Friday 27 July 2012

Olympics blogging

With the opening ceremony just hours away, time for a link to some of our past olympic themed posts:

1. Something old on the impact of the olympics on house building (which made me wonder what is going to happen to the already very bad construction output figures once the olympics is over)

2. Second, some reflections on the likely regeneration and other impacts of the new stadium (from me and from my colleague Gabriel Ahlfeldt)

Enough on the economics, I now intend to sit back and enjoy the sport (from a non-central London location, so back to blogging mid-August.

Tuesday 24 July 2012

Does stamp duty stop people moving house?

 Posted by Dr Christian Hilber, SERC and LSE

People buying a home in the UK have to pay stamp duty on the transaction.  Stamp duty-type taxes are one of the oldest forms of taxation – dating back to 1624 – and have long been criticised by economists as being inefficient.

The central case against the stamp duty is that it hampers household mobility. The 2011 Mirrlees Review neatly summarises this argument:

By discouraging mutually beneficial transactions, stamp duty ensures that properties are not held by the people who value them most. It creates a disincentive for people to move house, thereby leading to potential inflexibilities in the labour market and encouraging people to live […] in properties of a size and in a location that they may well not otherwise have chosen.”

To date little is known about whether the stamp duty does in fact hamper mobility and if so, by how much. In a new SERC Discussion Paper [pdf], my colleague Teemu Lyytikäinen and I provide some answers. 

UK stamp duty - or to use the official name, ‘Stamp Duty Land Tax’ – is an odd tax in that the tax rate jumps dramatically at certain thresholds. For example if you buy a house at the price of £250,000 you pay 1% of the value, or £2500 stamp duty tax. But if you buy a house that costs £1 more, you pay £7500 tax (3% of £250,001).

We exploit this ‘anomaly’ in our empirical analysis. Specifically, we use a Regression Discontinuity Design type analysis to study whether and to what extent the disincentive to move translates into lower household mobility.

We find that the overall effect is very substantial. A two percentage-point increase in the stamp duty from 1% to 3% reduces household mobility by around 40 percent. A closer look reveals interesting additional insights: the stamp duty does not appear to significantly affect labour-related longer distance moves, probably because the benefit associated with the move for these types of moves is greater than the cost, which includes the stamp duty. 

So the piece of comforting news is that the stamp duty may generate little mismatch in labour markets. Essentially, people who get a new job far away are likely to move anyway.

However, there is also a piece of bad news: The stamp duty has a very strong adverse effect on short distance moves, which are typically housing related. This suggests that the stamp duty likely has very detrimental effects on the functioning of local housing markets – the stamp duty induces substantial misallocation of dwellings because households do not adjust their housing consumption in order to avoid the stamp duty. This imposes a hefty welfare cost on the society as a whole.

All of this suggests that the stamp duty is highly inefficient from an economic point of view. In this light, the recent introduction of the 'mansion tax' of 7% for properties over £2m is, albeit popular, a move in the wrong direction.
Wealthy households, whose children have moved out for example, may opt to stay in their mansions in order to circumvent the tax. Yet, in the absence of the tax, they may well have preferred to ‘downsize’. It may even pay for them to keep their properties empty for longer periods of time. Both responses are legal but inefficient. A smarter intervention would be a land value tax, or a tax on property consumption – both of which would be much less distortionary, and much harder to avoid.

Friday 20 July 2012

Whither participation?

There's a strong belief among some academics and large parts of the practitioner community that local engagement/partnership is key to the success of many area based interventions.

Some time ago, I came across an attempt to assess this claim (possibly in the context of Single Regeneration Budget or New Deal for Communities) by looking at whether projects which had strong community engagement did better in terms of outcomes. I remember being surprised that there didn't seem to be any direct evidence that this was the case.

I was reminded of this, in a different (developing country) context, while reading Lee Crawfurd's recent 'Whither Participation?" blog post on Roving Bandit:

Many social programs insist on beneficiary participation in management, claiming that it is valuable and instrumental for program success. 

