Bigger cities are more productive but higher cost: what policy could do but doesn’t

Posted by Paul Cheshire, LSE Geography & Environment and SERC 

Originally posted on the British Academy blog

Cities are founded on specialisation. They were ‘discovered’ about 14,000 years ago and are arguably humanity’s most important invention. Why did we invent the wheel? Probably because the productivity advantage those early cities generated led to the need and ability to pay for food from ever further afield. The productive city-dwellers created not only a need – to transport food further and in larger quantities – but the resources to pay for it.

This strength of cities – specialisation – persists and except for military defence – the advantages and specialisms of cities are still today as they emerged millennia ago: specialised services, artisans and skilled manufacturing, cultural activities and industries, specialised retail and government and administration.

Cities, however, are the constructs of people and they are about people: systems to produce welfare and increase productivity. So buildings, design and infrastructure are a means to an end, not the end itself. And enhancing the built environment cannot promote prosperity or happiness in itself – but can if it improves people’s lives or productivity and is critical in helping cities deliver welfare and productivity more effectively. Yet, while cities are economic & social constructs, policy dominated by ‘design’ & ‘engineering’ modes of thought. Architecture and urban design have been the intellectual traditions urban policy has drawn from rather than urban economics or sociology. But urban economics for certain has made great progress in the past 15 years or so and has valuable things to say relevant to urban policy.

As cities get bigger their capacity to increase productivity and deliver welfare increases. Economists call this phenomenon ‘agglomeration economies’. Over the past 15 years or so we have succeeded in generating quite credible estimates and it seems as if doubling a city’s size produces about a 5% increase in total factor productivity (TFP), holding everything else constant. This implies that going from a city the size of Bradford or Cardiff to one the size of Leeds would increase TFP all else equal by 5 or 6%: and going from a city the size of Leeds to that of London by 18%.

There are also direct consumption benefits of city-size: bigger cities, all else equal, improve the quality of people’s lives. There is a wider range of goods and services available and more neighbourhoods of different character. One of the major sources of satisfaction is ones relationships with neighbours and the larger a city is, the more varied are its neighbourhoods and the easier it is to find congenial neighbours. Another obvious advantage of larger cities is that many activities depend on audiences, so the larger a city is, the more specialised its venues can be. To take football as an example (but it could equally be opera, classical music, or art) in a city as large as London a football fan can easily choose to watch any one of four or five world class teams and expect to see the greatest stars in the world playing when they visit. This is only possible because of the size of the audience. For these consumption benefits of larger cities, however, there are not yet any really reliable quantitative estimates.

The problem is, however, that costs also rise as cities get larger. Partly because of agglomeration economies more firms and people bid to get access to the higher incomes, revenues and welfare bigger cities generate, so the price of space rises. So, too, do other costs such as congestion and pollution. Until very recently people assumed that these increasing costs just ended up cancelling out the agglomeration economies and cities stopped growing; even got too big.

Recent research by a French team is the first to provide a serious quantitative estimate of how these costs increase with size and what particular features of cities drive the rise in costs. It finds that while, with a fixed land supply, costs do rise at about the same rate as agglomeration benefits in productivity, if land supply is elastic, the rate of increase of costs with size is only about 0.4 times that of the benefits.

The clear message for urban policy is to relax constraints on land supply subject to possible environmental costs. Alternatively, that the increase in price of farmland at the fringe of British cities that would result from allowing it to convert to housing is a measure of foregone agglomeration economies. Getting permission to build houses on a hectare of farmland on the northern fringes of London would increase its price from perhaps £20,000 to £12m: a clear signal of the loss of value imposed by not letting more people live where they really want to. Letting more people live where they find life most attractive and productive we could reap the benefits of bigger cities but pay far less in terms of costs. Cities can be both bigger and better; and better by being bigger.

The two other types of cost that rise with city size are those of congestion and pollution. Again urban economics has a clear policy message. We should impose a charge on congestion that reflects the extra costs any journey causes to others as accurately as possible. The London Congestion Charge is better than nothing but does not do the job as effectively as it might since it is not closely related to the congestion costs any given journey creates and, as a cordon charge, in fact generates an incentive once you have paid the charge to use your vehicle.

