime retail is the most expensive land around, and traditionally nowhere is more prime that London’s West End. At first sight summer 2011 should be tough for the West End. There is a recession – which the National Institute of Economics and Social Research even suggest may be the longest since modern records began a century ago.
London also has lots of new shopping space. Westfield Shepherd’s Bush added 1.6m sq ft in 2008, and plans a 0.5m sq ft extension. Westfield Stratford will open soon, adding another 1.9m sq ft. The internet and supermarkets continue to make inroads into non-food shopping, creating new rivals for West End shops.
And yet last month US fashion retailer Forever 21 paid HMV £13.75m to get access to HMV’s smaller (35,000 sq ft) Oxford Street store. The £13.75m did not buy the lease, or rent the space. It simply allows Forever 21 to rent the shop on commercial terms.
This is not a one-off. Chanel recently paid Nicole Farhi £5m for the right to pay £2.35m rent for a shop in Bond Street, while Superdry paid Austin Reed £12m for the right to pay £2.5m rent on Regent Street. There are many other examples, including Burberry and Hollister.
Three things stand out to a spatial economist. First, location remains hugely important. Brand image and sheer footfall mean that companies want to be in the West End. Demand for space is “derived demand”: if people want to buy Superdry hoodies in the West End, then Superdry will want space in the West End.
Second, it is good to see shops come and go. If demand for affordable fashion has increased, then it is good that Forever 21 has arrived. The same is true for all other newcomers.
More prosaically, newcomers drive productivity growth, particularly in retail. Even people who are not interested in Forever 21’s clothes want them over here.
Third, new firms will not find it easy to crack the UK market when the entry price is £13.75m. This is a huge barrier to entry. That is bad for everyone who cares about productivity, even if they have no interest in the particular store.
Finally, both the £13.75m fee, and the £800 per sq ft annual rental are clear market signals: we need more retail space in the West End. So what are entrepreneurs and planners doing about it? Who is looking at whether we should close some side roads, inserting shops where we currently have roads? Who is looking into creating first floor pavements, in the way that shopping malls have more than one floor to maximise retail area? Who is considering sinking the street itself underground, and paving it over, creating more space? Electric and hydrogen buses could easily use a “cut and cover” tunnel below the current road surface.
All of these things are expensive, but when companies are paying huge sums to be able to rent a shop, all of these things – and more – should be on someone’s agenda.
* Tim Leunig is a SERC Affiliate. He is a Reader in Economic History at LSE, and is also Chief Economist at CentreForum.
Friday, 12 August 2011
Riots: What next?
Let me start with a few things that are obvious. First, the cause of riots are complex, so we should be careful about specific 'solutions' proposed by people who say they 'know' what caused them. Second, the underlying problems are long run and structural so there are no immediate fixes. Politicians should try to remember this as they scramble desperately to 'do something'. Third, because the problems are long run and structural its useful to think about how the success or failure of recent urban policy should guide the response. So, in no particular order:
1. More shiny new buildings. Unlikely to help. See the NAO on the coalfields regeneration or my contribution to a recent SERC policy paper.
2. A renewed emphasis on mixed communities. Unlikely to help.
3. Reversing housing benefit reforms so that people don't have to move. Unlikely to make any long run difference unless you are somehow already persuaded that this is all about 'Tory Cuts'. In which case, see my earlier comment about people that think they know what caused the riot.
4. Closing the gap between rich and poor. Might help if this turns out to be an underlying cause (although the evidence on the role of relative poverty in the LA riots is pretty limited). If you think it helps but run local not national government, remember that local authorities aren't very effective at closing the gap between rich and poor.
5. Local jobs for local people. Silly.
6. Cultural regeneration. A much loved (by some) policy. There is little evidence this works.
7. More enterprize zones. Again, little evidence these work and even when they do increase employment locally, it is not clear those jobs go to local people.
8. More public sector jobs? Again, not clear these go to local residents and not clear to what extent they are additional. A pretty blunt Keynesian tool for areas most affected by the downturn suggests a very blunt urban policy for helping with riots. Focus should be on effective public service provision.
