SERC: Spatial Economics Research Centre

The case for local pay

2012-03-19T11:03:00.003Z

The weekend papers full of coverage on the move to regional pay. Some thoughts:

1. Public servants in poorer regions to get lower pay we are told by the Guardian. Misleading, at best, but captures the sentiment of many. In fact, what details we have suggest that this will be local, not regional and that pay will not be cut. Instead, once the pay freeze stops there will be higher wage increases in some areas than others. One way to do this would be to look at areas where it's difficult for the public sector to recruit high quality staff and allow wages to rise more there. Another would be to use finer grained data on (increases) in costs of living. Either of these would be better represented as 'public servants in high costs areas to get more pay'.

2. The most direct impact will be to raise the quality of public good provision in high cost areas. Colleagues at CEP, for example, suggest that low public sector wages in high costs areas lead to worse outcomes in the NHS. More preliminary evidence finds the same effect for schools and policing. Of course, addressing this through higher pay increases in high cost areas raises the possibility that these services would deteriorate in the poorer areas. Again, evidence from the NHS suggests this may not be a major concern because the effect is 'non-linear'. The bad effect of national wages in high cost areas are not offset by better outcomes in low cost areas (probably because higher quality staff in the high cost areas move to the private sector, rather than moving to the public sector elsewhere in the country).

3. What about the indirect costs on the local economies of disadvantaged areas? Here, we have very little evidence. In the short term, you could argue that the major issue in these areas is demand rather than supply. But these are not short term changes we are talking about - the differentials will tend to emerge only in the long term (as small differences in pay increases work through). It's also reasonable to suggest that longer term higher public sector salaries do create a local distortion that works against the private sector. Here there is a clear tradeoff. Higher public sector wages provide a demand stimulus to local service sectors. This likely offsets the distortion on the supply side (which comes from the fact that they have to pay higher wages to compete with the public sector). On the other hand, manufacturing (and other tradable) industries which don't serve local markets lose out because they don't benefit from the demand stimulus, but do get hit by the supply side distortion. Preliminary evidence from my own research on public sector employment suggests that these effects can be economically important. In short, high public sector pay may 'distort' local economies (towards local services away from manufacturing) and make them more 'dependent' on the public sector than they would otherwise have been.

4. What about 'fairness'? Personally, I prefer to think in terms of equal reward for equal work - which means that wages should reflect the local cost of living (something this move tries to achieve). Others may have different views - although I am unclear in what sense equal pay is in any sense 'fair' in this specific context even if there may be other reasons for supporting it more generally (e.g. for male and female workers doing the same job at the same firm).

5. On the subject of fairness, it seems reasonable to think that the negative effects of national pay in high cost areas are disproportionately experienced by poorer families. Partly because they will be the ones earning this pay, partly because they can't opt out of poorly performing public sector services. Again, personally, I think this is a bad thing.

On balance, I think the case for local pay looks strong although, as the reaction of many make clear, the politics are likely to be nasty.

Do city climate plans reduce emissions?

2012-03-15T09:50:00.005Z

Interesting paper from the Journal of Urban Economics (May 2012) suggests that climate change plans tend to be introduced by 'greener' cities to codify things they would have done anyhow. This suggests that, e.g., forcing other cities to adopt climate change plans wouldn't have much impact on emissions.

From the abstract: "More than 600 local governments in the US are developing climate action plans that lay out specific measures to reduce emissions from municipal operations, households and firms. To date, however, it is unclear whether these plans are being implemented or have any causal effects on emissions. Using data from California, I provide the first quantitative analysis of the impacts of climate plans. I find that cities with climate plans have had far greater success in implementing strategies to reduce greenhouse gas emissions than their counterparts without such plans. For example, they have more green buildings, spend more on pedestrian and bicycle infrastructure, and have implemented more programs to divert waste from methane-generating landfills. I find little evidence, however, that climate plans play any causal role in this success. Rather, citizens’ environmental preferences appear to be a more important driver of both the adoption of climate plans and the pursuit of specific emission reduction measures. Thus, climate plans are largely codifying outcomes that would have been achieved in any case."

My SERC colleague Max Nathan suggests one possible objection. It could be that local preferences might be shaped by previous plans, or discussions of future plans, or more general ‘political leadership’ that helps shape public opinion over a long time period. In that circumstance, environmental preferences are 'bad controls'. Producing the plan (or earlier plans) changes preferences which explains both the plan and the actions to reduce emissions. That said, I don't know of any evidence to support this specific objection (although not my area of expertise). Personally, I'd give more weight to the empirical finding - of no effect of the plans - than to the theoretical objection.

[For those without journal access, I couldn't find a pre-print on the author's home page although he may be able to provide one.]

[Update: Adam Millard Ball - the author - points out to me that he did try testing for the 'preferences' possibility using historical preferences and got essentially the same result. That strengthens the argument that plans had no effect.]

Greater Manchester Growth Plan

2012-03-13T11:18:00.003Z

I was at Portcullis House yesterday for the launch of the Greater Manchester Growth Plan. Speeches from Danny Alexander and Greg Clark suggest that the government remains committed to striking substantive deals with some of our major cities (we should see the details on the first of these fairly soon).

[Disclosure: I sit on the Economic Advisory Panel that helped draw up the Manchester Growth Plan.] I won't go in to the details on the 10 recommendations that we make but wanted to comment instead on the broader issues. As I said at yesterday's launch - the Onion style headline for the growth plan would read "Manchester Plan calls for more Money and Power for Manchester". I share this immediate reaction but, on balance, I don't think that such extreme scepticism is warranted. Let me explain my reasoning.

I should start by pointing out that my personal position on geographical disparities in the UK remains unchanged. The evidence is clear that who you are is more important than where you live in determining outcomes, but that both matter. It's very difficult to address either personal or area problems, but the evidence suggests that we have more success with the former than the latter. Given this, I would like to see policy focus on improving personal characteristics (e.g. skills) and then allowing people to take advantage of opportunities wherever they arise. In practice, in the UK, more of these opportunities will arise in the South than in the North. It's for this reason that I favour expanding housing supply in the South and allowing more people to live there. In other words, personally I would support more geographic concentration in the South. In contrast, part of the objective in giving 'more power and money for Manchester' is to work against more geographic concentration. I reconcile these differences because, tt the end of the day, I recognise that my personal opinion regarding more concentration in the South puts me in the minority. In other words, even if I am sceptical on geographical rebalancing (a 'normative' position) I think the recommendations in the Manchester growth plan should help achieve it (a 'positive' position).

I should also say that I don't think that 'more power' is just about geographical rebalancing. I am convinced by the evidence that suggests that more localisation will probably improve urban policy making (I also agree with the broad principles that underpin this move). Ironically, however, I'm less convinced that there is much evidence that localisation will have a large direct impact on economic growth. Still, I think we should support it because the highly centralised processes in the UK don't seem to have done much to deliver on economic growth outside of London and the South East. In short, the arguments for 'more power' are that (a) it should lead to better urban policy making; (b) it might lead to more growth and so we should try it.

