How did London [...]? - Lecture

If you weren't able to make it to my lecture on "How Did London Get Away With It?" both the podcast and the slides now available.

How Did London Get Away With It?

I am giving a public lecture this evening at LSE where I seek to answer this question. In case you cannot make it to here is my basic argument ...

It was widely expected that London would be the most severely hit of the UK regions in the recession brought about by the 2007-08 financial crisis. Because London was more reliant on financial services, and because financial services were most directly affected, incomes were expected to fall harder than in other cities, and it was predicted that unemployment figures would be greatest in the capital.

However, this has not turned out to be the case, and both income and employment in London have fared better than expected. The latest data show that London’s income per capita fell around 2.5 per cent between 2008 and 2009, while it fell 2.9 per cent for England as a whole. Only the north-east and west had lower falls than London, at around 2 per cent. But between 2007 and 2008 London grew nearly twice as fast as those two regions and, of course, London was already much richer. In terms of employment, the UK saw peak-to-trough falls of 3.9 per cent, whereas London saw only a 2.6 per cent fall.

TABLE (http://www.statistics.gov.uk/pdfdir/gva1210.pdf)

House prices too tell a similar story. Data from the Department for Communities and Local Government shows that between March 2008 and December 2010 house prices rose 1.4 per cent in London, compared to a fall of 1.2 per cent in the south-east. The Midlands and Northern regions saw falls in excess of 3.5 per cent whereas in Yorkshire house prices fell 6.1 per cent. There were also many other signs that the capital was holding up and that Londoners were happier than ever to spend on luxuries, such as a growth in theatre box office takings between 2008 and 2009. Between 2007 and 2010, average attendance for London premiership football clubs was flat, while it fell 6 per cent in the midlands and 5 per cent in the north. As a colleague remarked to me, “it feels like London got away with it”.

But if London did get away with it, how did it get away with it? One crucial factor is that the recession has not been as bad for the middle classes as expected. According to the Labour Force Survey, for England as a whole, professional and service occupations were less badly affected than administrative, trade and basic occupations. This helps the south as professional occupations account for a larger proportion of the labour force (nearly 50 per cent, compared to under 40 per cent in the midlands and the north). Reinforcing this overall trend, London’s employment in professional occupations held up particularly well and London also performed better in administrative, trade and service occupations. Only in the lower skilled occupations did London fair worse.

Understanding why the professions fared better in London than in the rest of the UK is difficult. It’s unlikely to be explained by public sector employment. Only in the south-east does public sector employment account for a lower share of the economy. The same is true for public sector expenditure as a percentage of overall expenditure. An outflow of illegal immigrants, differences in the effect on hours worked and real wages may all have played a minor role. London has higher house prices, so the impact of interest rates on mortgage payments has been larger. But, as with fiscal policy, relative to expenditure there is not a big differential with the rest of the country. In contrast, the impact on the very wealthy probably worked against London. The overall wealth of the UK’s richest 1000 fell by £77bn between 2007 and 2009.

Could the bailout of the banks play a role? Again, this is a surprisingly difficult question to answer. The Office for National Statistics haven’t yet produced the regional distribution of jobs directly affected by the government bailout the banks. Looking at what happened to public sector employment by region when these workers get reclassified gives a rough approximation. This suggests that London had the highest share of “bail out” jobs: around 16 per cent of the 220,000 jobs affected. Turning to the indirect effect of bank bailouts, Andrew Haldane at the Bank of England estimates that reduced risk because of government measures saved the banks £107bn in interest costs in 2009. More than 90 per cent of this went to the big five – HSBC, Barclays, RBS, HBOS and Lloyds – all of which are disproportionately represented in London. We do not yet know the impact of this on the London economy.

At least one other government intervention also disproportionately benefited London. The Olympic site currently employs 10,000 workers (Crossrail a further 2,000). The effect of these interventions can be seen in the employment numbers. According to the Work Force Jobs Survey, between 2007 and 2010 construction employment fell twice as much in the north as it did in the greater south-east (16% versus 8%). Employment in financial services fell 10 per cent in the north, it rose 5 per cent in the greater south-east.

So, where does all of this leave us? First, in absolute terms and relative to expectations, London appears to have successfully gotten away with it. 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. There is more research to be done to understand whether these economic mechanisms have played a role.

Finally, there are two important things to note. First, to the extent that the bailout and banking sector explains London’s performance, Boris Johnson may be right to worry about “banker bashing”. Second, some Londoners of course didn’t get away with it: the bottom end of the London labour market has seen falls in employment in line with the UK average. This contrasts with other broad occupational categories all of which did better in London. Housing (and other) benefit reforms will hit London and the South East particularly hard. London may have got away with it, but things do not look so rosy for London’s poor.

This blog post is based on the lecture ‘How did London get away with it? The recession and the North-South divide’ to be given by Henry G. Overman at the LSE on Thursday 20th January. Click here for more details.

[Thanks to Max Nathan and Giulia Faggio for help preparing this material]

Space Rationing

In today's Guardian, George Monbiot argues for a new approach to the housing crisis. The government should decide how much space we need per person and then find ways to strongly penalize anyone consuming more than this.

Funnily enough, my colleague Paul Cheshire raised this as a "suggestion" in a SERC policy paper on planning: "The second choice 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."

The difference between the two suggestions is that my colleague was joking, whereas George Monbiot appears to be entirely serious. You can read Paul's paper for the detailed arguments but I, for one, am convinced that central planning of space needs per citizen is not going to improve Britain's housing problem.

It's chaos out there ...

No, not the snow, but the government's approach to localism which one Conservative MP has described as deliberately chaotic (you can listen here - 7.14). There is a serious point here with which many urban economists would sympathise. Because people are different, with different preferences over public good provision and taxation it can be good to have different policies implemented in different places. This holds even if all places are otherwise identical. Add to the mix the fact that places may be different (say rural or urban), and there are many reasons why policy should vary.



The problem, of course, is that the British appear to be allergic to "postcode lotteries" - where outcomes differ across areas - and the hysterical reaction to Nick Boles' comments suggest that nothing much is changing there.

Localism and House Building

The localism bill has confirmed more power to local people to overrule planning decisions.

Back in August, I reflected on the fact that honest and direct debate about housing would convince most existing local residents that they should oppose new homes. The BBC has a nice example of how this might play out in practice.

High Speed 2 - no more consensus

In October this year, I wrote: "The case for spending £33bn on high speed rail is greatly exaggerated; the case is even less convincing in light of government spending cuts; yet all the main political parties are for it. Go figure ..."

One main political party is no longer so convinced by the project it appears. Better late than never, I suppose.

Building regulations

The coalition government has announced that it is scrapping new proposals that would have further tightened building regulations. I don't claim to be an expert on building regulations (they are complex - which is part of the problem CLG are trying to address) but I am fairly confident this is a sensible move.

Tight building regulations for new homes impose a regulatory tax which reduces the number of new homes built (although land prices and planning remain a more important barrier). These regulations are imposed so that new build should be of a better quality than existing stock (with respect to safety, living environment, carbon footprint etc). So, the flow of new housing stock is better quality as a result of building regulations. But the effect on the overall quality of UK housing depends on the flow relative to the stock. Unfortunately, in the UK we build very few new houses so the effect of these tight regulations is almost completely diluted by the state of the existing stock. The coalition government's move should help with the flow rate and providing that the increase in new build is sufficient to offset the marginal decrease in standards will improve the total impact of the regulations on new build. But none of this will have a very large impact - that requires action on the much bigger existing stock.