9. More spending on Area Based Initiatives. Unfortunately, evidence for their effectiveness is pretty weak. Based on the best evidence that we have available (for the NDC) a reasonably well funded ABI has not, on average, improved individual outcomes in targeted areas. In short, neighbourhood policies may provide important public goods (social housing and public spaces) but not economic development. There is a (possibly large) consumption value to these goods - although that hasn't been enough to prevent rioting and there is no compelling evidence that they meet objectives of narrowing the gap between disadvantaged individuals and the rest.
10. Policies around education and ‘up-skilling’ workers. Policy needs to focus on improving the skills of individuals and be realistic about the fact that those with new skills may choose to leave an area. There should be much less focus on policies based on attracting skilled workers to move to disadvantaged places.
And finally, an important policy prescription and my best guess as to the two areas on which policy should focus:
11. Policy should focus on, and be assessed by, impact on people not places. In the recent past, policy has been too heavily focused on public expenditure to “turn around” declining places while paying too little attention to individuals. At the individual level, interventions need to come as early in life as possible (the Manchester Independent Economic Review argues the case). Later in life, policy should focus more on encouraging labour market activity and removing barriers to mobility. No quick fixes here, but at least this increased focus on individuals might have some hope of solving the longer term problems.
[You can read more on these issues in my chapter in the recent SERC policy paper on underperforming places. And in the spirit of generating debate, that policy paper also includes contributions from people who would strongly disagree with some of the points I make above]
Tuesday, 9 August 2011
The economics of rioting
First, rioting is a complex issue. But the complexity is much more about the when, than the where and the who. In other words, its hard to predict when rioting will break out. But once it does it's easier to say things about what kind of people and neighbourhoods will be involved. [To clarify - in case this isn't blindingly obvious - I am talking about tendencies rather than suggesting that the police should be able to predict precisely where riots will occur and who will be involved with them a la minority report]
Second, the narrow economic approach to rioting would follow Becker and ask whether rioters are simply responding to the private benefits and costs of rioting. So rioting should be more common where the financial gains to rioting are high and the time costs to rioting are low (in terms of the opportunity cost of time and the probability of imprisonment). Consideration of the who and where suggests that these factors are at play in the London riots.
Third, it is often claimed that rioting is related to community level grievances. Again, this is something that we have seen with the London riots. Here, however, is where the economic analysis of the causes of riots get difficult. Because individual and neighbourhood deprivation tend to be very highly correlated it is very hard to distinguish between individual and neighbourhood explanations of socio-economic phenomena. With rioting, this general problem becomes even more difficult because there are several possible mechanisms at work. It could be that 'organisers' solve the coordination problem in specific neighbourhoods, or that peer pressure changes underlying norms (e.g. in attitudes to crime or responses to opportunities for crime) or that events in specific communities move them from no-riot to riot 'equilibrium'. With the London riots, it is quite possible that all of these mechanisms are at work. But it is equally possible that none of these mechanisms are at work and that individual factors are driving everything.
In summary, 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.
[PS: For those of you who would like to read more, try Dipasquale and Glaeser's paper on the LA riots which formed the basis for the arguments that I laid out here].
Monday, 8 August 2011
More supermarket bashing
Back in May, while writing about whether we should save the high street I discussed the fundamental problem: 'There is a serious issue to consider here - 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.'
People writing on this (who are usually anti-supermarket) put strong emphasis on the positive benefits restricting supermarkets, while downplaying the costs. As explained by my colleague Paul Cheshire a few weeks ago, however, the costs can be substantial: "a recent SERC study (summarised here) estimates that planning policies combine to reduce productivity in supermarkets by more than 20 percent."
The major costs come from town centre first policies that sought to protect the high street. As I have discussed before, however, an unintended consequence has been 'metro' type stores that are worse for independent retailers. The anti-supermarket brigade are finally recognising this 'contradiction' hence the call for yet more regulation to restrict supermarkets. Change of use restrictions are one mechanism, local competition tests another.