What about 'more money'? Here, there seemed to be some confusion at the launch. While the immediate recommendations revolve around powers, those on local government finance will lead to Manchester having more money in the long run (because it will keep a larger share of the tax revenues that it generates). So the recommendations are about both more power and more money. I think there are three arguments in favour of this. First, more money is conditional on more growth. This rewards Manchester for making difficult local decisions (e.g. on planning). In other words, more money is partly about getting the incentives right. Second, focusing expenditure on Manchester means that policy is at least working with market forces within the North West region. As I have argued before such concentration may be important in offsetting the very strong market forces working against the North as a whole (and in favour of the South). Third, the previous government tried jam spreading, the effects appear to have been limited, so now might be a good time to try some more concentration (especially given the overall fiscal position).

Overall then, not the impassioned support that you would get from those with more 'skin in the game' but support none the less. More money and more power for Manchester is a policy experiment worth trying.

NHS competition: a response to critics

2012-03-12T14:44:00.000Z

Posted by Steve Gibbons, SERC and LSE

In a recent blog post, Allyson Pollock, Alison Macfarlane and Ian Greener misrepresented work on NHS competition done with Zack Cooper, Simon Jones and Alistair McGuire, and built straw man arguments designed to undermine our findings. This might pass as political discourse, but is it academic debate?

Perhaps these objections arose because of the publicity that our work has received, rather than the detail of the research. But our goal as academics is to produce the most rigorous research possible, with the further goal of promoting evidence-based policies. When we produce evidence that can have an impact on policy, we present this work and make it available to policy-makers, press and the public. Researchers in publicly funded universities are expected to publicise their work in a timely manner to policy makers. How else should good policy be formed or research funding justified?

Pollock and her co-authors decried ‘The drip feed of pro-competition studies’ we have produced. In fact, there are just two studies. Our first study in the Economic Journal (EJ) looked at the impact of competition - by which we mean a move to less monopolistic local markets - on quality. This work illustrated that competition between NHS providers in a market with fixed prices led to better outcomes. Our findings were consistent with what economic theory would predict and they mirror precisely the academic literature from empirical research in the US. More than that, since our research came out, two subsequent studies by separate research teams (Gaynor et al and Bloom et al) have found nearly identical conclusions about the positive impact that fixed price competition has had in the NHS.

Our second paper looked at the impact of this competition on patients’ length of stay (and was an expansion of an earlier paper). It showed that NHS providers in competitive environments shortened their pre-surgical and overall length of hospital stays (which we regard as evidence of improvements in efficiency). In contrast, the net effect of the introduction of private providers into the market was to increase the average length of stay in NHS hospitals and is potentially suggestive of cream-skimming. This latter finding is not overtly pro-competitive. These studies provide precisely the kind of evidence that policy makers look for, so that they can learn about what has worked and not worked in the past, in order to chart a sensible path forward. This is why they have had a significant impact. Of course, wide-reaching policy should not be set on the basis of one study. However, as a body of evidence grows, the case for policy action becomes more persuasive.

What about the counter-arguments? So far, critics have not articulated a theory as to how fixed price competition could undermine quality in the NHS. They have presented no evidence of their own that competition has harmed patient outcomes.

To be fair, Professor Greener has done work in this area. For example, in 2009, he published an article in a journal called Public Money And Management titled, “Patient Choice in the NHS: What is the Effect of Choice Policies on Patients andRelationships in Health Economies”. This ethnographic study presents insights into the attitudes of hospital managers and staff in one NHS trust. But is it ‘good science’ in contrast to our work which he and Pollock call ‘bad science’ and which they have criticized in the Lancet?

Greener’s piece drew on 60 semi-structured interviews of NHS staff at a single NHS hospital; no patients were interviewed during the course of the research. From these interviews, he concludes that: ‘The case presented suggests that patient choice policies fall short on all of the conditions that are necessary for them to work. Patients in the case study were reluctant to exercise choice decisions’. Here, Greener is happy to use a qualitative style of research (interviews at a single hospital) to draw conclusions of his own against a national policy.

However, when other researchers use qualitative research together with quantitative evidence to show that competition can have positive effects, there is less tolerance. In their co-authored Lancet comment piece attacking our research competition, Pollock et al. dismissed work by Nick Bloom, Carol Propper, John Van Reenen and Stephen Seiler, stating disparagingly that in their study: “An association with management quality is based on interviews with 161 senior staff that did not take account of relevant causal factors’. Bloom et al. involved interviews at 100 hospitals and integrated quantitative work with advanced econometrics. If this is ‘bad science’, what are we to make of the critic’s own work, which adopts a related approach?

My colleague Henry Overman has kicked off a good conversation on this blog about what constitutes sensible blogging - we hope this discussion continues. We hope such a debate, plus our reply here, will provide a teachable moment to pause and reflect on how academics discuss evidence, consider the casual use of phrases like ‘bad science’ and begin a thoughtful discussion of the role of blogs in academic and policy debates in the social sciences.

Elsewhere on the LSE site we give a further point-by-point rebuttal to the criticisms of our work. It is worth noting that Professor Pollock has raised these points before and we responded to her points twice, both in a Lancet letter, and in freely accessible online 8-page document (a detailed response that Pollock et al. do not mention) posted online, also included as a linked appendix to our Lancet reply.

A version of this piece was originally published on the LSE British Politics and Policy blog.

Does cultural diversity help London businesses?

2012-03-09T09:43:00.000Z

Posted by Dr Max Nathan, SERC and LSE Cities

London exemplifies the cosmopolitan world city. Dominating the UK economy, a major hub of the global system, it is also one of the most diverse cities on the planet. The capital contains contains around 40% of UK immigrants, and has almost half the non-white population in England and Wales. London's schoolchildren speak almost 300 languages between them, and religious diversity is similarly rich.

Immigration is a major driver of these trends, but not the only one. Many 'new' communities have been here for some time, and London's multicultural history is a deep one. Peter Ackroyd's biography of London records "Cymric Brythons and Belgae ... remnants of the Gaulish legions ... East Saxons and Mercians ... Danes, Norwegians and Swedes ... Franks, Jutes and Angles, all mixed and mingling together to form a distinct tribe of 'Londoners'." Worries about multiculturalism aren't new either: in 883AD, fearing unrest, King Alfred banished the Danes from the city, to the east of the River Lea.

Today, a majority of Londoners are proud of the city's diversity, and see it as a social asset. Is it also an economic good?

Economic analyses of diversity have traditionally focused on the labour market impacts of 'immigration shocks', rather than on wider effects of larger, more mixed communities and cities. These dynamic effects of diversity come in several flavours. For example, diverse workforces might have access to a bigger pool of ideas and perspectives, which could help firms to innovate. But mixed groups might also face communication and trust barriers, at least in the short term. Conversely, co-ethnic networks might help companies access international markets, or new 'home markets' opened up by immigration. However, discrimination could limit their success in the marketplace.

