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!

On the unintended consequences of housing policies: A cautionary tale of three developed countries

Posted by Christian Hilber and Olivier Schöni

This article was originally published on Asia Pathways, the blog of the Asian Development Bank Institute

Lack of affordable housing is a serious policy concern in many countries. In large prosperous cities such as London, New York, Beijing, or Tokyo, the affordability crisis is particularly acute. In these cities, households often live in excessively expensive and crammed spaces. Homeownership remains an unachievable dream for many. Not surprisingly, voters in these places pressure politicians into implementing policies that tackle the crisis. The solutions typically offered focus on the demand side. Policies such as the Help-to-Buy scheme in the United Kingdom (UK) or mortgage interest deduction (MID) in the United States (US) aim to lower borrowing constraints, and thus allegedly help low-income and young households to achieve their dream of homeownership. These policies tend to be popular because of the alleged benefits for the targeted households and the hidden costs for taxpayers. Yet, apart from the fact that these policies are extremely costly—the US MID, for example, costs about $100 billion per annum in foregone tax revenue—tragically, they all too often end up making the targeted households worse off.

The fallacy of demand-side policies

Take the example of the Help-to-Buy scheme implemented by the UK government in April 2013 in response to the severe affordability crisis observed in large parts of England and particularly in the Greater London area. The main aim of the policy has been to help first-time buyers get their feet on the owner-occupied property ladder. The government argued that the scheme would stimulate demand for owner-occupied housing and this should translate into new owner-occupied housing being supplied, leading to a higher homeownership rate. Yet, in the year following the announcement of the policy, house prices in London shot up by 25.8%, a residential building boom failed to emerge, and the homeownership rate continued to decline.

So why did the policy fail so miserably? The fallacy was that policy makers assumed that housing supply would respond to demand stimuli. But this did not happen. One problem was that the UK had—and still has—an extraordinarily rigid planning system. Height restrictions, view corridors to protect certain vistas, conservation areas, and listed buildings, among other restrictions, are widespread. Arguably even more important is the fact that the UK, unlike most other developed countries, does not have a rule-based zoning system. Instead it operates a development control system: The 1947 Town and Country Planning Act expropriated the development rights of landowners, so since then any change in the use class for any parcel of land requires development control permission. This is granted at the local level. The trouble, in this context, is that the UK is a highly centralized country with virtually no fiscal powers at the local level. Local authorities face most of the costs of local development but reap virtually none of the benefits in the form of greater local tax revenue. This diminishes incentives to permit local development. To make matters worse, by trying to protect their nice views, green spaces and—ultimately—their asset values, not-in-my-backyard (NIMBY) residents will oppose any new development. Because NIMBY residents are also local voters, locally elected politicians have not only no fiscal incentives but also no political incentives to permit residential development. In such a setting, demand-side stimuli will not increase supply; they will merely push up house prices further, making it even more difficult for young would-be buyers to accumulate the necessary deposit to purchase a house.

Sadly, as we discuss in our forthcoming ADBI Discussion Paper, the fallacy of demand-side policies is not confined to London or even the UK. It applies to any country and city that has fairly tight long-term supply constraints—be they of a regulatory, physical, geographical, or topographical nature. The US provides a particularly interesting laboratory in this context because it contains both, tightly regulated and geographically constrained metropolitan areas—such as Los Angeles, San Francisco, and New York City—and metropolitan areas that are pretty unregulated and geographically unconstrained—such as Houston, Dallas, and Columbus. Hilber and Turner (2014) exploit these spatial differences in restrictiveness to explore the differential causal effect of the US MID on homeownership attainment depending on the degree to which metropolitan areas are tightly regulated. They find that due to the capitalization of the MID-subsidy into higher house prices, the MID has a negative impact on homeownership attainment in strictly regulated metropolitan areas. The positive effects on homeownership are confined to higher income classes in less regulated metropolitan areas. All in all, the US government foregoes about $100 billion in annual tax revenue to achieve essentially a zero net effect on homeownership attainment. Similar to the UK’s Help-to-Buy scheme, policy makers in the US appear to have ignored the fact that in supply-constrained places, demand-side policies are bound to mainly push up house prices.

