On Your Bike (Policy Exchange no Longer Insane)

It's interesting to see the government raising the issue of helping people move to take advantage of job offers, given the way they got their fingers burned when Policy Exchange suggesting something very similar sometime before the election.

I think the evidence on this is clear. Some places are better at generating job opportunities than others. For many years policy has tried to fix this by creating more job opportunities in places that are not generating enough employment. This policy has not worked very well. Therefore, it seems sensible to put more focus on helping people to move to jobs (rather than moving jobs to people). Two important caveats. First, it's important not to overstate the likely impact. Where you live is far less important a determinant of job market outcomes than who you are. Unemployment in London remains a big problem for those at the lower end of the labour market. Second, high house prices in better performing areas are a crucial economic barrier that prevent people from moving to take advantage of opportunities. It is still unclear how government intends to address the question of providing LAs with adequate incentives to address this problem.

Housing and the budget

John Muellbauer, of Oxford University (and a SERC affiliate) has a nice Guardian comment piece on housing.

John is one of the economists who did "see it coming" in the sense that he has been talking about problems in the housing market for a long period of time. Unfortunately, while the coalition government's decentralisation plans are surely welcome, it's still unclear (as John points out) what, if anything, they are going to do to provide appropriate incentives to LA's to allow residential and commercial development.

Well, that's one (brownfield) target met

In 1998, approximately 50% of development occurred on brownfield land (a figure that had been remarkably stable for long periods of time). The Labour government committed itself to a target of 60% of new development on brownfield land by 2008. The target had been met by the early 2000s. In 2005, 73% of new development was on brownfield land.

Brownfield land is expensive to build on. It is often re-developed at high density to meet national targets. Lots of it is in ex-industrial cities where demand for housing is low. Large pieces of land that become available (ex MOD of NHS sites) are some way from existing settlements (working against stated objectives on densification). Worse, as highlighted by the coalition government today, a large proportion of building on "brownfield" land has been building on private residential gardens.

In short, top down targets for brownfield land haven't delivered the kind of housing people want in the places where they want to live. They have also been terribly unpopular with local residents. If top down planning doesn't appear to be making anyone happy*, then you have to welcome today's announcement to localise decision around building on private gardens.

But, all of this comes with a very big caveat: It is still unclear how the coalition government is going to ensure local residents in popular places are offered sufficient incentives to say "yes" to new housing. Partly the existing brownfield target was met because not many houses were being built (and not just in the recession). Prevent building on gardens and supply falls further. Lower supply means higher prices and greater price volatility. We are promised more reform of the planning system, if we are not to make the same mistakes as the last government, it has to tackle the incentive problem head on.


*[I guess it makes planners happy - by some figures the sixth fastest growing occupation in the England in the past decade]

Big Society: Local Planning

From the CLG highlights, I think that for this to work:
"Giving communities a greater say over their local planning system"
we will need this:
"a comprehensive review of local government finance"
or something similar to provide sufficient incentives to make sure that new commercial and residential building can happen in popular places where people and firms want to locate.

Devolving decisions coupled with a system that provides decent incentives should be a better solution than top down spatial plans. But the first without the second will spell trouble in the form of restricted supply leading to higher (and more volatile) house prices and commercial rents.

Cuts, cuts, cuts

RDA's spend around £1.5bn per year. Administration accounts for about 7% of this. The Homes and Communities Agency is budgeted to spend £6bn this financial year. Administration accounts for less than 2%. It should be clear that efficiency savings in the delivery (e.g. through abolishing these quangos) will only make a small difference to the overall expenditure. The new government is going to have to cut programme expenditure. So the crucial question is: what should it cut?

I would significantly decrease government expenditure on the provision of commercial real estate. In a few places (the centres of Manchester, Leeds, Newcastle) such expenditure has probably positively reinforced developments in the private sector. In poorer areas and cities with weaker economies, I believe that shiny new government funded buildings simply transfer employment from other places in the immediate area and as a result don't provide significant employment benefit.

I would continue some of the public realm expenditure in more deprived neighbourhoods. I would focus on the public good (amenity) benefits these deliver to poorer families. For example, public space provision (e.g. parks) likely has large amenity benefits in poorer neighbourhoods where families have little private space. The benefits of signature buildings and public art are, shall we say, less clearly defined.

Improving the quality of private space (e.g. via decent homes) clearly benefits poorer families, although it may cause other problems - e.g. decreased incentives to work. That said, crappy social housing is surely not the best way to deal with these problems so some component of decent homes expenditure should stay.