We know surprisingly little about how the wider economics of diversity operate in any city, let alone in London. So in some research recently published by SERC, Neil Lee and I tried to find out.

We used rich data from the London Annual Business Survey to test links between London firms' diversity and aspects of their business performance. We focused on firms' top teams, as managers and owners tend to make the business-critical decisions. Our analysis throws up four main results. First, management diversity - and co-ethnicity - are positively linked to innovation in firms. Second, this does not carry over into successful commercialisation of ideas. Third, firms' diversity shapes the markets they sell into: 'migrant-diverse' firms are heavily internationalised, while 'ethnic-diverse' firms plug into London's cosmopolitan home markets. Finally, we find positive links between migrant status and entrepreneurial firm formation.

Together, these findings suggest a small but robust 'diversity bonus' for London businesses. So what does this mean for policy?

Our results suggest the current Government's immigration policies are unhelpful for London firms: both the immigration cap and restrictions on post-study work routes seem likely to restrict the future supply of potential entrepreneurs in the capital.

However, different skills are clearly required for starting up a business, having good ideas and taking them to market. Economists talk about 'noisy learning' as entrepreneurs try out new products, many of which will fail. However, our results suggest a commercialisation gap for many migrant and minority ethnic firms - which could be due to discrimination, a lack of skills, or poor quality business support.

Our findings also highlight broader welfare issues. Long term, some employers could use these diversity effects to improve their business models; others might become dependent on relatively cheap migrant labour. There is already some evidence of 'migrant-dependence' in sectors of the London economy. Better regulation of wages and working conditions for migrant workers are important here, as are effective employment and training initiatives for low-skilled Londoners.

A version of this post was originally published on the LSE British Politics and Policy blog.

NHS competition: Bad blogging etc (part II)

2012-03-07T11:47:00.004Z

I wrote yesterday about misleading criticism of LSE research on NHS competition. In reponse to a couple of comments on my piece, one of the authors of the research (Steve Gibbons, SERC's research director) posted a reply. I thought his reply would be of general interest (particularly regarding their motivation for conducting the research which is discuss towards the end of the comment) and deserved a re-post. You can read the other comments at the bottom of my original piece.

Here's what Steve wrote:

"In response to the comments on this blog regarding our use of "LOS" [Lenght of Stay] as proxy for efficiency and productivity in our latest discussion paper, I agree that we use these terms loosely. The paper is, taken at face value, about the way that the relationship between hospital market structure and LOS changed over the period of the 2006-2008 choice reforms. However, this statistical evidence would be completely uninteresting and useless for informing academic debate or policy makers without some theoretical assumptions about what these numbers in the data might mean in terms of 'real world' factors. This much is true of any empirical analysis, not just ours. Our suggestion is that LOS (particularly pre-operation LOS) is one potential measure of efficiency savings (i.e. reducing any slack in the system without imposing additional costs on staff or patients). We drew this assumption from the literature, and our general understanding of the institutional environment (it is, for example, a pervasive theme in the training materials on the NHS institute for innovation and improvement website http://www.institute.nhs.uk/)

On other points raised in the comments, we have answered before the objection that these elective choices are not actually being made by GPs or patients. The evidence in the HES data (we do not report it in the current version papers) is that patterns of choice did change systematically between the pre and post-reform periods. GPS started referring to more providers and patients were less likely to attend their nearest hospital. But what is more important is that the institutional structure and information systems that facilitate choice were put in place in 2006 and it is the hospital response to these institutional changes, the threat of competition from other NHS providers, that is relevant, not whether different choices were actually being made by patients. I guess, if the GP commenting here has not made use of this choice availability, this is because he and his patients were happy with the choices he was making already and with the service being provided in his locality. The HES patient data suggests that this is not true in general of all GPs or all patients in England.

Lastly, I am baffled as to what political intent critics think we have in writing these papers. For sure, we probably all have priors that involve caution about local monopolies, and think that not being offered a choice about where you can go for e.g. a hip operation is unlikely to be a good thing, either for quality or equity. I do not think this makes us rabidly pro-market or right-wing and I am not in favour of privatising the NHS (and nor are any of my co-authors as far as I am aware). Nor do we wish to see some kind of punitive competitive regime imposed on doctors, nurses or other NHS staff. My wife is an NHS consultant, so this would personally not be in my favour. On the contrary, the research is motivated by a general interest in the role of market structure in public service provision, following in a line of academic work in economics on this issue, and for a desire to provide evidence to help inform policy.

Ironically, given the assumptions that people seem to make about our political motivations, the message from both our papers on NHS competition is in favour of more local NHS hospitals, not less."

Is Heathrow in the Wrong Place?

2012-03-07T09:39:00.000Z

Posted by Paul Cheshire, SERC and LSE

The Guardian reports that Justine Greening agrees with proponents of Boris Island that Heathrow is in the wrong place – “if you were starting fromscratch”. But the fact is that weare not starting from scratch, and this has fundamentally importantimplications for decisions on airport policy.

First, Heathrow has – admittedly inadequate – public transportlinks already in place. Second, and even more importantly, one must considerthe costs any large airport inflicts on residents who might experience itsnoise and pollution without compensation. The conventional answer is that theseare the people living near Heathrow. But it is not as simple as that.

Almost no one living in Southall, Richmond or Wraysburylooks out of their windows and says – ‘What a surprise – there are noisy aeroplanes overhead’.Almost no one has lived continuously in the affected area since 1965 (although one occasionally appears on TV, unearthed by ajournalist looking for a human interest story or a visiting politician).

Heathrow has been a big and noisy airport for at least 40years. Some people live in the area because they work at the airport; some becausethey are frequent users; but most live in the area because - all else equal -the cost of housing is lower there.

Research on how housing markets work shows almost beyonddoubt that house prices and rents fully reflect all the costs of disamenitiessuch as aircraft noise, high crime or flood risk. In the same way, the cost ofhousing quickly adjusts to reflect the value of better local state schools,local parks or transport links.

What’s more, people pay not only for current amenities but alsofor expected future values of those amenities, as I showed insome 2004 research [pdf]. So it is not just the present experience of aircraftnoise and pollution that is reflected in house prices around Heathrow but reasonableexpectations about levels of that nuisance in the future.

So if we were truly starting with a clean slate, London’smain hub airport would not be where Heathrow is. But given that Heathrow iswhere it is, and has been there for more than a generation, it is in exactlythe best place in terms of compensating people for the noise and pollution itcauses. People who are affected have been compensated at least once via lowerhouse prices and in many cases twice - because they have received help to payfor sound proofing their houses.

Wherever they are, aircraft and airports cause local nuisance and pollution. So we need to compensatethose affected by airports and reduce the environmental costs by taxing flyingappropriately. But the best way of compensating people is through the housingmarket – and that implies not only Heathrow is 'in the right place', but that policymakersshould focus any necessary expansion of airport capacity where airports arealready located.