Perhaps, for rich parents who have the luxury of being able to spend time worrying about their children’s educations, participating in the Village Education Committee and being given a voice to obtain more resources for their schools is indeed empowering. Poor parents may care just as much about education, but may have no energy left to figure out exactly how to work the system or to figure out what they might be able to accomplish when they are given vaguely defined powers ... perhaps, finding ways to make schools actually work without the community having to worry about it at all would be even more empowering.
Back in England, I can't imagine anything worse than having to meet all of my neighbours after work to figure out how we are going to run the rubbish collection or fix the potholes in the road. That stuff just gets done. Services get delivered without me having to think about it at all. All I need is a mechanism to complain if things don't work, but don't ask me to help you plan how to fix it.

There is a great quote from the earlier paper "Mandated Empowerment" (HT: @thrh)
Both examples raise concerns about committing ourselves entirely to antipoverty strategies that rely on the poor doing a lot of the work.
When you put it like that, it sounds pretty sensible. The implication of which is not I think "don't consult people," quite the opposite - provide an open platform for suggestions, comments, and complaints. Just consider how much work you are asking from your "beneficiaries.

Which got me thinking. I know outcomes aren't everything, but does anyone know of good evidence in a developed country context (or specifically UK) that tells us whether more or less community participation improves policy outcomes?

Wednesday 18 July 2012

London and the Census

Posted by Prof Ian Gordon, SERC and LSE
What the first snippets of data from the 2011 Census show is that since the Millennium London’s population has been growing about as fast as Mayoral Plans have imagined – but without much of the extra housing intended to accommodate it.
It’s happened despite this for two  basic reasons.  One is that newly arrived migrants from poorer countries have been packed in at higher densities. The other is that the traditional route for established Londoners to acquire more living space - moving out to buy houses in more affordable areas outside London - has got increasingly choked off.  First supposedly ‘pro-city’ policies empowered NIMBYs to resist  land release for housing in the South East - and then the banking crisis closed  affordable finance to first time buyers.     
It’s dangerous to draw more than the simplest conclusions from the Census’s first ‘headline’ growth figures for London. But it is clear that the way in which this growth has been accommodated over the last ten years is not a sustainable one.  It is time to drop the complacent claim that London can (or will) house all ‘its own’ population growth, and get back to planning how the wider economic region can provide decent housing for its dynamic population. 
A version of this post first appeared in the Evening Standard letters page, July 17th 2012.  

Monday 16 July 2012

Slum clearance

Quoted in the economists piece on moves to deal with housing overcrowding in Newham: Good housing is obviously better than bad housing, but bad housing is better than none, and when the state gets into the business of licensing goods supply tends to fall. As Henry Overman, professor of economic geography at the London School of Economics, puts it, “schemes that restrict the ways in which we can use housing tend not to be beneficial to the poor.”

I was reminded of this again when catching up with Episode 6 of the BBC's excellent Secret History of our Streets: "The sixth episode features Arnold Circus, in the East End and the story of a Victorian social experiment that changed Britain. Arnold Circus is home to the first council estate which opened in 1896. The planning of the estate, from its lack of pubs to the pattern of the brickwork, was deliberate in order to make its residents respectable, as previously the land had played host to a notorious crime-ridden slum."

It worked - to a point - newly arriving residents were certainly more respectable. But, what happened to the original slum dwellers? It turns out the council mapped their re-location after the slum clearance. The result? Not a single one of the original residents returned to Arnold Circus - all of them located somewhere nearby in other slums. This was hardly surprising - rents increased by a factor of four, taking the new housing out of reach of the original residents. Of course, over time, continually up-grading the quality of the entire stock helped improve housing conditions of the poorest. But we shouldn't fool ourselves - in the short to medium run rent hikes - be they from new regulations or renovation - help some poor families while hurting others.

