Wednesday 30 January 2013

Planning, planning, planning

I seem to have spent the week so far talking and thinking about planning and development.

Monday was spent in Durham at a land market event being held as part of the North East Independent Economic Review. Interesting to hear people talking about how the recession has forced a shift to 'more market focused' plans (in other words, a system that responds more to price signals). I'll reserve judgement on whether this is happening, but some of us have been arguing for that shift for quite some time.

I spent most of Tuesday writing up my think piece for the NEIER. But also find time to enjoy Tony Travers piece in the Evening Standard on the implausible alliances emerging on either side of the green belt debate. I also very much enjoyed reading a post from Phil Barnes on the politics of planning arguing that planners need to increase their educational role in making the case for more housing. As part of this, I would like to see greater debate around the role for more market focused plans in delivering this housing. Interestingly, when I made the case for this at my recent public lecture, a (rather angry) member of the audience accused me of being a neo-liberal. I don't think this kind of response is particularly helpful (and without going in to the details of my personal politics, I'd tend to place myself on left-leaning side of Travers' implausible alliance in favour of more green belt development.)

Finally, on a more personal note, I've spent this morning cursing the planning application from my local surgery for a dispensing pharmacy and needle exchange (on a residential street, next to a nursery and community centre). I haven't decided yet whether to object, but just in case here's an earlier post justifying my 'hypocrisy'. More seriously, these cases serve to remind us that the planning system has an important role to play in moderating competing claims over land use. Just because I think the current system gets some aspects of that decision wrong doesn't mean I think there's no role for planning. I am, after all, no neo-liberal.

Wednesday 23 January 2013

The Economic Future of British Cities: What should Urban Policy Do? (Part II)

A day later than planned, here's my write up of the second part of my LSE public lecture (you can read the first part here)

I've made the case that it is very hard for policy to affect area level productivity. Policy can, however, have a very large affect on costs of living and doing business and this, in turn, can have a big impact on the economic performance of UK cities. Let me start with the evidence that we have that policy in the UK works to increase costs of living. A starting point for this is to note that in the period from 1970 to 2006 real house price growth in Britain averaged an incredible 4.5% per annum. This is the highest figure in the OECD. In contrast, the Netherlands experienced 3.5%, the USA a little over 2% and Germany saw house prices stay constant in real terms. Two things might explain this phenomenal increase. One is that we experienced a house price bubble as increases in supply were unable to keep up with speculative increases in demand. This is what happened in Spain and Ireland, for example, countries which saw similar increases in prices to Britain at the same time as building many more houses. Britain's story is fundamentally different, however, because most of the increase in prices is down to the fact that we built too few houses in areas where people wanted to live. The fact that we did so is down to the fact that the planning system in Britain strongly constrains the supply of land. My colleagues Christian Hilber and Wouter Vermeulen have attempted to quantify the role that the planning system explains in driving high house prices in Britain. By their estimates a Local Authority that moved from the average level of 'restrictiveness' to no restrictions would have houses that were about 35% cheaper than currently. That might seem too extreme, but even moving from the average restrictiveness in the South East to that implemented by Local Authorities in the North East would see housing that was 25% cheaper. These are significant costs of the present planning regime.

These costs are not just limited to housing. Paul Cheshire and Christian Hilber have also looked at the impact of supply restrictions on the cost of office space. To do this, they look at the cost of renting space relative to the cost of developing it (using the idea that large mark-ups of revenues over costs should be arbitraged away by commercial developers unless they are constrained by planning policy). This gives a rough and ready measure of the regulatory tax imposed by the planning system. In the West End of London this tax is around 800%. In Canary Wharf it's around 320%. Whenever people see these figures, they tend to argue that London is 'beautiful' and needs protecting. But central Paris is pretty attractive and there estimated regulatory tax is 305% (la-Defense is around 160%). London is already crowded is usually the other objection, but downtown Manhattan (very crowded) manages a tax rate that is somewhere between 0 and 50%. This isn't just a problem for London. Birmingham imposes a 250% tax rate. To put this in to perspective, towards the end of the boom office rents in Birmingham were comparable to office rents in San Francisco. With rents like that, is it any wonder that Birmingham might struggle to attract private sector employers?  

As a final 'bonus', SERC research suggests that planning restrictions also reduce supermarket productivity by about 20%. In plain English, planning increases the price of our weekly shop.