Lax planning systems and the problem of sprawl

In contrast to the UK and many American “superstar” cities, Switzerland appears to have a rather flexible approach to planning. In most of the country—with the exception of Geneva and perhaps parts of Zürich—housing supply can be considered to be fairly responsive to demand and housing affordability is, not surprisingly, not one of the hotter policy issues. Another housing issue is very high on the political agenda, however: the problem of urban (and rural) sprawl. Switzerland’s sprawl problem can be explained by its institutional setting, which is characterized by fiscal federalism. To begin with, income taxes at the local level—in conjunction with tax competition—provide strong fiscal incentives to local municipalities to zone desirable land for residential development. Such residential zones are often at the outskirts of existing suburban areas, presumably because wealthy mobile tax payers—the key target of municipalities—prefer large houses with plenty of garden space. Second, Switzerland has an exceptionally low homeownership rate, currently around 37%. Unlike homeowners, renters do not benefit from rising house prices and rents, so they have much fewer incentives to behave as NIMBYs. Lastly, Switzerland has a fairly flexible rule-based zoning system—that is, if land is zoned for residential purposes, landowners have in principle the right to develop it, subject to staying within the rules of the law. This, in contrast to the UK’s development control system, facilitates residential developments, especially on the outskirts of suburban areas, where land is often made available and NIMBY pressures are smaller.

Lessons to be learned 

So what are the lessons that emerging Asian countries and their governments might possibly learn from the cautionary tale told here? One view is that policy makers are doomed regardless of the system they implement: They either employ a planning system that focuses on urban containment—only to be haunted by a housing affordability crisis—or they implement a fairly flexible planning system, in which case sprawl will create another form of political backlash (as evidenced in Switzerland where voters recently approved an intrusive initiative to halt sprawl in touristic regions and another initiative that aims to drastically limit immigration). This is too coarse a view, however: Although a trade-off between housing affordability and sprawl exists to some extent, clearly there are worse and better planning systems and housing policies.

Let’s start with the worst kind of housing policy: demand-side oriented policies. Clearly, stimulating housing demand makes the situation worse, not better, independent of whether a country has a strict or lax planning system. In countries and cities with fairly tight supply constraints—be it because of geographical or regulatory constraints—demand-side policies mainly push up house prices and thus worsen the housing affordability crisis. Stimulating demand is also counterproductive in settings where supply is fairly flexible. This is because the demand push aggravates the sprawl problem.

What about supply-side policies? Blindly relaxing the planning system and providing huge fiscal incentives to local jurisdictions to zone land for residential development will, in all likelihood, create a sprawl problem, such as the one observed in Switzerland. Moreover, planning serves an important purpose: to correct for market failures by, for example, providing public parks, separating incompatible land uses, and protecting historic sites and buildings. So, abolishing planning would be a bad idea.

How should a planning system then look like and what would be good policies and instruments to tackle the key housing issues? First, a good planning system should be designed to focus on correcting market failures. Second, by (i) allowing vertical expansion (i.e., largely abolishing height restrictions) and thereby permitting densification in central parts of cities, (ii) imposing a land value tax, possibly with varying rates (to prevent excessive construction in areas where this is not desirable—tax rates could be extremely high, for example, in areas of natural beauty), and (iii) only allowing the construction of new housing near existing developments (thereby limiting the excesses of sprawl), policy makers could keep housing affordable and largely prevent sprawl. While implementing such radical reforms may be difficult and will undoubtedly attract resistance from vested interests, the political rewards in terms of sustained political support could be substantial. Now there is an idea for policy makers around the globe. 

References

Hilber, C.A.L. and O. Schöni (in Press) “Housing Policies in the United Kingdom, Switzerland and the United States: Lessons Learned,” forthcoming as Asian Development Bank Institute Working Paper.