It's hard to know where the balance lies in the case of Newham. If supply responds to the new regulations then winners might outweigh the losers. But this is a borough that has such a shortage of housing that it was looking to other LAs to house it's poorer families (in a city which suffers from housing shortages). In short, you might reasonably worry that London's latest bit of 'slum-clearance' will have affects that are not so different in some respects from those experienced by Arnold Circus' residents over a century ago.

Wednesday 11 July 2012

Conservation Areas: Prisoners' Dilemmas and Gilded Cages

Posted by Dr Gabriel Ahlfeldt, SERC and LSE

What’s heritage worth? Valuing such intangible cultural goods is challenging. It is similarly challenging to evaluate policies like Conservation Areas, which aim to preserve historic or architectural local character in England.  

In a recent  report commissioned by English Heritage, my colleagues Nancy Holman, Nicolai Wendland and I try to unpick the economics of Conservation Areas using a combination of quantitative and qualitative techniques. (See here for some FT coverage.)

Over 9,800 Conservation Areas have been designated in England since the 1960s. For economists, the challenge in assessing such policies is that most of what they deliver to their surroundings – and society as a whole – is not directly traded on the market. And since there are no directly observable prices, it is difficult to put a number on people’s willingness to pay for their effects.

We therefore looked at observable market outcomes – as reflected in more than 1m property transactions across England since 1995. Exploring more than 8000 conservation areas, we found that property prices are generally higher inside conservation areas – about 9% controlling for other factors – and also tend to increase with the density of historic buildings. We also conducted 111 in-depth residential interviews with residents living in 10 Conservation Areas. Here, we found that the premium people pay for living in conservation areas rises with a neighbourhood’s aesthetic quality, as ranked by local residents.

All this is compelling evidence that there is a willingness to pay for the aesthetic quality and the historic character of the neighbourhood, at least by those living in these areas.

Are there any downsides? For homeowners, Conservation Areas pretty significantly constrain the degree to which properties can be altered. We might expect these constraints could cause property values to decline following a designation. However, looking at over 900 recent designations across England, we couldn’t find any significant effect on prices. Owners we interviewed also generally express positive attitudes towards the planning constraints that come with designation, and the planning system more generally.

This is good news for policymakers, since it suggests Conservation Areas secure local social benefits without costs to individual homeowners. Rather, designation captures externalities that are then capitalised into house prices. In doing so, Conservation Areas solve a form of prisoners’ dilemma. If all local homeowners look after their historic houses, everyone is better off. But individual homeowners might be tempted to let their properties go to seed, while free-riding off nearby properties’ ‘character’.  A regulation that ensures collective action makes such free-riding much harder to do.

It’s harder to say whether more conservation area designations are in the interest of society as a whole. For instance, we don’t know if Conservation Area designations limit the supply ofnew housing in some regions, or the country as a whole. If they do, too many designations may create gilded cages – beautiful towns in which living space becomes unaffordable for the average household. More work needs to be done to answer this question.

Friday 6 July 2012

(Core) City Deals

We now have detail on all the city deals struck with England's 8 largest cities. These cover a range of policy areas including finance and investment, skills and employment, transport, housing and some sector specific components (Centre for Cities provides a useful summary table).

I am broadly sympathetic to the outcome that this process is trying to achieve. British government is very centralised and more localisation is, on balance, a good thing. That said the process does feel a little odd with powers being granted in one area in exchange for commitments in other unconnected policy areas (e.g. power over some transport spending in exchange for a commitment on youth employment and training). Not much point dwelling on it - the process is achieving something - but you'd hope that in the longer run government will be looking to learn lessons on what works with a view to localising in those areas across the board.

In addition to supporting the ultimate objective, there are specific things agreed in the latest round that I'd certainly support. The end of RDAs left a vacuum in terms of sub-national strategy on transport (at least for some cities). The deals generally look to fix this. Likewise in the broad area of business support - investment funds, support for enterprise, inward investment etc - although I confess to remaining sceptical on whether these policies are cost-effective. I'm also pleased to see local experimentation around skills and training - not least because national policy in this area is in a state of flux (or in a mess, depending on your perspective).

