What "FOREVER 21" means to spatial economists

Posted by Tim Leunig, SERC, LSE and CentreForum

Traditionally prime retail is the most expensive land around, and traditionally nowhere is more prime that London’s West End. At first sight summer 2011 should be tough for the West End. There is a recession – which the National Institute of Economics and Social Research even suggest may be the longest since modern records began a century ago.

London also has lots of new shopping space. Westfield Shepherd’s Bush added 1.6m sq ft in 2008, and plans a 0.5m sq ft extension. Westfield Stratford will open soon, adding another 1.9m sq ft. The internet and supermarkets continue to make inroads into non-food shopping, creating new rivals for West End shops.

And yet last month US fashion retailer Forever 21 paid HMV £13.75m to get access to HMV’s smaller (35,000 sq ft) Oxford Street store. The £13.75m did not buy the lease, or rent the space. It simply allows Forever 21 to rent the shop on commercial terms.

This is not a one-off. Chanel recently paid Nicole Farhi £5m for the right to pay £2.35m rent for a shop in Bond Street, while Superdry paid Austin Reed £12m for the right to pay £2.5m rent on Regent Street. There are many other examples, including Burberry and Hollister.

Three things stand out to a spatial economist. First, location remains hugely important. Brand image and sheer footfall mean that companies want to be in the West End. Demand for space is “derived demand”: if people want to buy Superdry hoodies in the West End, then Superdry will want space in the West End.

Second, it is good to see shops come and go. If demand for affordable fashion has increased, then it is good that Forever 21 has arrived. The same is true for all other newcomers.

More prosaically, newcomers drive productivity growth, particularly in retail. Even people who are not interested in Forever 21’s clothes want them over here.

Third, new firms will not find it easy to crack the UK market when the entry price is £13.75m. This is a huge barrier to entry. That is bad for everyone who cares about productivity, even if they have no interest in the particular store.

Finally, both the £13.75m fee, and the £800 per sq ft annual rental are clear market signals: we need more retail space in the West End. So what are entrepreneurs and planners doing about it? Who is looking at whether we should close some side roads, inserting shops where we currently have roads? Who is looking into creating first floor pavements, in the way that shopping malls have more than one floor to maximise retail area? Who is considering sinking the street itself underground, and paving it over, creating more space? Electric and hydrogen buses could easily use a “cut and cover” tunnel below the current road surface.

All of these things are expensive, but when companies are paying huge sums to be able to rent a shop, all of these things – and more – should be on someone’s agenda.

* Tim Leunig is a SERC Affiliate. He is a Reader in Economic History at LSE, and is also Chief Economist at CentreForum.

Riots: What next?

With the violence (at least temporarily) under control attention is now turning to the longer run questions raised by this week's rioting. Today I wanted to focus on one aspect of this: to what extent the riots reflect a failure of urban policy and what, if anything, could be done better.

Let me start with a few things that are obvious. First, the cause of riots are complex, so we should be careful about specific 'solutions' proposed by people who say they 'know' what caused them. Second, the underlying problems are long run and structural so there are no immediate fixes. Politicians should try to remember this as they scramble desperately to 'do something'. Third, because the problems are long run and structural its useful to think about how the success or failure of recent urban policy should guide the response. So, in no particular order:

1. More shiny new buildings. Unlikely to help. See the NAO on the coalfields regeneration or my contribution to a recent SERC policy paper.

2. A renewed emphasis on mixed communities. Unlikely to help.

3. Reversing housing benefit reforms so that people don't have to move. Unlikely to make any long run difference unless you are somehow already persuaded that this is all about 'Tory Cuts'. In which case, see my earlier comment about people that think they know what caused the riot.

4. Closing the gap between rich and poor. Might help if this turns out to be an underlying cause (although the evidence on the role of relative poverty in the LA riots is pretty limited). If you think it helps but run local not national government, remember that local authorities aren't very effective at closing the gap between rich and poor.

5. Local jobs for local people. Silly.

6. Cultural regeneration. A much loved (by some) policy. There is little evidence this works.

7. More enterprize zones. Again, little evidence these work and even when they do increase employment locally, it is not clear those jobs go to local people.

8. More public sector jobs? Again, not clear these go to local residents and not clear to what extent they are additional. A pretty blunt Keynesian tool for areas most affected by the downturn suggests a very blunt urban policy for helping with riots. Focus should be on effective public service provision.

9. More spending on Area Based Initiatives. Unfortunately, evidence for their effectiveness is pretty weak. Based on the best evidence that we have available (for the NDC) a reasonably well funded ABI has not, on average, improved individual outcomes in targeted areas. In short, neighbourhood policies may provide important public goods (social housing and public spaces) but not economic development. There is a (possibly large) consumption value to these goods - although that hasn't been enough to prevent rioting and there is no compelling evidence that they meet objectives of narrowing the gap between disadvantaged individuals and the rest.