Hilber, C.A.L. and T.M. Turner (2014) “The Mortgage Interest Deduction and its Impact on Homeownership Decisions,” Review of Economics and Statistics Vol. 96, No. 4, 618-637.

Offshoring and the geography of British jobs

Posted by Luisa Gagliardi, Simona Iammarino, Andrés Rodríguez-Pose
Originally posted on VOX EU 

Offshoring has risen in all advanced economies in recent years. This column analyses the impact of offshoring trends in the UK, where offshoring in services has followed the abundant offshoring in manufacturing, by uncovering their spatial implications. The impact of offshoring in places more exposed to such trends has been significantly negative on routine occupations. On the other hand, when investment abroad targeted developing economies, the effect on job creation in non-routine occupations was positive. Offshoring trends and their implications Complaints and opposition to offshoring deals by multinational enterprises (MNEs) have risen in all advanced economies in recent years. Offshoring trends, especially towards lower-wage developing and emerging countries, have been brought under the spotlight as being responsible for the destruction of low-skilled jobs and the progressive deterioration in the economic fortunes of domestic employees at the bottom of the employment ladder. During the 2000s, analyses of newspaper articles on offshoring indicated that references to the subject increased steadily both in the US (e.g. Mankiw and Swagel 2004) and in the UK (e.g. Abramovsky et al. 2004).

Fears about job losses have been traditionally centred on manufacturing. However, recent data show that services – as they become more easily tradeable due to improvements in technology – may be subject to similar trends. Examples of such drifts abound. In 2006, Barclays Bank was the first UK bank to negotiate a framework with the unions over the outsourcing of jobs to low-cost countries. More recently, it was again a media target as a result of moving hundreds of back-office jobs to India. Other firms, such as Adecco (a UK labour recruiting agency) and British Airways, are among a growing number of British companies that have opened offices and/or call centres in developing economies, often facing the wrath of public opinion.

The implications associated to offshoring trends, especially with respect to their labour market impact in the home economy of the multinational enterprise, have also become a popular topic in the academic debate. However, most of the existing evidence has pointed to an overall modest impact of offshoring (e.g. Grossman and Rossi-Hansberg 2006, Robert-Nicoud 2008, Amiti and Wei 2009, Barba Navaretti et al. 2010). Countries relocating low value-added, routine activities abroad and retaining higher value-added activities at home are expected to gain from the rationalisation of their value chain, as job losses in routine occupations may be more than offset by new jobs in non-routine occupations.

Offshoring trends in Great Britain: New evidence 

Our work rests on the assumption that the distribution of benefits and costs across geographical segments of the labour market and occupation typologies in the UK is shaped by changes in the industry composition of offshoring. Differences in the industry mix of local labour markets mean sectors vary in their exposure to international relocation of production activities in both manufacturing and service industries. The spatial implications associated to offshoring trends are of primary importance, since the same forces that are likely to spur international convergence – i.e. globalisation of production – may also seemingly prompt subnational polarisation and divergence.

Figure 1. Routine and non-routine jobs in Great Britain, 1999-2008

Source: ONS/ASHE.

Our research has analysed the impact of offshoring trends by uncovering their spatial implications, a factor which was generally overlooked in previous analyses. The UK represents a particularly interesting case for analysing how offshoring alters job composition.

• First, the country has undergone progressive job polarisation (Goos and Manning 2007), with labour market disadvantages increasingly concentrated in specific occupational categories. Routine occupations have declined rapidly over the past decades, whereas there has been a slight increase in the number of non-routine jobs (Figure 1). 
• Second, labour market disadvantages were geographically concentrated even prior to the offshoring surge in the 2000s, with a strong spatial clustering at the extreme of the occupational distribution (Figures 2 and 3). Data from just before the turn of the millennium show that routine occupations were overrepresented in some parts of the UK, mainly in the midlands, the north and the northwest, Wales, and parts of Scotland. By contrast, non-routine activities were overwhelming concentrated in London and the southeast, with spikes in cities such as Aberdeen, Edinburgh, Harrogate, Manchester, and Bristol. 
• Third, the UK also experienced sizeable offshoring especially towards developing and emerging countries (Figure 4), with a growing percentage of outward flows occurring in the service sectors (e.g. Abramovsky et al. 2004, Hijzen et al. 2005, Sako 2006).