One thing that I don't yet understand is what happens if cities cannot deliver on their commitments as part of the deal? For example, people are talking about Leeds Deal as involving a commitment to achieving a NEET free city (so all young people will be in education, employment or training). That seems ambitious. What happens if they don't achieve it? Even more extreme, what happens if outcome measures in some of these employment and skill areas worsen (with significant budgetary implications)? But true experimentation at the local level must allow for the possibility that policy changes will make things worse, not better, and I don't understand how the latter is going to be managed.

Another area for concern are the development deals that allow borrowing against future business rate income in key development zones. To the extent this creates new business this seems OK, but these area specific incentives also have the potential to distort location decisions within cities. At worst, this might mean no additional jobs being created but plenty of displacement from other parts of the city (some of the evidence on US EZ's would suggest this is a distinct possibility - as does our preliminary work on UK LEGI policy). Manchester's 'earn back deal' looks a better bet in this regard, because it isn't focused on a specific part of the city. It also covers a wider range of tax revenues - which makes for a stronger incentive [Disclosure: I sit on the Manchester Economic Growth Panel].

While we are on areas for concern, I'd also flag the sector specific components (including the various green economy commitments). I have talked about my problems with these sort of cluster/sector policies in my recent post on tech city, so won't repeat myself here.

So, overall, pluses and minuses. The final question concerns next steps. The government has committed itself to continued negotiations with the bigger cities. That's clearly welcome. The trickier thing is which new deals to start negotiating. I can imagine the temptation is to go for the next biggest cities in terms of population size. I think this would be a mistake if it excluded smaller cities that have, arguably, the biggest growth potential (to use the CfC e.g.: Cambridge, Milton Keynes). In the current economic climate, striking deals with some of these cities must be a top priority.

Wednesday 4 July 2012

Cluster Policy and (a tale of) Tech City

Centre for London's Tale of Tech City makes for an interesting read. SERC's Max Nathan was involved and you can read his take on it here. One broader point that strikes me however is that the report highlights the difficulties of cluster policies.

This is a sentiment that is clearly (partly) shared by the report's authors. To my reading, their first three recommendations suggest that they think current government policy isn't getting it right. The most striking of these is the suggestion (I am sure correct) that the government would be wrong to see Tech City as a solution for the Olympic Park legacy problem.

Their next three recommendations are essentially aimed at solving a problem of the government's own making. In a globalised world, high tech industries benefit disproportionately from being able to attract the very talented. The government's immigration policy, to put it mildly, is not helping here. But this is as true for many other high tech organisations and not unique to Tech City.

On recruitment more generally, the report makes some suggestions on Recruitment Fairs (with which I certainly wouldn't argue if market participants think worth the costs).

Recommendations around finance and mentoring are the most 'cluster orientated' but also the ones were it becomes trickiest to figure out whether they are the right things for government policy to be doing. Should finance seek to encourage entry or growth? The report appears to plump for both. I am all for competition, but how do we know that government subsidised entry is good for a cluster? Are we sure that mentors' time spent supporting other (potentially rival firms) is better spent doing that than running their own business? Is a £150m Capital Fund aimed specifically at Tech firms a better vehicle than a larger general fund that supports all kinds of businesses (I am sure the former is better for Tech City - so consistent with the report's objectives. But is it the right thing to do from a wider policy objective?).

The report also makes suggestions about the planning policies of the relevant local authorities. These call for more flexibility around, and provision of, affordable workspace. Again, no particular arguments there, but not a problem that is unique to Tech Firms (even if they are more affected than most). Internet connectivity recommendations have a similar feel to them.

Finally we are back to Governance of the strategy itself. Very important of course, because as my comments make clear, we really have no idea what targeted cluster policies should do to reinforce the strength of clusters. There are, of course, many cluster policy advocates who would disagree, but personally I remain highly sceptical.