Pollution is, like congestion, an externality; the price any individual pays does not reflect the costs imposed on others by their actions but pollution is less obviously amenable to pricing. Instead regulation can be very effective but often needs to be at well above the city level both because the wind carries pollutants across administrative boundaries and because imposing technical changes on, for example farming methods or vehicles, requires action at the national or international level. It may seem odd to include farming in this account of urban policy but the most recent findings are that emissions from intensive agriculture - mainly of ammonia – are the single most important cause of premature death for city dwellers in Western Europe from air-borne particulates.

Three challenges facing the Northern Powerhouse

Posted by Neil Lee, Department of Geography & Environment and SERC 

The Northern Powerhouse is the government's latest attempt to spatially rebalance the economy. The idea is that by joining the cities of the north into a single functional agglomeration, they would have the scale and critical mass to counterbalance London. The optimistic goal is to ‘reverse the North-South divide'. The agenda has achieved public recognition far above other economic development policies, although this is a pretty low bar.

I’m speaking today at the Social Market Foundation on the economics of the Northern Powerhouse, as part of their 'ask the expert' series (I have a new SERC policy paper on the topic). There’s an element of fraud about my presentation: the Northern Powerhouse is far too fuzzy and wide-ranging for anyone to be an ‘expert’ on everything. It has become a broad agenda which drifts far from the theoretical underpinnings, with significant moves around devolution of powers, new and better coordinated transport, investments in science and innovation, and some tokenistic moves around culture. Many of these would have happened anyway, but my research suggests there has been some (limited) new investment.

There is much to agree with in the Northern Powerhouse agenda. It is loosely based on the economics of agglomeration and an optimistic view of cities as a driver of growth. Many of the institutional reforms, notably Transport for the North, seem overdue. And it is a great brand. But there are also some significant issues with the agenda.

First, it is geographically vague – and this has led to competition for resources. It isn't clear if this is an agenda about providing a single counterweight to London, or about creating an equal playing field across the North. As Ben notes here, spreading the jam too thinly risks achieving little. In addition, perhaps with an eye on the promised new finance, lots of places outside the North are also trying to become ‘Powerhouses’.

Second, it isn’t clear whether there is enough jam to have any meaningful impact. The government claims significant new investment as part of the agenda. But the evidence here is shaky. There is a long-standing debate about the extent to which government investment favours different places, and there is no definitive figure on Northern Powerhouse spending in official reports. A rough estimate suggests that while there has been some new resources, the new spending is around £10bn - nothing compared to that going into projects like Crossrail (I'm grateful for updates on any of the numbers here). Moreover, they must be set against significant general reductions in finance for Northern local authorities.

Third, it is unconvincing on the most important driver of disparities in the UK: skills. Wider improvements might (indirectly) attract skilled workers, universities do get more resources and some devolution deals will touch on skills. But these are minor parts of the agenda - and Jim O'Neill (Minister for the Northern Powerhouse) has recently begun to recognise the importance of education and skills to the success of the agenda. It is hard to see an easy solution, however. There are longstanding concerns about vocational education in the UK; so passing the buck to local areas would not be a great move. But spatially targeted improvements in schools seem to have had some impact in London. New ideas, particularly from the northern councils, are important here.

Turnover is not supply

Posted by Felipe Carozzi, Department of Geography & Environment and SERC

An article published in the Economist this month linked transaction volumes in the British housing markets with housing supply. Given that newbuilds usually amount to less than fifth of all housing sales, the sale of used stock is a key determinant of housing supply. According to the article, this is often overlooked by economists emphasizing the need for increased construction to boost supply and slow price growth in the United Kingdom.

This argument contains a slight confusion about what constitutes housing supply. Economists usually think of the stock of occupied houses as providing housing services which are enjoyed through renting or homeownership. According to this perspective housing supply is not necessarily determined by turnover (frequency of house sales), at least as long as the vacancy rate is relatively constant over time. Hence, transaction volumes do not in and of themselves increase supply. To illustrate this point, suppose there is an increase in the number of households moving home. It is true that these households will increase the number of houses on sale, but they will also increase demand for housing units in the market by (exactly) the same amount. Overall, total housing demand and supply of units remain unchanged. So the emphasis on turnover as a tool to curb increasing prices is misplaced.