NHS competition: bad science or bad blogging?

2012-03-06T10:53:00.005Z

Generally speaking I support the idea that academic researchers should engage with public debate. If we have evidence that could help inform policy and wider debates then it's right that we should publicise that beyond our own narrow academic communities. Blogging is one highly effective way of doing that. But every so often I read something on an academic blog that makes me pause and question whether more blogging will end up improving the quality of public debate in the long run.

Yesterday's LSE British Politics and Policy Blog on NHS competition provides a good example of the kind of post that worries me. This post criticises research about the impact of NHS competition on patient outcomes and accuses my LSE colleagues of engaging in bad science, data dredging and faulty analysis. I assume that this post will have been read by far more people than the original scientific paper. That's to be expected - after all it is what the blog is trying to achieve. But as I read through the post I became increasingly puzzled by the fact that the criticism in the the post appeared to bear little relation to the scientific papers I had read. When I went back to the original papers this morning, this confirmed my original concerns.

As I know people may not have access to the academic paper, let me give some concrete examples.

The 'major cause of reductions in AMI'?

PAPER: “using [acute myocardial infarction] AMI mortality as a quality indicator, … mortality fell more quickly (i.e. quality improved) for patients living in more competitive markets after the introduction of hospital competition (to the NHS) in January 2006"

BLOG: "The major improvements in outcome after acute myocardial infarction can be attributed to improvements in primary prevention in general practice and in hospital care".

These points are not contradictory. Couldn't the major improvement be attributable to primary prevention and hospital care while hospitals that face more competition saw mortality fall more quickly?

Heart attack victims don't choose where to be treated

BLOG: "the government’s cardiac Tzar, Sir Roger Boyle, was sufficiently angered by their claims to respond with withering criticism: AMI is a medical emergency: patients can’t choose where to have their heart attack or where to be treated!"

PAPER: "we expect that AMI mortality will decrease more quickly in more competitive markets from mid-2006 onwards after hospitals were exposed to competition created from the new NHS reimbursement system and the expansion of patient choice. While providers are not explicitly competing for AMI patients because competition in the NHS is limited to the market for elective care, we expect the market-based reforms to result in across-the-board improvements in hospital performance, which in turn will result in lower AMI death rates. To that end, Bloom et al. (2010) looked at NHS hospitals and found that better managed hospitals had significantly lower AMI mortality and that greater hospital competition was associated with better hospital management."

In short, the paper is quite clear on the mechanism. Competition on elective care care improves management which also happens to benefit AMI. Why not use elective care directly? Because hospitals can 'manipulate' statistics around those in a way that it can't with AMI precisely because patients have no choice! In other words, the authors clearly understand that patients have no choice for AMI but this helps rather than hinders them in their research.

Elective patients don't choose hospitals

BLOG: "Less than the half patients surveyed in 2008 even remember being given a choice, and only a tiny proportion made those choices based on data from the NHS choices website."

PAPER: There were three components to the health reform only one of which concerned patient choice but all three of which sharpened incentives for hospitals. Also, even if patients don't remember being given a choice: "since GPs are highly active in informing the destination of most referrals, GPs now play a substantial role dictating how money flows around the post-[reform] NHS."

There are several ways in which the reforms sharpened incentives for hospitals. Pointing to the fact that patients don't remember being given a choice doesn't seriously address whether or not these incentives worked in practice.

No biological mechanism for choice to affect outcomes

BLOG: There is no biological mechanism to explain why having a choice of providers for elective hip and knee operations surgery [...] could affect the overall outcomes from AMI where patients do not exercise choice over where they are treated."

But the paper doesn't ever claim that there is a biological mechanism. It claims there is an economic one via the incentives described above.

They ignore the existing evidence

BLOG: "They sweep aside decades of careful economic theory and evidence which shows why markets do not work in health services"

PAPER: Provides pointers to existing literature (and reviews) and specifically considers the reasons why evidence from the reforms of the mid 1990's, the internal market might not be very useful "because the internal market never created significant financial incentives for hospitals to change their behaviour"

They engage in data dredging and their work should never have been published

BLOG: "if you repeat an analysis often enough significant statistical associations will appear." The work was subsequently published in "the Economic Journal. That it got through that journal’s peer-review process is perhaps indicative of the poor understanding of healthcare and routine data from reviewers of that journal."

I don't see any basis for the first of these claims. Data 'dredging' is a serious problem - but not one that appears to apply to this paper (which shows that the results are robust to many different variations in specification - the exact opposite of the data mining problem). The Economic Journal is one of the world's leading peer-reviewed economics journals. I don't believe that peer review is everything, but simply insinuating that the referees and editors of that journal don't know what they are doing doesn't cut much weight with me.

Bad blogging versus bad science

I could go on to discuss the errors around the second paper where, e.g., the blog claims that they don't control for the mix of operations when the paper actually considers within treatment changes in outcomes (so mix is irrelevant). But I assume that the authors are perfectly capable of further defending their own research.

My point is simply that a blog that is supposed to help improve the public's understanding of the evidence is carrying a post that is pretty misleading about what the papers actually do, what they find and what claims they make about their findings. To my mind, this raises far more concerns about bad blogging than it does about bad science ...

[Disclosure: Steve Gibbons is SERC's research director and I am affiliated with the Centre for Economic Performance]

Miserable Londoners

2012-03-01T11:06:00.002Z

The new government wellbeing statistics suggest that London is the most miserable place in the country. Worse, from a personal perspective, in 4 years time I'll sit in the late 40s age group which will make me part of the unhappiest group in the the UK (men 45-49 living in London). Time to move, perhaps?

This begs the question what we learn from spatial differences in wellbeing? As usual, the situation is more complex than the simple headlines would suggest. First, it's possible that small regional differences occur by chance. This can occur even when surveys are nationally representative because the number of people interviewed in any one location will be considerably smaller. Second, the survey tells us that individual characteristics affect stated happiness. From SERC work on wages we know that areas differences in wages look much smaller once we allow for the fact that different types of people live in different places.

Indeed, a recent paper by Oswald and Wu for the US (published in the Review of Economics and Statistics 2011) show that the relative position of US states in terms of wellbeing shifts around a lot if you control for observed non-financial individual characteristics (i.e. not income). Again, from our work in the UK on wages we know that controlling for the unobserved characteristics of people would change these area effects even more. In short, when who you are is important in determining how happy you are, simple comparisons of areas are much less useful than they might seem.

A further complication is also highlight by Oswald and Wu's work. Once we recognise that people are mobile across space, economic theory suggests that people shouldn't be able to make themselves better off by moving. As Oswald and Wu explain: "If Vermont, for example, offers a more attractive level of well-being to representative individual A than does Ohio, then we would expect to see Ohio citizens like individual A try to move to Vermont. That kind of migratory flow will cease only when a receiving region has become less desirable as an area in which to live. The economic equilibrium ought to be one of strict equality of utility [...]. If the economist’s arbitrage theory across regions is correct and well-being data are a useful proxy for utility, then its prediction should be detectable in an empirical test for state-by-state equality of well-being
for a person of given characteristics".

