Regional Growth Fund (Round II)

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

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

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

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

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

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

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

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

Crime Maps

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

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

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

High Speed Fail

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

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

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

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

Radical Solutions to the Housing Crisis

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

• Encourage the Elderly out of big houses.
• Freestyle planning.
• Contain population growth.
• Force landlords to sell or let empty properties.
• Ban second homes.
• Guarantee mortgage payments.
• Build more council houses.

My preferred 'radical' solution - build more houses.

Millennium Villages and the Analysis of Place-Based Policies

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

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

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

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

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

NHS evidence: seriously flawed?

Posted by Steve Gibbons, SERC and LSE

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

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

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

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

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

Empty Bedrooms and the Housing Crisis

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

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

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

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

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

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

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

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

Planning Policy Roundtable

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

Our objectives

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

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

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

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

The starting point

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

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

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

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

Government reforms

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

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

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

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

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

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

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

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

The reform process

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

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

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

What is needed now?

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

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

The planning roundtable

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

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

House swaps to help the jobless?

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

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

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

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

Youth Unemployment

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

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

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

(Return of) The North-South Divide

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

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

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

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

The spending review in October 2010, clearly looked set to reinforce the overall spatial pattern: "Abstract from issues about the timing and speed of cuts, it is as interesting to think about the long run impact on the economic geography of the UK. A growing public sector has clearly propped up total employment in some areas that are very bad at generating private sector employment. The direct effects of public sector job cuts simply must be bad for those areas. But the tricky thing to predict is how the economy will adjust to this initial effect. For the private sector in these areas there are two offsetting indirect effects. The first is that public sector jobs create demand for local goods and services - so cutting them will be bad for the private sector. High public sector salaries also create distortions in local labour markets - particularly in competing for the best workers - so this cutting jobs will be good for the private sector. The coalition is banking on the second effect being larger than the first. Labour used to think that the latter effect dominated in the South East, but that the former dominated in the rest of the UK. In reality we simply don't know the magnitude of these two offsetting effects."

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

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

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

Smart growth failures

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

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

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

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

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

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

The Globalization Paradox

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

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

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

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

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

Council Estates and the Riots

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

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

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

Cameron's Brownfield Plan

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

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

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

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