Change of use mechanisms are messy and could be used to prevent competition as well as encourage it. In principle, I am more sympathetic to the idea of local competition tests but I am not sure how well they would work in practice - especially when placed on top of the current planning restrictions which do so much to prevent competition: Town centre first policies strongly restrict the supply of land. Sequential needs tests then mean that a new entrant may not be able to get planning permission for new development if the local authority have already identified enough land for supermarkets - even if the land identified is owned by a rival supermarket chain and currently vacant! It is these planning restrictions that make land-banking so incredibly value (leading some to joke that in the UK, Tescos is a highly successful land developer with a side arm in retail). If local competition tests were to be introduced, then the 'local' part of this should only apply to the market area over which the tests are applied, not to who gets to make the decisions. They certainly shouldn't be 'interpreted' by local planners or politicians nor aimed at one particular retailer.
Let me finish with one area of common ground with those who are anti-supermarket. In this area it is important that the government doesn't allow itself to be strongly influenced by existing retailers. Any one of the big four has huge vested interests in certain aspects of the land planning system because it creates so many distortions. Large land holdings + many centre city sites = in favour of section 106 (they can afford to pay) plus most town centre first restrictions (keeps up the value of their land and existing stores portfolio). Independent retailer = against supermarkets + pro anything that restricts competition. New entrant = against town centre first policy + less restrictions on change of use.
A final point: tighter regulation, especially if operating via the planning system would increase costs further. In other words, saving the high street costs is not going to be cheap so we better be very sure that it is truly a price worth paying.
Friday, 5 August 2011
I was reminded of these issues this morning, while listening to Eric Pickles talking about the need for Local Authorities to publish details of their assets (broadly defined). CLG have also been pushing hard on more openness on spending. For example, they have called for 'armchair auditors' to examine details of local authority expenditure as well as providing extensive details on departmental procurement. And it is not just CLG. The Cabinet Office are consulting on how government can become more open.
Of course, more open information isn't just about feedback but also about accountability. For both these reasons I think more open government should be welcomed. However, the real test of this policy will be how open government is on major items of expenditure and how those decisions are reached.
Let me give a specific example. For a couple of years, SERC has been trying to evaluate the impact of the Single Regeneration Budget and the Local Enterprise Growth Initiative. I have talked before about the strategies that might be used to evaluate such policies. One crucial thing is that you need as much information as possible on who applied, what for, who got money and who didn't and on how decisions were made. For both these policy areas civil servants have been unable to provide me with this information - particularly with regards to how decisions were made and who applied but failed to get money. Part of the problem with SRB is that the policy is old and no systematic records were kept. LEGI is a more recent policy, but despite the best efforts of people within CLG to help they still can't provide the kind of information we would need to improve our evaluation of LEGI.
Some would argue that evaluating past policies shouldn't be a priority in the current circumstances. I, of course, would disagree. We can learn important lessons from the past. For example, our SRB evaluation is looking explicitly at whether a certain type of expenditure (on commercial buildings) had much long run impact on the local economy. In addition, we can figure out how to effectively evaluate these kinds of spatial policies. Once we have done that, we can use the methodologies that we have developed to evaluate current policies, which then better informs voters and policy makers, so that we can adapt policy to achieve more for less.
But effectively evaluating (in the broadest sense of the world) current policies will require detailed information about how policy decisions were reached and how money was spent. I hope this sort information is already being recorded for policies such as Enterprise Zones and the Regional Growth Fund. If it is, then the next big challenge for open government will be whether or not politicians truly are willing to release it.
Wednesday, 3 August 2011
Adapting to Localism
Harford argues that trail and error is an effective tool for solving problems. As the world gets more complicated, it appears that a bottom-up trial and error approach may work better than the old top-down hierarchies. For those interested in pushing decentralisation in government, this will sound familiar. Indeed, the fact that decentralisation allows for experimentation is one of the big pluses highlighted by advocates of moving power away from Whitehall. Those converted to this argument will enjoy the examples, from the military and the private sector, that Harford uses in his book.