10. Policies around education and ‘up-skilling’ workers. Policy needs to focus on improving the skills of individuals and be realistic about the fact that those with new skills may choose to leave an area. There should be much less focus on policies based on attracting skilled workers to move to disadvantaged places.

And finally, an important policy prescription and my best guess as to the two areas on which policy should focus:

11. Policy should focus on, and be assessed by, impact on people not places. In the recent past, policy has been too heavily focused on public expenditure to “turn around” declining places while paying too little attention to individuals. At the individual level, interventions need to come as early in life as possible (the Manchester Independent Economic Review argues the case). Later in life, policy should focus more on encouraging labour market activity and removing barriers to mobility. No quick fixes here, but at least this increased focus on individuals might have some hope of solving the longer term problems.

[You can read more on these issues in my chapter in the recent SERC policy paper on underperforming places. And in the spirit of generating debate, that policy paper also includes contributions from people who would strongly disagree with some of the points I make above]

The economics of rioting

Let me start by pointing out that I am not an expert on civil unrest. But given events in London (and other UK cities) I was interested to see what the urban economics literature had to say about the causes of riots. Initial impressions suggested 'not a lot', but a little more reflection suggests this conclusion was a little hasty. Let me try to spell out what I learnt and how it helps frame the debate about the causes of the London riots.

First, rioting is a complex issue. But the complexity is much more about the when, than the where and the who. In other words, its hard to predict when rioting will break out. But once it does it's easier to say things about what kind of people and neighbourhoods will be involved. [To clarify - in case this isn't blindingly obvious - I am talking about tendencies rather than suggesting that the police should be able to predict precisely where riots will occur and who will be involved with them a la minority report]

Second, the narrow economic approach to rioting would follow Becker and ask whether rioters are simply responding to the private benefits and costs of rioting. So rioting should be more common where the financial gains to rioting are high and the time costs to rioting are low (in terms of the opportunity cost of time and the probability of imprisonment). Consideration of the who and where suggests that these factors are at play in the London riots.

Third, it is often claimed that rioting is related to community level grievances. Again, this is something that we have seen with the London riots. Here, however, is where the economic analysis of the causes of riots get difficult. Because individual and neighbourhood deprivation tend to be very highly correlated it is very hard to distinguish between individual and neighbourhood explanations of socio-economic phenomena. With rioting, this general problem becomes even more difficult because there are several possible mechanisms at work. It could be that 'organisers' solve the coordination problem in specific neighbourhoods, or that peer pressure changes underlying norms (e.g. in attitudes to crime or responses to opportunities for crime) or that events in specific communities move them from no-riot to riot 'equilibrium'. With the London riots, it is quite possible that all of these mechanisms are at work. But it is equally possible that none of these mechanisms are at work and that individual factors are driving everything.

In summary, the economics literature tells us that separating out whether individual or community factors drive rioting is incredibly difficult. This suggests we should be very wary about believing anyone who claims to know otherwise.

[PS: For those of you who would like to read more, try Dipasquale and Glaeser's paper on the LA riots which formed the basis for the arguments that I laid out here].

More supermarket bashing

In the latest round of (non-violent) supermarket bashing, Labour are calling on the government to 'confront Tesco'. According to the Guardian, they want the Portas' review of the high street to 'recommend a competition test to prevent grocery retailers acquiring a dominant position'. Perhaps this a useful moment to re-hash some of the arguments.

Back in May, while writing about whether we should save the high street I discussed the fundamental problem: 'There is a serious issue to consider here - high streets generate 'externalities' that individual shoppers do not take in to account when making their decisions. Some of these externalities are positive (e.g. the sense of community generated) while some are negative (e.g. extra congestion from having people drive in to the centre of town). Market forces don't deal well with externalities so it's possible that policy makers should intervene.'

People writing on this (who are usually anti-supermarket) put strong emphasis on the positive benefits restricting supermarkets, while downplaying the costs. As explained by my colleague Paul Cheshire a few weeks ago, however, the costs can be substantial: "a recent SERC study (summarised here) estimates that planning policies combine to reduce productivity in supermarkets by more than 20 percent."

The major costs come from town centre first policies that sought to protect the high street. As I have discussed before, however, an unintended consequence has been 'metro' type stores that are worse for independent retailers. The anti-supermarket brigade are finally recognising this 'contradiction' hence the call for yet more regulation to restrict supermarkets. Change of use restrictions are one mechanism, local competition tests another.