In other words, once we control for individual characteristics then there shouldn't be any spatial differences in wellbeing measures providing that the wellbeing measure is actually capturing the factors that determine people's 'wellbeing' (in the sense of utility). In practice, for the US, Oswald and Wu find that some spatial differences in wellbeing do persist but they also find support for a weak form of spatial arbitrage - once we control for individual incomes wellbeing is lower in states with higher average per capita incomes. In other words higher incomes are compensation for living in less nice places in terms of the non-financial benefits they deliver.

So where does all of this leave this soon to be middle aged London based male? The evidence suggests that moving is unlikely to do much for my happiness (unless I am doing it because for personal reasons I know think me and my family would be happiest somewhere else). Instead, I should try to keep my wife happy (married people are happier), enjoy the kids (at least until they are 11) and start saving for that Porsche.

Rethinking our cities; density or size?

2012-02-28T09:51:00.006Z

Will Hutton bemoans the quality of the first London Mayoral debate arguing that the candidates shouldn't focus narrowly on transport and the police, but should address the wider issue of what makes London great and what could make it greater?

Hutton highlights two features of cities which he thinks of as crucial to their success - the ability to attract a diverse mix of high quality people and the willingness to house them at high density. He links the first of these issues to immigration, a policy area over which the mayor has no control. The mayor has much more control over density (through decisions made about the London plan) and here Hutton sides with Livingstone who tends to favour more tall buildings as a way of achieving greater density. I have suggested before that the arguments in favour of more tall buildings in London - and some other UK cities - seem pretty compelling (in the sense that the price signals from the market clearly indicate that they would have huge social value). We don't get them for a variety of reasons including, but not limited to, planning restrictions.

I'd express one note of caution, however. Hutton assumes that density is key to innovation and the success of cities. But we don't actually know whether it is density or size (or concentrations of particular types of workers or industry) that drive economic performance. Researchers are trying to separate these effects out, but it's difficult because size and density tend to move together. People who like 'compact' walkable cities tend to interpret evidence on density effects as somehow solving this debate without recognising that the effects could come from size.

Where does that leave us in terms of buildings in our larger cities? The evidence on positive externalities is inconclusive about whether we should favour density over size . There are negative externalities from building on undeveloped land, but also from destroying sight lines by building up. Overall, the evidence suggests that these externalities may not be big relative to the value of new building (as indicated by the price of new development). That is we should consider both 'up' and 'out' when the price signals are sufficiently strong to suggest the social benefits outweigh the social costs.

Is NHS competition good for patients? It depends on who's competing

2012-02-23T09:01:00.003Z

Posted by Steve Gibbons, SERC and LSE

Last year, my research with Zack Cooper on hospital competition generated a lot of interest. In that work we found that reforms in 2006, which allowed patients to choose between NHS hospitals for routine surgery, had knock-on effects on outcomes in emergency care – lower heart attack mortality rates specifically. A lot of people – those with distaste for the very idea of competition in public services – did not like this finding at all and the arguments ran for some time in the medical press.

Our latest research [pdf] is more of a crowd-pleaser. There's something for everyone, both those who support and those who oppose greater choice and competition in the NHS system. In fact, there are headlines drawing on our newest research that spin the message either way.

So what does our new research really show? Building on our previous work, we look at the effects of the same policy change in 2006 on patient ‘length of stay’, which is a common indicator of a hospital’s efficiency. Length of stay has been declining over the past decade as surgical and preparative technology and practice improves, and as hospitals have tried to decrease theatre turnaround time, increase patient turnover, utilise resources efficiently and reduce waiting times.

The choice policy change in 2006 allowed patients to choose any hospital offering the surgery that they required. This was a nation-wide change, but had more ‘bite’ in places where choice was feasible and facilitated by the local hospital geography than in places where choice was infeasible or impeded. We use these differences to trace out the effects of the policy change on length of stay, by comparing reductions in average length of stay for patients in places of high potential choice with the reductions in places of low potential choice.

Just as we found that the switch to a more competitive market structure in 2006 amongst NHS hospitals was associated with reductions in heart attack mortality rates, we find it also led to shorter length of stay for routine operations like hip replacements, cataract and hernia operations. Average length of stay went down more in those places with a lot of potential choice than in places with few potential choices. This was true both for the time spent in hospital after an operation, and for the time spent in hospital waiting for an operation to happen.

But is a shorter length of stay a good thing? It is a hospital management target, and reduces costs - but is it good for patients? If hospitals discharge patients ‘quicker but sicker’ after surgery in their haste to free up beds, then clearly not. But a less ambiguous case can be made for the benefits of reducing the time a patient spends in hospital before their operation, especially for routine operations of the type we consider. Preparation for these kinds of operations now takes place in pre-operative clinics before a patient is admitted, specifically to avoid costly delays due to unforeseen complications. The aim is to get patients in surgery on their day of admission to hospital. And our evidence shows that same-day operations became more likely after 2006 in the more competitive markets relative to the uncompetitive markets. This is good news for proponents of competition. There are implied cost savings of around 6 per cent from these length of stay changes, which is a non-trivial amount when scaled up to the NHS as a whole.

The bad news is that when NHS hospitals are exposed to competition from private providers things look less encouraging. We can learn about these effects because in 2008, patient choice policy was extended to private hospitals, meaning that private hospitals could offer routine operations to NHS patients (paid for by the NHS). Whereas competition between NHS providers reduced length of stay, competition with private providers tended to increase the average length of stay for patients in NHS hospitals. What could explain this result? The most likely explanation is that private providers could ‘cherry pick’ patients that had no additional complications and were likely to be easier to treat. This resulted in a harder-to-treat case mix in NHS hospitals, with average length of stay rising as a result. In fact we find some evidence that NHS hospitals facing more private competition from 2008 on ended up with older and poorer patients.

The general picture can be seen in the graph: length of stay is declining overall (the black line) even in baseline paces with no competitor hospitals. After introduction of choice in 2006, length of stay falls faster in areas where there are more NHS competitors (the blue line).When there are more private competitors after 2008, length of stay starts to increase (the green line) relative to the baseline. Note in this picture length of stay is normalised to zero in 2006 to make the relative changes clearer.

So does this mean that private competition is bad for the NHS and is competition beneficial or detrimental overall? This is hard to say from this evidence alone. The main message is that choice and competition amongst NHS public providers seems to have generated some positive incentives and has been a force for improvement. Yet, if private hospitals are to compete with NHS providers under a reformed NHS, safeguards need to be in place to ensure that NHS hospitals are properly compensated for the more risky and challenging mix of cases they could end up treating.

A version of this post originally appeared on the LSE British Politics and Policy blog.

Is Building Social Housing better than the Benefit Cap?