Does any of this matter? I chose to highlight two implications in my lecture. First, these restrictions make our more successful cities very expensive. In fact, the productivity effect of living in our more successful cities is far outweighed by the cost of living effect. People who choose to live in those cities are compensated by those urban amenities that I discussed in part one of the lecture. But these amenities aren't sufficient to compensate many people who find themselves priced out of more successful urban areas. Posh restaurants are also cold comfort for the urban poor. What about the economic performance of British cities? Here too, I think there is a case to be made that planning restrictions are having a major impact on the urban system as a whole. In the lecture I made this point by appealing to something called zipf's law. Applied to cites, Zipf's law suggests that the second largest city should be half the size of the largest, the third largest city a third the size etc. To a reasonable approximation, this law holds for the relative sizes of cities in many different countries in the world. But not in Britain where our second tier cities appear to be too small. Most people read this statement as suggesting that London is too big. It turns out, however, that London is about the right size when you look at our smaller cities (say those ranked about 25th onwards). The issue we have is that our urban population tends to be 'spread out' across a number of largish cities. To fit Zipf's law, what we would need is for some of those cities to become much larger and some to become much smaller.

What stops that from happening? Part of the problem is the supply restrictions that I have discussed in depth above. Take, for example, one of the recent city success stories - Manchester, which has seen the fastest growth in population outside London and the South East. As documented in their independent economic review supply constraints meant that this rise in population was accompanied by steep increases in house prices and office rents (at least in the more successful parts of the city). This, in turn, will have choked off further growth.

As I discussed in the lecture, planning constraints are not the only problem. Our larger cities struggle to provide good schools, accessible open space and safe streets. All of these things discourage more mobile households (particularly families) from living in our more successful cities. As discussed above, concentrations of higher skilled workers are important for cities, so if these families are 'forced' out of cities, this has implications for urban economic performance. More controversially, perhaps, I would argue that our relatively successful cities have also been hampered by the fact that 'place based' interventions tend to involve a lot of jam spreading. What I mean by this is that spending money in a city like Manchester on new transport links, reclaiming land, improving parks etc is seen as 'unfair' if we don't pursue similar policies in less successful urban areas. As a result, what money we do spend, gets spread around rather than trying to build on success in cities like Manchester (I should disclose, that I sit on the Manchester LEP advisory board but one could make similar points about other relatively successful cities).

In short, I am arguing that the policy mix of supply constraints and jam spreading have led to cities like Manchester being smaller than they otherwise would have been. I think this has fundamental implications for the economic performance of those cities and the wider British economy and I'd like to see a serious debate about whether we should recognise this problem and try to do something about it. Focusing more on our relatively successful cities raises very difficult questions about what we should do for the places 'left behind'. I am not arguing that these places should be 'abandoned'. But I do think that the policy mix in these areas needs to be more realistic about the economic prospects of those areas. The balance of expenditure should be strongly tilted towards ensuring better education and skills outcomes for households who live in those areas and away from the need for shiny buildings and expensive new transport infrastructure that will do little, if anything, to turn these places around.

Of course, this is a very difficult policy prescription for constituency based politicians. But the economic performance of Britain's cities is vitally important and improving that performance requires a serious debate about what urban policy can and should do better.

Monday 21 January 2013

The Economic Future of British Cities: What should Urban Policy Do? (Part I)

Thanks to everyone who attended my LSE works public lecture last Thursday.

Podcast and slides are available here:

The starting point for the lecture was the recent performance of British cities. I think it's easy to forget that growth in our cities in the last 15-20 years represented a significant turn around from what we had seen in the period following the second world war. London, for example, lost a couple of million residents in the period after the war, only to see that loss completely reversed more recently. Positive population growth in Birmingham, Manchester and Newcastle during the 2000's represented an even more recent turn around - those cities had all seen declining populations in the 1990s. It's also important to note that this turn around wasn't uniformly experienced - Liverpool and Sunderland, to take just two examples continued to see population static or declining. It's also not clear the extent to which this (partial) resurgence will be hit by the continued economic downturn.

How do we understand this recent economic performance. It's essentially driven by two inter-connected phenomena. First, the structure of the economy has shifted towards activities that tend to benefit more from urban locations. This is true both of the general shift from manufacturing to services, but also of the shift within those broader areas. Second, at the same time as cities became more important as places of production, they have also become more important as places of consumption. The fact that the structural shift has also tended to benefit more skilled workers means that these two changes have tended to reinforce one another. Successful cities have attracted higher skilled workers, who in turn have made those places more successful. In fact, I argued in the lecture that these two factors explain resurgence, the resilience of places to the downturn and the likely economic future of British cities.