A note of caution, however. Harford argues that experimentation is only part of the solution. Organisations need to be prepared to fail, to identify failure and to respond to such failure by changing course. These are things that do not come easily to government (of course, they don't come easily to business either). In some quarters David Cameron's willingness to change his mind is already opening him to criticism (and even ridicule). Personal experience suggests that both politicians and policy makers tend to start with the working assumption that their policies are working. Contrasts the randomistas that Harford describes conducting socio-economic experiments in developing countries who justify random assignment by assuming that their intervention will have no effect. These different outlooks often make policy makers averse to proper open evaluation of their policies. Harford explains this aversion by appealing to several 'nudge type' explanations of why we struggle to learn from mistakes. Policy evaluation might not matter so much if there were other effective feedback loops in place. But the type of group incentive mechanisms that Harford describes in his book may be difficult to implement in the public sector (where outcomes may be harder to evaluate and assign to specific groups) than in the private sector. Local democracy may, unfortunately, prove a rather weak feedback mechanism (especially when strong vested interests are involved). All this suggests that the coalition government needs to give as much thought to the problem of the feedback on, and adaption to, failure as it is currently giving to the promotion of experimentation.
A few further thoughts.
For those of us that struggle with many aspects of the planning system the book highlights the key problems for those who create visionary top-down plans (rather than the kind that adapt e.g., to market signals). It also provides a great example, the 'Merton rule', which explains why some of us worry about the unintended consequences of the government's decision to go for Zero-Carbon homes (you'll have to read the book).
In the chapter on development, Harford considers the problems that occur when trail and error isn't enough. What if we need some kind of big push coordinating lots of changes at once? The problem is well recognised in the development literature and Harford goes for experimenting with Paul Romer's solution - 'charter cities'. I am a lot more wary - and would draw the parallel with Enterprise Zones. In short, you need to worry a lot about displacement (in the short to medium run) and whether any changes then spill over to changes elsewhere in the longer run. In the spirit of Harford's book - this is an experiment that may be worth trying - but surely on a small scale first.
There are some other specific issues on which I am not so convinced, but let me finish with a more general one. Specifically, I struggle with the leap from 'trial and error is important' to the conclusion that 'we should use evolutionary approaches to model economies'. Harford explains that evolutionary modelling is better at describing certain aspects of firm behaviour (e.g. the life cycle of firms). That may be true, but that doesn't necessarily advocate shifting whole-scale to evolutionary type modelling because these models often can not replicate aspects of firm behaviour that may be equally, or more important, for our understanding. (To be fair, I am not sure whether Harford is advocating this - but at a couple of points he certainly appears to come close to it). I am reminded of the debate in urban economics about zipfs law. This is the idea that the second largest city is often half the size of the largest, the third largest city a third the size of the largest etc. For a while, it was fashionable in economics to try to build models of city systems that replicated this particular pattern. But, as pointed out by Gilles Duranton in a paper in the American Economic Review, these models failed to replicate other aspects of the behaviour of cities (for example the tendency of some cities to specialise) that had far stronger empirical support. Duranton argues, and I agree, that is far better to have models that match these facts and only approximate zipfs law. I think the same critique could be applied of the evolutionary approach to clusters, which is popular right now with some economic geographers. These evolutionary models can replicate some of the complex network of interactions between firms that we might see in real life, but at a cost that they lose focus on basic insights about the costs and benefits of clusters. Again, in keeping with the spirit of Harford's book, I am happy to let a thousand flowers bloom - but I still think that many of those flowers need to be of the non-evolutionary type.
Regardless, much food for thought (and perhaps a useful addition to Ed Milliband's summer reading).
Monday, 1 August 2011
High Speed Rail: No Fast Track Fix
Comparing the direct benefits (faster travel) etc to the costs suggests that benefits are likely to outweigh costs although both benefits and costs are highly uncertain.
The environmental impacts are limited.
The wider benefits - e.g. reducing the north-south divide - are unknown and likely to be overstated. [Max Nathan has a post considering this in detail]
People are in favour of high speed rail providing that (a) they don't have to pay for it; (b) they don't live directly on the route [Watch out for post by Gabriel Ahlfeldt on this issue in a couple of weeks time].
The opportunity costs of high speed rail are large. To me, this is the fundamental issue. Quite simply, I remain unconvinced that this is the best way for the government to spend money. Over the last two (or more) years, none of the assertions to the contrary has changed my mind that this remains the central problem with HS2.
[Disclosure: I sit on the HS2 Analytical Challenge Panel]