2012-02-21T14:22:00.002Z

I just read through Left Foot Forward's latest on why building social housing would cut the housing benefit bill three times faster than the benefit cap.

The idea of spending 'more on social housing' appeals to many involved in the housing debate regardless of the impact on the overall fiscal position. In addition, LFF suggest that social housing for all 67,000 families affected by the benefit cap would save £8.1bn (way more than the 2.7bn that would be saved by the benefit cap). This sounds like "win-win". Is it?

Here's how LFF calculation works. Assume that social housing could house 67,000 families at a cost of £100,000. This gives a total cost of £6.7bn. The Office for Budget Responsibility suggests that spending an extra £1 on infrastructure increases national income by £1 per year (see table C.8). LFF think that 0.65p of that £1 would go to the exchequer in revenues. This means 67,000 homes cost the exchequer £2.3bn.

Two crucial assumptions underpin this calculation. The first is the exchequer benefit of 65p out or £1. I don't fully understand where this comes from, but it certainly seems a high figure for the marginal tax take out of output in the UK context. The second problematic figure is the use of the infrastructure multiplier. This is open to dispute on two levels. First in terms of it's overall magnitude. For example, Jonathan Portes of NIESR, talking on the Today programme a couple of week's ago suggested that the infrastructure multiplier was probably closer to 0.7. Second, it's not clear why the infrastructure multiplier for roads, rail and other productive infrastructure should apply to housing. In short, £6.7bn of expenditure on social housing is likely to cost the government considerably more than £2.3bn.

The next big saving according to LFF's calculations is in rental payments. They suggest that social housing rents "are much lower [than private sector], perhaps as much as £300 per week". That adds up to £15,600 per family per year and a whopping £8.1bn over 10 years.

LFF don't give a source for these figures but they, again, seem pretty high. According to DCLG, private sector rents in London average £198 per week (see table 715 of live tables on rents etc). In London, registered social landlords charge about £85 per week (table 715 again). These figures aren't a like for like comparison (as the underlying portfolio of properties differ) so they exaggerate the difference that would apply to equivalent properties. In short, savings of £300 per week (or £15,600 per year) for moving families from equivalent private sector to social sector flats seems a tall order (although it's hard to understand exactly what calculation LFF are making).

Finally, LFF assume that the land comes free from Local Authorities. That ignores the cost in terms of the large capital receipts that LAs could get from selling off valuable land (which the government is just about to let them realise through land auction pilots).

In short, there is an argument to be had about social housing provision, but it's not obvious that 'huge fiscal savings' are a big part of that argument.

Inexpensive Progress: Two steps forward, one step back ...

2012-02-16T12:16:00.004Z

I have been reading that National Trust 'Inexpensive Progress' report on the planning system.

It's a little hard to know what to make of it (for reasons discussed below). But let me be generous and suggest that overall I think it represents two steps forward, one step back.

I summarised my overall position on the planning system in a post on the proposed reforms in March 2011: "Planning delivers many benefits, but it is also costly (in terms of resources to implement, the way in which it affects costs of living, its negative impact on economic growth). Many would argue, myself included, that we need a serious debate about whether these costs now outweigh the benefits and whether reform is needed. Depressingly, I am deeply skeptical about whether or not we are going to get that serious debate."

This scepticism was well placed. As the debate has proceeded people continue to imply that we have no evidence on the costs of the planning system. This is simply not true as Max Nathan and I explained in our policy paper on 'What we know (and don't know) about the links between planning and economic performance'. The National Trust's 'inexpensive progress' report considers a number of these costs in detail and doesn't strongly refute the evidence that we suggested underpinned them. Overall, then, I take the report as recognising many of the costs that we argued were being ignored in the debate. This feels like progress - hence two steps forward.

So, what's not to like about the report? Let's set aside the fact that it underplays some of these costs (for example in the discussion about the benefits of bigger places which focuses on static benefits to existing residents). The much bigger problem is that while the report acknowledges all of these costs the National Trust continues to suggest that the many benefits of the planning system likely outweigh them. Note, by the way, that I don't have a problem with the idea that the planning system delivers benefits and that these could outweigh the costs. Campaigners are perfectly entitled to argue that these are prices worth paying to 'protect the countryside' or achieve other policy objectives.

So, it's not claims about the existence of these benefits that troubles me. Rather, it is the assertion that we don't have much evidence on them and that, therefore we shouldn't reform the planning system until we have such evidence. Just as with costs, we have plenty of evidence on the benefits of the planning system. For example, economists have performed many 'hedonic studies' using house prices to figure out the value of many things delivered by the planning system. Further to this, the government has just spent many millions of pounds on the National Ecosystem Assessment that tries to get at the non-economic value of undeveloped land.

So, in terms of the aspect of the planning system in which the National Trust is most interested - the non-economic value of undeveloped land - we have a signficant body of evidence (collected at far greater expense than the evidence on costs). The National Trust report does mention these studies, but downplays their significance in terms of informing us about the cost and benefit tradeoff of building on more undeveloped land. Why is that, I wonder? Could it be because for a lot of undeveloped land those measured non-economic costs are just way too small to justify the decision to prevent development?

I am all for a planning system which compares the broad social value of preserving undeveloped land to the broad social value of building on that land and makes decisions accordingly. On the balance of the evidence that we have available that would lead to lots more development on low social value agricultural land at the fringes of our cities. It would also preserve lots of beautiful English countryside that has high social value.

There is certainly an argument to be had on whether or not the government's planning reforms achieve that balance. But the case for the reform remains compelling when the evidence (on both costs and benefits) suggests that the current system is too restrictive to achieve that balance.

The labour market impact of public sector employment

2012-02-14T10:22:00.003Z

I have been doing some research (with my colleague Giulia Faggio) looking at the impact of public sector employment on local labour markets.

Looking at changes in Local Authority public sector employment from 2003-2007 suggests two things. First, at least during that period, we don't find much evidence of crowding out in terms of overall private sector employment. Second, public sector employment appears to have a multiplier effect on local service sector employment but an offsetting crowding out effect on manufacturing employment.

In some ways, this isn't that surprising. Public sector employment creates demand for local goods and services. At the same time, public sector employment creates a supply distortion that hits local firms (and is more pronounced the bigger the public sector wage premium). For services, the demand effect appears to outweigh the supply effect. The demand effects for local manufacturing are much smaller (because the public sector and its workers don't demand much from local manufactruing firms). As a result, for local manufacturing, the supply distortion dominates.

As I said, the result isn't that surprising but what is surprising is that it doesn't appear to have been carefully documented before. This raises a question about existing research on the impact of the public sector on local labour markets. So far, we have tracked down the following: some material from the states looking at the impact of specific pieces of public sector employment (particularly the closure of military bases); UK research from LSE colleagues and others on the impact of national pay on public sector service quality (negative); UK research from IFS and others on the extent of the public sector pay premium (pretty big except for males in the south east). We would be very grateful for any pointers on additional material. For various reasons, this kind of question isn't considered much in the huge literature on regional input-output models. There's also some broadly descriptive stuff on previous government relocation. However, what we are after is references to research that tries to get at the causal impact of public sector on local labour markets. Very grateful for any suggestions (either as comments below or email to my usual address).