Figure 2. Spatial distribution of routine jobs across local labour markets (TTWAs) in the UK, 1999

 
Source: ONS/ASHE.

Figure 3. Spatial distribution of non-routine jobs across local labour markets (TTWAs) in in the UK, 1999

  Source: ONS/ASHE.

Figure 4. Outward investments abroad from the UK, 1998-2008 

Source: ONS/ASHE

Offshoring trends between 1998 and 2007 had important distributional consequences at both the spatial and individual level. The impact of offshoring in places more exposed to such trends as a consequence of their pre-existing industry specialisation was significantly negative on routine occupations. Whereas job destruction of routine occupations took place regardless of whether the offshoring was directed towards developed or developing/emerging economies, job creation in non-routine occupations only happened when investment abroad targeted the latter. In addition, compensation effects of job creation in non-routine occupations were strengthened in the long term, once efficiency gains linked to the geographical rationalisation of production had been capitalised. 

Implications 

The results of our study have significant implications. Although efficiency gains coming from the geographical fragmentation of production activities may emerge, particularly over time, automatic compensation mechanisms acting through the increase in the demand of domestic skill intensity may not necessarily be able to eliminate the costs in the home economy. Specialisation following offshoring has in fact been mainly ‘functional’ within industry, rather than across the industry mix (e.g. Robert-Nicoud 2008, Crinò 2009). This implies that adjustments in industry structures within each local labour market may be rather slow.

Therefore, the consequences of offshoring are likely to be particularly severe in the short and medium term in specific areas with a high initial specialisation in routine activities. The extent to which such processes generate and reinforce hot spots of job market disadvantages for specific typologies of workers and in locations more exposed to offshoring trends has relevant distributional consequences.

The overall impact of offshoring thus poses important challenges to policy design and implementation. Initiatives targeting the mitigation of the negative consequences of offshoring are deemed necessary in regions characterised by greater risk of exposure to the relocation of production, and in these areas to specific categories of workers. Examples of these initiatives are income support schemes for specific vulnerable groups, coupled with both effective industrial policy interventions to reconvert and revitalise old industrial areas towards higher value added activities, and new approaches to training and skill upgrading programmes.

References 

Abramovsky L, R Griffith, and M Sako (2004), “Offshoring of business services and its impact on the UK economy”, Advanced Institute Management (AIM) Research, November.

Amiti, M and S J Wei (2009), “Service offshoring and productivity: Evidence from the US”, The World Economy, 32(2), 203-220.

Barba Navaretti G, D Castellani, and A Disder (2010), “How does investing in cheap labour countries affect performance at home? Firm-level evidence from France and Italy”, Oxford Economic Papers, 62, 2, 234-260.

Crinò, R (2009), “Offshoring, multinationals and labour market: a review of the empirical literature”, Journal of Economic Surveys, 23(2), 197-249.

Goos, M and A Manning (2007), “Lousy and lovely jobs: The rising polarization of work in Britain”, Review of Economics and Statistics, 89(1), 118-133.

Grossman, G M and E Rossi-Hansberg (2006), “Trading tasks: A simple theory of offshoring”, NBER, WP 12721.

Hijzen A, H Gorg, and R C Hine (2005), “International outsourcing and the skill structure of labour demand in the United Kingdom”, The Economic Journal, 115(506), 860–878.

Mankiw, N G and P Swagel (2006), “The politics and economics of offshore outsourcing”, Journal of Monetary Economics, 53(5), 1027-1056.

Robert-Nicoud, F (2008), “Offshoring of routine tasks and (de) industrialisation: Threat or opportunity—And for whom?” Journal of Urban Economics, 63(2), 517-535.