Of course, such stories are easy to tell, but a lot of work we do at SERC is about trying to gather much more systematic evidence on what drives the underlying performance of cities. It turns out that this more rigorous evidence is pretty consistent with the story I have just told. For example, research that I did with Steve Gibbons and Panu Pelkonen followed hundreds of thousands of workers as they moved across areas in Britain. This allowed us to decompose area differences in wages in to an 'area effect' driven by where people live and a 'people effect' driven by the kind of people that live in an area. We found that people effects, i.e. the composition of the area, were the most important factor underpinning area differences in wages. Area effects do, however, play a role and SERC research tries to understand what causes those area effects. Why is it that workers are more productive when they locate in some places rather than others?

The evidence (not just from SERC) suggests that pure size of the place plays the most important role in understanding area effects. Bigger places makes it easier to interact with other firms and people (be that buying and selling from them, or alternatively exchanging ideas with them). Such agglomeration economies - benefits from size - tend to be self reinforcing. As a place becomes more productive it attracts more people and firms which, in turn, makes it more productive. If a place itself isn't big, the next best thing is often to be well connected to places that are big and successful (think commuter towns around London). It also helps to have lots of skilled workers because composition appears to have an additional affect on productivity over and above the fact that higher skilled people earn more. Finally, it helps if an area happens to have one of those industries that do well in cities, or is doing well nationally. These issues are discussed more extensively in our work for the Manchester Independent Economic Review.

If these benefits tend to reinforce one another, how come we don't just have one or two very large cities. The answer, of course is that the costs of living and working in a city also rise as cities grow. These costs play an important part in the second half of the lecture.

With a better understanding of what drives the economic performance of cities, we are better placed to start thinking about the impact of different urban policies. In the lecture, I drew on some of our work in progress to make the case that it's very difficult for policy to directly target and improve area productivity. Often, area based initiatives like the Single Regeneration Budget and Local Enterprise Growth Initiative appear to simply shift employment around relatively small areas (most economists don't find this terribly surprising). Giving money directly to firms (e.g. through Regional Selective Assistance) does seem to be able to create some additional employment at larger spatial scales but doesn't seem to have any measurable effect on productivity. That's troubling from a productivity point of view, because increasing employment in smaller low productivity firms will tend to drive down area level productivity. Improving road links has similar impact - it clearly effects the location of employment, but in our research to date, measurable effects on productivity have proved allusive.

If the evidence that we have suggests it's very hard to affect area level productivity, are there other things that urban policy can do to help improve the economic performance of British cities and respond to the challenges they face? In the second half of the lecture I argued that this might be achieved by paying far greater attention to the costs of living and doing business in our more successful cities. I'll outline my arguments on those issues in more detail in tomorrow's post. If you can't wait till then, you'll have to listen to the podcast.

Thursday 10 January 2013

The Boles 'Bung'

Interesting to see Nick Boles suggesting that local communities will get some share in the (Community Infrastructure Levy) development gain generated by new housing.

CIL is a charge that Local Authorities can impose on new development. The money can then be used to fund infrastructure in the local area. Nick Boles ring fencing of a share of this money for town and parish councils is trying to do several things. First, by varying the amount depending on whether or not there is a neighbourhood plan he's trying to provide incentives to draw up such plans. Second, he's trying to counter NIMBYism by giving the most directly affected residents a financial incentive to say 'yes' to development.

There's just one problem with this - LAs need CIL money because new development imposes costs on them that it's impossible for them to recoup (at least in the short to medium term) because council tax from new homes only generates a small percentage of local revenue. Even then, those future council tax revenues might not be enough to cover the additional costs of new housing (schools, roads, etc). The rest of the cost comes from central grants that are (a) slow to adjust and (b) open to all kinds of central government manipulation.

Using some CIL money to try to tackle NIMBYism, reduces the usefulness of CIL money in offsetting the financial disincentive LAs face when agreeing to new development. My gut feeling is that CIL income isn't likely to be enough to both offset the cost of new development and compensate local residents affected by those developments. For that, local communities need to be able to hold on to more of the gains that come from allowing new housing. That either requires reforms to the local tax system or some kind of ring fencing of central government tax revenues generated by expanding local authorities. It's hard to see either of those happening on a large scale anytime soon.

[PS: One final point - one might have thought that a government committed to localism would leave LAs free to decide how best to split the income from CIL depending on local circumstances. Oh well ...]