Time for a no risk £30bn stimulus package?

I haven't been heavily engaged in arguments about whether the government should currently be borrowing more to try to stimulate the economy. My simplistic take on the argument is that some people think 'the cost of borrowing is low so we should borrow and invest' while others think that 'borrowing more will raise the cost of borrowing'. Distinguishing between these two arguments requires taking a stance on sentiments in the bond markets - a subject on which there appears to be plenty of strong opinion, but precious little evidence.

This has led the SMF (and others) to call for a 'balanced budget' plan for growth. This involves making cuts to low growth areas and recycling to high growth areas. If government wants to go beyond this - say to fund Jonathan Portes' £30bn infrastructure package - it would need to borrow more and we are back on to concerns about what this would do to the costs of borrowing (even if the costs of serving that debt are currently low).

But what if the UK had very publicly committed itself to some large amount of spending on a low return project that would only pay off very many years in the future? Couldn't we take the money from that and spend it now on a fiscal stimulus without affecting the cost of borrowing? After all, if investors were concerned about the borrowing for the project they should already be factoring that in to our cost of borrowing given the fact that the government is committed to it.

Step forward high speed 2. Costly, controversial and offering poor returns over a very long time period. Wouldn't a decision to scrap HS2 (made credible by the winding up of HS2 Ltd) allow us to spend more money now without having to worry about the impact on the cost of borrowing? Sure, scrapping HS2 would involve the government changing direction on something they have previously supported. But changing direction on one contentious infrastructure project has got to be easier for the coalition than selling a wholesale shift from plan A to plan B. And in a happy coincidence, the costs of HS2 are predicted to be about £30bn so scrapping HS2 would nicely fund Portes' infrastructure package without us even needing to resort to additional pasty taxes.

No Alternative to High Speed Rail?

So, the parliamentary group whose "objectives are to raise awareness of the need for high-speed rail among parliamentarians" has published a report saying that we, er, need high speed rail. I think it would be fair to say that this is not a huge surprise.

I won't reiterate the overall arguments that I have made many times before. One specific comment, however: by the time HS2 is finished there will be congestion all over the transport network (see the Eddington report). The costs and benefits of easing that congestion are quite well captured by standard cost-benefit analysis. On the basis of standard cost-benefit analysis HS2 does badly relative to other projects. In other words, if the arguments in favour of doing HS2 are about capacity (as this report suggests) then HS2 should be far down our list of priorities relative to other investments that address future capacity problems on the transport network.

House Prices: Local Booms and Busts

The most recent American Economic Review has a set of interesting papers on 'Very Local House Price Dynamics'. It's surprising how little we know about what happens within cities as house prices boom and bust. As usual, one of the biggest barriers is absence of data. Now, new detailed data sets are allowing researchers to make progress in considering these issues. It's also possible that the fairly long duration of the boom had simply pushed this issue lower down people's radar in terms of an interesting research question.

But interesting it certainly is. For today, I'd particularly highlight work by Veronica Guerrieri, Daniel Hartley and Erik Hurst that looks at within city variation in urban decline in Detroit[1]. They show, unsurprisingly, that 'the declines in population and income were not experienced uniformly across the census tracts within Detroit.' More surprising, however, is the fact that 'the poorest census tracts experienced the largest declines in population while it was the rich census tracts that experienced the largest declines in income. In particular, it was the relatively rich neighborhoods that were in close proximity to the richest neighborhoods that experienced the biggest income declines.' What this suggests is that population decline drives the remaining rich to greater concentration, while the poor move in to the neighbourhoods that they leave behind. The first effect tends to stabilise the population in the richest neighbourhood, while the latter effect drives both the larger decrease in population in poor areas and the larger fall in average incomes in relatively rich neighbourhoods (a kind of reverse gentrification).

In some ways, perhaps this seems obvious. But many people when talking about declining cities have a tendency to suggest that the markets simply collapse and that concepts like 'sorting' (of different income groups driven by market forces) are therefore no longer useful for thinking about urban structure (these cities are in 'disequilibrium'). In contrast this paper suggests that those forces continue to operate even in a city like Detroit which has seen massive declines in population.

[1: Open access version from Feb 2012 here]

Road Pricing

A new report from the IFS makes the case for road pricing:

"Such a move would generate substantial economic efficiency gains from reduced congestion, reduce the tax levied on the majority of miles driven, leave many (particularly rural) motorists better off, and provide a stable long-term footing for motoring taxes without necessarily raising net additional revenue from drivers," the IFS said.

No arguments here, but the political economy remains horrible: economic efficiency arguments are a hard sell relative to emotive ones around freedom, impact on business etc. I don't know if there is any evidence to suggest that the argument that this would replace other vehicle excise taxes would be enough to placate those so bitterly opposed. Depressingly, I suspect not.

Is the Regional Growth Fund rubbish?

Reporting of the NAO report on the Regional Growth Fund has highlighted the fact that the 'scheme may cost up to £200,000 per job'.  A senior labour MP tells the BBC that they find these figures 'shocking'.