Sako, M (2006), “Outsourcing and offshoring: implications for productivity of business services”, Oxford Review of Economic Policy, 22(4), 499-512.

Facebook or Wikipedia? ICT and Education: Evidence from Student Home Addresses

Dr Rosa Sanchis-Guarner, BA Postdoctoral Fellow at the IC Business School and CEP Research Associate 

The Government is currently investing over £1 billion to provide superfast broadband to 95% of the UK by 2017. Both the European Union and the US have similarly ambitious plans to increase access to broadband services providing download speeds of 30Mbps or above. These investments are justified as having positive impacts on individuals and businesses, ranging from higher productivity to more flexible working schedules.

One important justification is that better broadband will improve educational attainment. Students of all ages spend a lot of time online, and online educational resources are increasingly popular (YouTube or Wikipedia, or more recently massive open online courses - MOOCs). However, the existing evidence on the impact of broadband is far from conclusive as it is hard to assess the causal impact of broadband on socio-economic outcomes. In our recent paper we combine a rich collection of microdata with an original empirical strategy to study whether better broadband improves educational attainment. However, despite government investment in this area we find improved broadband has no causal impact on pupils’ achievement.

In order to understand the relationship between ICT and educational achievement we set up a simple theoretical model that decomposes the effect into two mechanisms: the impact of ICT on study hours and the impact of ICT on study-hour productivity. On the one hand, reduced ICT costs could have a positive impact on learning productivity as, with faster connections, students can access more online educational content per unit of time (i.e. Wikipedia). On the other hand, students might decrease study hours by spending more time online on other activities (i.e. Facebook). The net effect is unclear.

To test between these two hypotheses - Facebook or Wikipedia - we use English microdata that allows us to link administrative test scores for the population of primary and secondary school student to the available ICT at their home addresses. We focus on the impact of ICT on standardised (Key-Stage) tests scores for English pupils aged 7 to 16 years old during the period 2002-2008. To causally estimate the impact, we exploit a well-known feature of DSL-broadband technology – that the length of the copper wire that connects residences to the local exchange station is a key determinant of the available internet connection speeds. Capacity constraints at the individual telephone exchange stations lead to invisible and essentially randomly placed boundaries of station-level catchment areas that in turn give rise to substantial and discontinuous jumps in the available ICT across neighboring residences. Variation in available broadband speed stems from jumps in the length of the copper wire that connects residences to their assigned exchange station on the slower side (longer distances to connected exchange) relative to the faster side (shorter distances to connected exchange) of a given boundary segment. We exploit this feature across more than 20,000 boundaries in England in a spatial regression discontinuity (RD) design.

The jump in available ICT across exchange station boundaries is substantial. The average difference in residential distances to their connected exchange station between neighboring residences on different sides of the boundary is 725 meters, 2,250 meters when restricting the estimation to the top third of boundary segments with the largest mean difference in connection distances. These discontinuous jumps in copper wire connection lengths translate into substantial differences in the available ICT across space. We find that the average jump in the time cost of accessing a given amount of online content rises by 22 percent when moving from the slow side of a boundary segment to the faster side of the invisible boundary (47 percent for the top third).

When turning to the effect of available internet speed on test scores, our estimates suggest that even very large changes in the available internet connection speeds have a precisely estimated zero effect on educational attainment. Our robustness checks show that the estimates are causally identified: house prices, student socioeconomic characteristics and access to local (dis-)amenities are unaffected by the boundaries. Using the additional microdata on student time use and internet use to quantify the channels underlying this zero overall effect, we find that jumps in the available ICT have no significant effect on student time spent studying online or offline, or on their study productivity. 

Access to fast broadband has been claimed as important for educational success, and the lack of such connections identified as a drawback for the development of rural communities. Our research suggests a less negative scenario. Given the amount of funds committed and the bold claims made about superfast broadband investment, more robust evidence is urgently needed. Some of the future work of the CEP Urbanisation Programme will focus on providing such evidence. So get off Facebook, and watch this space.

Business Rates: Hoorah! But Watch Out for Housing!