Admittedly, it is true that some forms of turnover (e.g. trade downs by older households) may foster a better match between the size of households and their homes. But it is unlikely that this would solve the broader problem of insufficient supply in the South East.

Telling evidence on the relationship between sale volumes and prices can be found when looking at the series for different regions within England (available at the Land Registry website). Transaction volumes are low in all regions by historical standards. However it is only in the South East that prices have recovered to pre-crisis levels, and continue to increase. And low turnover is not the explanation for it.

Greenbelt Madness: or how to get it back to front

By Paul Cheshire, SERC and LSE Geography & Environment

A couple of year back I blogged about how the legalistic mechanics of land designation were threatening to destroy one of our most special wildlife sites. The most important nesting site for nightingales in the British Isles it might be but it was also a former Ministry of Defence site on the Hoo Peninsula. So it was a ‘Brownfield’ site and thus ‘judged’ suitable by Kent to accommodate 5000 houses. Goodbye nightingales….

Almost ever since I wrote the nightingale blog in 2013 planning lawyers have been locked in battle and earning a fortune arguing about whether the site on the Hoo Peninsula is, or is not, truly and legally ‘Brownfield’. No one is arguing about the real point: its importance to our rapidly diminishing remnant population of nightingales. Our planning system does not deal in reality; only legally constructed reality.

Now we have another case in Cambridge which illustrates the point in microcosm. The City is short of land for housing and housing is unaffordable there (we Brits have constructed a magic formula that means we build twice as many houses in Doncaster and Barnsley each year as in Cambridge and Oxford). Cambridge, in its desperation, has even proposed building some houses in its Green Belt. But now there is a proposal for 3 houses CLOSE to the Green Belt and this is causing an outcry.

The tragedy is that there are reasonable grounds for opposing building these three houses, on this particular site. Not because it is close to the Green Belt - less than 200 metres from the boundary. But because, unlike Cambridge’s Green Belt land, this site actually has significant environmental value and is probably used as an informal adventure playground by local kids. It is a part of the old Cherry Hinton Chalk Pits – from which the lime to build many of Cambridge’s ancient buildings came. Quarrying ceased in the 1980s and most of the site reverted to nature and is now a designated wild life area with rare chalkland flowers and butterflies. One of its plants – the Moon Carrot – is found in only 3 places in Britain; the Cherry Hinton Chalk pits, Beachy Head and Knocking Hoe in Bedfordshire. The 3 houses proposed are on a small section of the Chalk Pits filled with excavations for the new Addenbrooks hospital building. So probably no great rarities on this site: just a pleasant semi-wild little urban green space.

The real madness is that the outcry is not because it is a pleasant urban green space with a potential for nature and informal recreation: but because it is ‘near the Green Belt’. 74 percent of Cambridge’s Green Belt is intensive agriculture, providing no wild life habitat and no recreational value: just privately owned, subsidy-attracting, ‘tax-efficient’, chemically-drenched desert. Bounding the Chalk Pit Wildlife reserve is an endless expanse of arable crops. Google earth suggests heavily sprayed cereals in the nearest field – perhaps 30 hectares – and maybe rapeseed in the next 30 hectare field. Developing 60 hectares at 50 houses /Ha would mean 3000 much needed houses and still have a net gain in terms of environmental quality, biodiversity and equity.

According to Kate Barker in 2010 agricultural land at the edge of Cambridge – despite its subsidy and tax avoidance advantages – was worth only £18,500 per Ha: but with planning permission for houses the value shot up 150-fold to £2.9m. As Martin Wolf said in the Financial Times a year ago: “…building an economy upon a massive and growing distortion in the market for land is foolish. We do not need to concrete over England. We do need to stop constraining the growth of the places where people really want to live.” We do not need 3 houses on a pleasant little green urban patch: we need 3000 more, please, on the adjoining intensive agricultural land!