From High Street to Bond Street

2012-02-09T14:18:00.008Z

Posted by Dr Tim Leunig, LSE and CentreForum

Recessions mean bankruptcies, and bankruptcies in the retail sector mean boarded up high streets. Between 2008 and 2010 the number of empty shops has gone up five fold. Only one shop in 40 was empty in 2008, but the rate is now one in seven. It is higher still in some places - one in five in the North West as a whole, one in four in Blackburn, Grimsby, and Walsall, and one in three in Margate.

Does this mean that we should 'let the high street die', as a comment piece in this week's FT suggested? It's true that both cyclical and structural factors are stacking up against retail premises. But just as Portas pilots won't solve the problem alone, a laissez-faire response would not be helpful either.

In a market economy prices adjust: rents fall until shops are cheap enough that new businesses become economic. That is happening a bit: the FT states that rents on renewed leases in struggling regional cities typically fall 30 percent . This has been sufficient to stabilise vacancy rates since October 2010. One landlord interviewed said: "The common cry from retailers is halve the rent, or we're off". The market is working, if slowly and sluggishly.

In many ways the retail market mirrors the job market. Unemployment rose initially, but has broadly stabilised since. What is worrying is that, like unemployment, there may be structural factors which mean that some shopping areas will never come back.

The last 50 years have seen a big shift in labour demand away from the low skilled, and towards the highly skilled. The wages of manual workers have fallen relative to graduates and footballers, but we are still left with a lot of people who are out of work even in good economic times.

The same seems to be happening in retail. On the same day that the Financial Times reported that high streets in poorer areas were struggling, it also reported that Ferragamo agreed a new record high rent - almost £1,000 per square foot per year - for its shop in Bond Street. Bond Street is Champions League retail. Margate and Grimsby are not.

Policymakers need to be realistic. I bought a set of Tefal pans from Amazon recently. I could have bought them from Argos, or John Lewis. I expect that they were cheaper from Amazon, but I didn't check, because the convenience of Amazon outweighed any likely saving. That part of the high street is all but dead.

In contrast I imagine that people who buy Ferragamo leather goods want to see them before they buy them. They sell wallets for £725, and handbags for over £1,000. Retailers selling these items need retail space, and it needs to be near the people with money.

The answers in labour market policy are clear: we need to increase skill levels, so that there are fewer unskilled workers who find it hard to get work, however determined they are, and more graduates who find it relatively easier to be employed.

For retail, we can draw similar conclusions. Prices adjust in a market economy to give a signal to entrepreneurs about what to do more of, and what to do less of. The signals are clear: we need to provide more shopping space in high end venues, primarily in London, and less space in places where there is little demand.

Tim Leunig is chief economist at CentreForum, the liberal think tank, and a reader in economic history at LSE.

A version of this post originally appeared on the CentreForum blog.

Portas Pilots

2012-02-08T09:28:00.008Z

I am not sure what to make of the Portas Pilots. The government competition will see 12 "winners benefiting from a share of £1 million to help turn around their unloved and unused high streets." The amount of money is fairly small, but the scheme does seek to implement some of the better recommendations from the Portas Review (those concerned with the management of high streets).

Given the small amount of money available it's presumably important that government learns the maximum amount possible from the pilot. According to Grant Shapps we need to "try new things, experiment [to learn] lessons and help communities across the country breathe new life into their own towns." The issue, of course, is that we don't know what, if anything will work.

As I have discussed before, most government evaluations don't allow us to learn lessons about whether policy works, because we don't know what would have happened in the absence of the policy. The Portas Pilots are likely to provide another example if government officials use a whole lot of criteria to select 'the very best bids'. If high streets in the pilot area then do better how do we know if this is anything to do with the Portas process? Perhaps these areas were doing a good job on lots of other policy areas (remember they were capable of writing the 'best bids') and the high streets happened to benefit as a result of that and not the Portas process. Alternatively, perhaps they would have done many of these things anyhow, without the government providing them money. In addition, to these concerns about assessing the impact of the pilots, it is worrying that centralised rankings of bids may have a tendency to kill the very experimentation that government says they want to create.

If government wants to be truly innovative on Portas pilots then there is a way to solve this problem. Assuming that the government gets lots of good bids why does it need to try to pick 'the very best'? Why not, instead, just pick a random selection of 12 bids from all of those that seem good enough to get funding? Randomness helps solve the selection problem so that we can learn more from the pilot (by comparing the lucky winners to the unlucky losers). It will encourage creativity because bidders will not be trying to guess exactly how officials will rank bids. It will also save on central government resources in having to produce those rankings (which is a pretty difficult task anyhow given that we don't know what works). There's a cost, of course - ministers will feel like they have less 'control'. But given the uncertainties about what works this 'control' is an illusion anyhow (at least in terms of the economic impact). In short, in keeping with the overall philosophy, some experimentation in the selection process might help us learn a lot from the 'Portas Pilots'.

Northern Assembly Needed?

2012-02-06T12:10:00.003Z

Interesting to see the call for a new 'northern assembly' to help tackle the north-south divide, partly inspired by the observation that the recession appears to be increasing that divide.

Here's my blog post from a couple of months ago talking about why the divide is increasing. In short, a lot of it is to do with the fact that the lower skilled workers are getting hit hard everywhere. The north has a higher proportion of lower skilled workers, so it's getting hit harder than the south. But lower skilled workers in the south are doing pretty (equally?) badly too.

Against this backdrop, would decentralisation in the form of an elected northern assembly help? As I have said before, there's precious little evidence to back up this assertion. If you are interested in reading further, Max Nathan discussed some of this a couple of weeks ago in a post on city deals (and you can find more details on the evidence in this older policy piece).

Government grants to small firms

2012-02-02T10:49:00.003Z

I wrote yesterday about our research showing that government grants to smaller firms in economically disadvantaged areas of Great Britain can increase employment, but that grants to larger firms are wasted.

I confess to being surprised by this result. My starting position was that all this money was wasted because firms would have gone ahead and done the investment even if they hadn't received the money. Our results suggest that this is not the case, at least for smaller firms.

Does this mean the government should be providing much more support to smaller firms in disadvantaged areas? Personally, I don't think our results should be interpreted in that way. The programme that we studied, RSA, was targeted at firms that served national or international markets. I suspect that this is one of the reasons why we do not detect much displacement (where jobs at supported firms just replace jobs at nearby unsupported firms). However, many smaller firms serve local markets and I would expect support to those firms to mostly generate displacement. Findings from preliminary work on another government scheme (Local Enterprise Growth Initiative) support this assertion. Specifically, we are finding that support from LEGI, which mostly went to small firms serving the local economy, only generated displacement (and that over quite small distances). There appears to have been no impact on overall activity so money to both small and large firms was 'wasted'.