The government should spend less on building houses. According to the HCA around a half of the homes delivered this year will have been (part) funded by the government. This figure is distorted by the recession but why does the government need to be so involved in the provision of affordable housing? The simplistic answer is that "house prices are too high". But what drives this are policies which raise costs: e.g. the national brownfield building target (because building on polluted land is expensive) and supply restrictions from the planning system. In effect, government restrictions raise land costs, which raise the price of housing, which makes housing unaffordable, so the government spends large amounts of money to provide affordable housing. Government has it in its power to change these restrictions (e.g. through taxing developers and land owners and giving the money to local homeowners, LAs etc, negatively affected by new building).

Moving away from the built environment, there is a case to be made for reducing the amount spent on corporate welfare (specifically giving money to business to locate in poorer areas). I would stop funding pretty well everything which simply shuffles around the existing pool of high skilled workers and focus instead on things that directly improve the employment prospects of poorer residents. Generally, I think that corporate welfare is an effective way of getting firms to locate in places that they otherwise wouldn't. But it is expensive and it doesn't turn areas around (at least on the basis of fifty years expenditure to date).

If the cuts fall in all these areas, it would allow us to protect expenditure that I think matters most - that on improving educational outcomes of poorer children and improving the labour market prospects of poorer adults.

RDAs: It's what you do, not the way that you do it

Before the election, I prepared an election briefing for the CEP on regional and urban policy. It touched on some of the difficulties in evaluating RDAs and concluded:"In short, there is no compelling evidence as to whether the RDAs are a good or bad thing. Labour is committed to them; the Conservatives and Liberal Democrats are (probably) committed to abolishing them. It should be clear that these positions cannot truly reflect evidence-based positions on RDAs’ effectiveness." Revisiting the evaluation evidence over the last few days really hasn't done anything to change my opinion on this.

Even if you look at the overall growth performance it's still impossible to make an evidence-based judgement. Individual region growth rates and the gap between the growth rates in the North and South are essentially unchanged in the periods before and after the introduction of RDAs. If you think the underlying trends (net of the effect of government policy) would have been the same in the two periods, then RDAs were more effective than the previous arrangements if they spent less money (and vice-versa). What if you went to the data and the RDAs had spent more? This looks bad for the RDAs unless you think that things would have got progressively worse for the Northern regions in the absence of intervention, so we had to spend more to stand still. In short different assumptions on the counterfactual (what would have happened in the absence of government intervention) allow you to reach different conclusions, but as the counterfactual is unobserved the aggregate data can't help us much either.

In the end, what we are left with are the broad arguments around costs and benefits of different arrangements. My feeling is that, on balance, the somewhat arbitrary regional structure makes less sense than something based around groupings of Local Authorities. The latter have democratic legitimacy. Such groupings are also more likely to end up covering "functional" economic areas (i.e. sub-national areas in which intra-area economic interactions important). Although, the evidence on whether this makes much difference is surprisingly limited.

In the end, given the evidence we have, I think that we are better placed to answer questions about what policy should do, rather than how it should be delivered. More on this next week.

RDAs and evaluation: A bit more value added

It suddenly occurs to me that I am in danger of appearing contradictory. I complain that I can't learn a lot from the cross-cutting RDA evaluation but then I suggest that its an example of an area where systematising evaluation across subnational organisations may have big payoffs.

Let me clarify - I think systematic evaluation is better than no systematic evaluation. My major problem with the cross-cutting RDA evaluation is the reliance on user benefit surveys to calculate additionality. The recent practical guide from BIS notes: "To assess the net impact of an intervention, information is needed on the situation that would exist both with and without the intervention. The standard approach is to use a beneficiary survey – asking questions on the impact [...] and getting beneficiaries to estimate what would have happened otherwise. There are clearly limitations with this methodology. A more robust approach is to compare the change in activity and outputs of beneficiaries before and after the intervention against the achievements of a control group (i.e.: people/businesses that would have been eligible for support but did not receive it). However, results are dependent on identifying an appropriate control group, which is not possible in many cases. [...] In addition, a control group approach is usually more expensive than beneficiary surveys. As a result, using a survey of beneficiaries is generally the preferred approach when balancing costs and benefits of the two methods."

I agree with much of this. But the point is that when you are talking about spatial policy there are complex interactions that mean the impacts extend beyond the direct beneficiaries. Further the beneficiaries have absolutely no idea about the nature of these complex interactions. As a result beneficiary surveys are often not a great way of evaluating spatial policy. To be clear, hopefully better than nothing, but not great.

Quite simply, when you are spending large amounts of money on spatial policy (collectively the RDAs have spent around £15bn) by all means use "light touch" beneficiary evaluation for some (even most) of it. But (i) you shouldn't read too much in to the results and (ii) at least some of your evaluation work needs to try and tackle these issues through more robust analysis.