Change of use mechanisms are messy and could be used to prevent competition as well as encourage it. In principle, I am more sympathetic to the idea of local competition tests but I am not sure how well they would work in practice - especially when placed on top of the current planning restrictions which do so much to prevent competition: Town centre first policies strongly restrict the supply of land. Sequential needs tests then mean that a new entrant may not be able to get planning permission for new development if the local authority have already identified enough land for supermarkets - even if the land identified is owned by a rival supermarket chain and currently vacant! It is these planning restrictions that make land-banking so incredibly value (leading some to joke that in the UK, Tescos is a highly successful land developer with a side arm in retail). If local competition tests were to be introduced, then the 'local' part of this should only apply to the market area over which the tests are applied, not to who gets to make the decisions. They certainly shouldn't be 'interpreted' by local planners or politicians nor aimed at one particular retailer.

Let me finish with one area of common ground with those who are anti-supermarket. In this area it is important that the government doesn't allow itself to be strongly influenced by existing retailers. Any one of the big four has huge vested interests in certain aspects of the land planning system because it creates so many distortions. Large land holdings + many centre city sites = in favour of section 106 (they can afford to pay) plus most town centre first restrictions (keeps up the value of their land and existing stores portfolio). Independent retailer = against supermarkets + pro anything that restricts competition. New entrant = against town centre first policy + less restrictions on change of use.

A final point: tighter regulation, especially if operating via the planning system would increase costs further. In other words, saving the high street costs is not going to be cheap so we better be very sure that it is truly a price worth paying.

Open Government

Earlier this week I talked about the problems that governments face when trying to get feedback on what they do, so that they can adapt when things aren't working. Unfortunately, elections are a pretty blunt tool for achieving this feedback. Partly because they are infrequent, but also because of the inherent problems the voting systems have in effectively communicating voter preferences (public choice theorists spend much of their lives studying these issues). One of the many barriers flows from the asymmetry of information about what government is actually doing on our behalf.

I was reminded of these issues this morning, while listening to Eric Pickles talking about the need for Local Authorities to publish details of their assets (broadly defined). CLG have also been pushing hard on more openness on spending. For example, they have called for 'armchair auditors' to examine details of local authority expenditure as well as providing extensive details on departmental procurement. And it is not just CLG. The Cabinet Office are consulting on how government can become more open.

Of course, more open information isn't just about feedback but also about accountability. For both these reasons I think more open government should be welcomed. However, the real test of this policy will be how open government is on major items of expenditure and how those decisions are reached.

Let me give a specific example. For a couple of years, SERC has been trying to evaluate the impact of the Single Regeneration Budget and the Local Enterprise Growth Initiative. I have talked before about the strategies that might be used to evaluate such policies. One crucial thing is that you need as much information as possible on who applied, what for, who got money and who didn't and on how decisions were made. For both these policy areas civil servants have been unable to provide me with this information - particularly with regards to how decisions were made and who applied but failed to get money. Part of the problem with SRB is that the policy is old and no systematic records were kept. LEGI is a more recent policy, but despite the best efforts of people within CLG to help they still can't provide the kind of information we would need to improve our evaluation of LEGI.

Some would argue that evaluating past policies shouldn't be a priority in the current circumstances. I, of course, would disagree. We can learn important lessons from the past. For example, our SRB evaluation is looking explicitly at whether a certain type of expenditure (on commercial buildings) had much long run impact on the local economy. In addition, we can figure out how to effectively evaluate these kinds of spatial policies. Once we have done that, we can use the methodologies that we have developed to evaluate current policies, which then better informs voters and policy makers, so that we can adapt policy to achieve more for less.

But effectively evaluating (in the broadest sense of the world) current policies will require detailed information about how policy decisions were reached and how money was spent. I hope this sort information is already being recorded for policies such as Enterprise Zones and the Regional Growth Fund. If it is, then the next big challenge for open government will be whether or not politicians truly are willing to release it.

Adapting to Localism

I have been enjoying Tim Harford's 'Adapt (Why Success Always Starts with Failure)'. Some interesting lessons here in terms of the decentralisation debate.

Harford argues that trail and error is an effective tool for solving problems. As the world gets more complicated, it appears that a bottom-up trial and error approach may work better than the old top-down hierarchies. For those interested in pushing decentralisation in government, this will sound familiar. Indeed, the fact that decentralisation allows for experimentation is one of the big pluses highlighted by advocates of moving power away from Whitehall. Those converted to this argument will enjoy the examples, from the military and the private sector, that Harford uses in his book.