Posted by Paul Cheshire and Christian Hilber, SERC and LSE 

At last we have had a serious and radical policy change that really can improve one element of our dysfunctional, policy-induced development morass. As we showed in our 2008 paper the move to convert Business Rates into a purely and transparently national tax largely removed the incentives for Local Authorities (LAs) to permit commercial development. This increased the costs of office space substantially more than any feasible level of business rates might ever have done. Because it just induced an even greater shortage of supply.

Now we have a radical government proposal to make Business Rates a local revenue resource. This is splendid news, given how we showed that the present reluctance of LAs to allow office development combined with the Alice in Wonderland complexity of our planning system, amounted to a tax on office space of up to 800% and, even in a struggling city like Birmingham, of 250%.

Cheaper office space means more jobs and a more competitive service sector. People may argue rents are only a small fraction of business costs but, as we recently showed in another paper, the exact location and selection of sites makes a big difference to total factor productivity - at least in retail. Giving LAs a real incentive to permit commercial development also means businesses – with the exception of retail, which is still straitjacketed by Town Centre First policies – will have a freer selection of sites and micro-locations.

Sadly, however, there is a down side to this positive policy change. We all know we have a real housing crisis. Housing starts in England continue to wobble around their post 2007 crisis level and are still about a quarter down on their immediate pre-crisis levels and at less than half the level every informed observer argues is the minimum necessary. Consistent with this, the latest English Housing Survey showed a continuing rise in age for first time buyers with the proportion of 25 to 34 year old owner occupiers falling from 59 to 36% over 10 years; and for the first time ever, more owner occupiers did not have mortgages than did. In other words all the evidence shows that house building is not significantly rising from what was a 100-year peacetime low in 2010, that the supply and affordability crisis gets worse and the redistribution of housing wealth to the elderly continues.

The only policies on offer to address this crisis are what might be called magic; there is more than enough snake oil in all parts of the political forest but since the Conservatives are in power let us focus on theirs. There is the ‘Starter Homes’ initiative, tweaked at the Party Conference, and the Housing Minister promising that 1 million houses will be built by 2020. Neither begins to address the fundamental problem. This is lack of supply: supply of land to put houses on and the supply of space building upwards could deliver (building above 7 stories is frighteningly difficult – see the map here).

So we have promises and hare-brained schemes that will hardly increase the net building of houses at all. Since they go together with boosts to demand via, for example, Help to Buy, in the absence of a radical change to free up land supply, demand side measures mainly increase prices. So given the radical change in incentives the new policy on Business Rate revenues represents, what should we expect to happen? Well obviously LAs – desperately starved of funds – will fall over backwards to attract commercial development. Since the supply of developable land for housing is in effect almost perfectly unresponsive because of our planning system and NIMBY pressures, this means they will divert land to commercial development and away from housing. This is despite government policy trying to transfer commercial buildings and land to housing! Economics and history show that if you tell people to do one thing but pay them to do another, they tend to follow the money. So a very good policy change from the perspective of the supply of commercial space threatens to freeze out even that little land available for housing. So the net effect will be to undermine the Starter Homes initiative (not so much a policy anyway – just political grandstanding) and help make housing yet more unaffordable.

The Government has shown courage to spur commercial development. It is now all the more important policy makers show similar – or even more – courage to tackle the housing crisis. Both the British tax and planning system are hopelessly inadequate to deliver enough new homes. Replacing the Council tax (and the stamp duty) with a proper local property (or better: land value) tax could create the necessary incentives for LAs to offset for the effects of the Business Rates Retention to reduce land for housing and could even lead to more housing construction net. And, on the margin, since better designed land and housing taxes would be both more equitable and improve the efficiency with which land was used, there would be additional benefits. Tax reforms alone, however, cannot solve the housing crisis entirely. The planning system is far too deeply flawed for that. The sad reality is nothing short of a radical overhaul of our planning system can have any real effect. Now that would create a lasting political legacy. There’s a thought for the current Government…