But before we get carried away, it's worth noting two things. First, the average cost per job isn't that different from similar schemes with comparable objectives (NAO is very clear on this). Second, before concluding that the £200k per job maximum is 'shocking' we might usefully look back at the maximum cost per job achieved by the RDAs. Upon quickly flicking through the PWC report (vol 2) I see that EEDA's innovation capital project was estimated to cost 213k per job (table 40); EMDA's tourism marketing managed an impressive £1m per job (table 71); the LDAs Centre for Fashion Enterprise cost £259k per job while its pre-commercial fund cost £217k per job (table 101).

As I have explained before, I take all of these figures with a pinch of salt. But it's simply not helpful to compare the maximum from the RGF to the average from other programmes and reach any conclusion about the effectiveness of the RGF. I am sympathetic with the NAO argument that one might question why policy doesn't pick the highest value for money projects - but this argument would appear to apply as much to RDAs as it does to RGF.

I am not a massive fan of the RGF. I have always argued that RGF should have (1) had money ring-fenced for skills and focused on people; (2) handed money to LAs (or LEPs) to do with it what they want; (3) spent the rest on projects that delivered highest value for money. I continue to think that this would be a better set up for the fund. But I don't buy the argument that these figures tell us that RGF is somehow worse than RDAs.

Of course it depresses me that governments invest in schemes that represent bad value for money - but that's politics for you.

Back where they started?

Posted by Prof Tony Champion, SERC and CURDS, Newcastle University 

Most people agree that our big cities have had a pretty good 90s and 00s. In the past two decades, big cities like Manchester and Liverpool have had a physical makeover and have seen employment and jobs growth.   

But how well have the big cities actually done, in relation to each other and to London and the country as a whole? And with the UK economy entering a second phase of recession, what’s been the impact of the first recessionary dip? A new SERC paper, of which I am co-author with Alan Townsend, sets out some key facts and figures (see below).

It’s easy to over-claim the urban renaissance, at least in terms of raw numbers. Even before the 2007 banking crisis, the State of the English Cities report showed that, while cities had been making a comeback in the decade to 2003, the scale of population and employment growth for urban England had been relatively modest and patchy.

Subsequent analysis by Alan Townsend and me showed that in the 10 years to 2007, employment growth in England’s eight Core Cities’ city-regions was consistently below the national level – except in 2000-2, around the dot-com downturn. And while their jobs growth accelerated in the late 1990s, it then slowed in the 2000s.

Alan and I have now updated the analysis to 2010, allowing us to see the recession’s initial impact on employment. As the credit crunch took hold, most people expected London to be the most severely impacted part of the country – much as it had been in the early 1990s downturn. But as SERC colleagues have explained, London seems to have ‘got away with it’. In fact, our data (which now includes Glasgow as well as the eight Core Cities) suggest that, for these city-regions, this recession feels more like the early 1980s. 

Between 2007 and 2010, these nine city regions saw their combined employment drop by over 320,000 Full Time Equivalent jobs. This is a drop of 4.9%, compared to a fall of just 2.2% for London’s city region and 3.5% for Great Britain as a whole.

The worst-hit city regions in our study were Birmingham and Glasgow (both -8.0%), followed by Liverpool (-5.5%), Newcastle (-5.3%), Manchester (-4.5%) and Sheffield (-4.3%). Bristol was in a class of its own, seeing its FTEs rise by 1.8% against the national trend, while Leeds and Nottingham were around the national average (-3.2% and -3.8% respectively).

The bad news for local leaders across these city-regions is that these impacts eroded much of the employment growth of the previous decade. Allowing for discontinuities in the data, we find that Birmingham’s city region was set back the most; its 2010 FTEs were the lowest since 1996. The equivalent dates are 1999 for Glasgow, 2000 for Liverpool, 2001 for Newcastle, 2002 for Leeds and Manchester, 2003 for Sheffield and 2004 for Nottingham. By contrast, for London city region, the 2007-2010 downturn has only shifted FTEs back to 2005. Many of these cities now clearly face a big uphill struggle in their efforts for economic growth – made all the harder by the post-2010 public-sector cuts and by the lack of growth nationally.

Cities reject elected mayors

It looks like most, if not all, of the cities offered a choice are voting no to mayors [check Centre for Cities for a useful running commentary on results].

I confess to being fairly indifferent (a position I would appear to share with the vast majority of the electorate judging by the turnout figures). There have been some pretty strong claims made for mayors off the back of relatively little evidence. When it comes specifically to the issue of economic growth, what evidence there is supports metro-mayors (covering wider areas), not the directly elected Local Authority leaders which are on offer this time round.

As Diane Coyle argued on her blog yesterday, "to have a mayor or not doesn’t seem to me to be the issue, so much as what decision-making powers are decentralised, and the quality of governance applied to decisions at the city region level." I agree with this assessment. As has been widely discussed, the government were very vague on powers, with some arguing that this contributed to the strength of the no vote.

A couple of other reflections. First, there is a certain irony in the fact that Labour went for a new tier of government that was arguably 'too big' (elected regional assemblies) while the coalition have gone for something that was arguably 'too small' (elected local authority leaders). Second, surely the discussion on mayors has to go on the back burner for now, with focus instead on further city deals? Further down the line, perhaps government can return to this issue with stronger proposals around metro-mayors and a set of negotiated city deals which better clarify the issue of powers and what mayors might actually do.

[Update: Bristol says 'yes'; so perhaps the intial pessimism misplaced, but my general indifference unchanged]