A note of caution, however. Harford argues that experimentation is only part of the solution. Organisations need to be prepared to fail, to identify failure and to respond to such failure by changing course. These are things that do not come easily to government (of course, they don't come easily to business either). In some quarters David Cameron's willingness to change his mind is already opening him to criticism (and even ridicule). Personal experience suggests that both politicians and policy makers tend to start with the working assumption that their policies are working. Contrasts the randomistas that Harford describes conducting socio-economic experiments in developing countries who justify random assignment by assuming that their intervention will have no effect. These different outlooks often make policy makers averse to proper open evaluation of their policies. Harford explains this aversion by appealing to several 'nudge type' explanations of why we struggle to learn from mistakes. Policy evaluation might not matter so much if there were other effective feedback loops in place. But the type of group incentive mechanisms that Harford describes in his book may be difficult to implement in the public sector (where outcomes may be harder to evaluate and assign to specific groups) than in the private sector. Local democracy may, unfortunately, prove a rather weak feedback mechanism (especially when strong vested interests are involved). All this suggests that the coalition government needs to give as much thought to the problem of the feedback on, and adaption to, failure as it is currently giving to the promotion of experimentation.

A few further thoughts.

For those of us that struggle with many aspects of the planning system the book highlights the key problems for those who create visionary top-down plans (rather than the kind that adapt e.g., to market signals). It also provides a great example, the 'Merton rule', which explains why some of us worry about the unintended consequences of the government's decision to go for Zero-Carbon homes (you'll have to read the book).

In the chapter on development, Harford considers the problems that occur when trail and error isn't enough. What if we need some kind of big push coordinating lots of changes at once? The problem is well recognised in the development literature and Harford goes for experimenting with Paul Romer's solution - 'charter cities'. I am a lot more wary - and would draw the parallel with Enterprise Zones. In short, you need to worry a lot about displacement (in the short to medium run) and whether any changes then spill over to changes elsewhere in the longer run. In the spirit of Harford's book - this is an experiment that may be worth trying - but surely on a small scale first.

There are some other specific issues on which I am not so convinced, but let me finish with a more general one. Specifically, I struggle with the leap from 'trial and error is important' to the conclusion that 'we should use evolutionary approaches to model economies'. Harford explains that evolutionary modelling is better at describing certain aspects of firm behaviour (e.g. the life cycle of firms). That may be true, but that doesn't necessarily advocate shifting whole-scale to evolutionary type modelling because these models often can not replicate aspects of firm behaviour that may be equally, or more important, for our understanding. (To be fair, I am not sure whether Harford is advocating this - but at a couple of points he certainly appears to come close to it). I am reminded of the debate in urban economics about zipfs law. This is the idea that the second largest city is often half the size of the largest, the third largest city a third the size of the largest etc. For a while, it was fashionable in economics to try to build models of city systems that replicated this particular pattern. But, as pointed out by Gilles Duranton in a paper in the American Economic Review, these models failed to replicate other aspects of the behaviour of cities (for example the tendency of some cities to specialise) that had far stronger empirical support. Duranton argues, and I agree, that is far better to have models that match these facts and only approximate zipfs law. I think the same critique could be applied of the evolutionary approach to clusters, which is popular right now with some economic geographers. These evolutionary models can replicate some of the complex network of interactions between firms that we might see in real life, but at a cost that they lose focus on basic insights about the costs and benefits of clusters. Again, in keeping with the spirit of Harford's book, I am happy to let a thousand flowers bloom - but I still think that many of those flowers need to be of the non-evolutionary type.

Regardless, much food for thought (and perhaps a useful addition to Ed Milliband's summer reading).

High Speed Rail: No Fast Track Fix

The Transport Secretary, writing in the Telegraph to mark the end of the public consultation, claims that high speed rail is "the fast track fix for bridging the North-South divide". A clever, but completely misleading, headline. The article itself is more tempered ('tackling a divide that has lasted for generations is no easy task') but still makes big claims for the potential impact of high speed rail. I remain to be convinced, so this seems a good moment to rehearse the arguments.

Comparing the direct benefits (faster travel) etc to the costs suggests that benefits are likely to outweigh costs although both benefits and costs are highly uncertain.

The environmental impacts are limited.

The wider benefits - e.g. reducing the north-south divide - are unknown and likely to be overstated. [Max Nathan has a post considering this in detail]

People are in favour of high speed rail providing that (a) they don't have to pay for it; (b) they don't live directly on the route [Watch out for post by Gabriel Ahlfeldt on this issue in a couple of weeks time].

The opportunity costs of high speed rail are large. To me, this is the fundamental issue. Quite simply, I remain unconvinced that this is the best way for the government to spend money. Over the last two (or more) years, none of the assertions to the contrary has changed my mind that this remains the central problem with HS2.

[Disclosure: I sit on the HS2 Analytical Challenge Panel]