Further, as discussed yesterday, RSA didn't seem to have much effect on productivity, so it increases the employment share of weaker firms. Such firms are vulnerable to future shocks so its not clear whether this represents a long term solution. Our analysis also ignores the impact that taxation to fund the scheme might have on firms located outside of eligible areas.

In short, as usual, careful empirical evaluation cannot necessarily answer all the questions about a policy and more research is needed. But one central message does emerge: If the government is to have these type of investment subsidies, it seems clear that targeting smaller firms would be much more cost-effective.

The impact of government grants: employment up, productivity down

2012-02-01T10:24:00.005Z

[aka: 'Grants to large firms a waste of money']

The Great Recession has brought industrial policy back into fashion. Huge subsidies have been granted by governments around the world to private firms most dramatically in financial services, but also in other sectors like autos. Despite the ubiquity and cost of such schemes, rigorous evaluations of the causal effect of these “industrial policies” are rare.

In a recent paper, (co-authored with Chiara Criscuolo, Ralf Martin and John Van Reenen of the CEP) we provide some of the most rigorous evidence to date on the impact of one such policy – Regional Selective Assistance.

Our research suggests that government grants to smaller firms in economically disadvantaged areas of Great Britain can increase employment, but that grants to larger firms have no effect. These positive impacts on firms translate in to wider area benefits. However, the resulting increases in local manufacturing employment and reductions in unemployment come at a cost in terms of productivity. Specifically, because RSA grants support employment in lower productivity firms while having no impact on firm level productivity, RSA lowers measured aggregate productivity by increasing the employment share of low productivity firms

Our research analysed the impact of expenditure on the Regional Selective Assistance programme over a 20-year period. We had access to every grant and examined every manufacturing plant in England, Wales and Scotland – over 2.3 million observations – before and after receiving government support. The main factor holding back credible evaluations of industrial policies is the absence of a clear identification strategy (i.e. a way to figure out what would have happened in the absence of policy). However, because European Union law changed over this 20-year period, some parts of Britain became eligible for subsidies and others saw their grants disappear. This enabled us to work out the impact of investment subsidies on firm performance by comparing similar firms that only differ in terms of their changing eligibility for treatment. We were able to assess the impact of RSA on investment, employment and productivity.

Our findings suggest a large effect of grants on recipient firms: a 10% investment subsidy causes about a 7% increase in employment with about half of this (3.6%) arising from growth in existing firms and half from firm entry. These effects are underestimated if analysis ignores the fact that the participants in the scheme are firms and areas who would otherwise perform badly. As I highlighted above, these positive employment effects are confined to smaller firms (e.g. with under 150 workers) possibly because larger firms are more able to “game” the system and take the subsidy without changing their investment and employment levels. Another possible explanation is that grants help remove the financial constraints faced by smaller firms.

The wider impacts on employment and unemployment at the area level suggest that positive effects at the firm level aren’t just about a shuffling of jobs from nearby firms who don’t receive financial support. In fact, the new jobs created appear to come mostly from the pool of unemployed workers in the area, which is encouraging in terms of welfare (the cost per job is around $6,330).

So grants to firms in disadvantaged areas can support local employment. The policy is not costless, however, as there appear to be no additional effects on productivity after controlling for investment effects. Since less productive plants receive more subsidies, this implies that the program lowers measured aggregate productivity because it increases the employment share of low productivity firms. [We also don't consider the negative effect of the taxes need to fund this investment]

Overall, then, our results are mixed news for advocates of firm level grants to turn around disadvantaged areas. While these policies can increase area level employment, they have no impact on productivity, leaving firms in this area vulnerable in the future (which may partly explain why firms and areas keep coming back for more support). As always with these types of policies, careful economic analysis suggests there is no free lunch – firm grants can raise employment, but at a cost in terms of productivity which goes beyond the purely financial implications of supporting investment in the first place.

[Further information: Paper; Press Release]

Cities and Economic Growth

2012-01-26T10:42:00.007Z

Yesterday's depressing economic growth figures, Tuesday's announcement by Greg Clark on city mayors and Monday's City Outlook from Centre for Cities have got me thinking again about urban economic policy and the role of cities in UK economic growth.

For some time now it has seemed to me that there is a fundamental, but unresolved, tension concerning the economic objectives for UK cities. On the one hand, government wants to maximise their economic potential. On the other government wants rebalancing both in terms of a shift away from financial services and geographically (from south to north). Of course, some will argue that these policy objectives are not in conflict. Most urban economists would disagree. If we do need to choose (at least in the sense of prioritising one over the other) what should we do? Overall, at least for the UK, I think the evidence points towards prioritising growth in our more successful cities even if this leads to more uneven spatial development. Let me explain why.

Disparities across local areas in Britain are pronounced and very persistent but much of these disparities are driven by ‘people’ rather than ‘place’

Let's start with the underlying drivers of spatial disparities. In recent SERC research we assess the extent of and persistence in wage disparities across labour market areas in Britain. We examine to what extent these area differences arise because of differences in the characteristics of people who live in different places – ‘sorting’ – versus different outcomes for the same types of people living in different places – ‘area effects’. We also consider the extent to which these differences across areas contribute to overall individual wage disparities. Our research finds that between 1998 and 2008 there were few changes in area disparities, despite many policy interventions. It also turns out that who you are is much more important than where you live in determining earnings (and other outcomes). Area effects only play a small role in the overall wage dispersion.

Earnings disparities are uninformative about differences in people’s overall wellbeing unless we take account of differences in the cost of living and the availability of amenities

Such disparities between different cities and different labour markets concern policymakers because they seem to imply differences in standards of living and economic welfare. In fact, however, this is not the case. Our research shows that across Britain increased living costs (particularly of housing) tend to offset completely increased wages for the average household. In terms of real earnings (conditional on skill) it doesn't make that much difference where you live in Britain.

In short, looking at area differences greatly exaggerates the importance of place in determining individual wellbeing. Of course, the evidence says that place does play some role in determining wages so there is a question about whether or not we should try to address these area effects. If, say, Hull's economy is doing relatively badly because of the combination of lower skilled workers and bad area effects, shouldn't we try to address both?

It is very hard for policy to change area effects

Unfortunately, evaluation of specific policies suggests that it is very hard to change area effects. Details on that will have to wait for another day, but for the purposes of this post let me simply point to the fact that our research suggests that a decade of fairly significant intervention left underlying area effects essentially unchanged. It's asking a lot for the current government to achieve any bigger impact with much less money.

It is very easy for policy to drive up the cost of living

In contrast to the difficulties in reducing area effects it is very easy for government to do things that drive up the cost of living in our more successful places. The most obvious way in which we do this is through constraints imposed by the land use planning system (SERC's Max Nathan explains the evidence here) but transport and other policies all play a part. If you can't do much to tackle underlying area effects, then an alternative is to allow people to move to areas where they will do better. Of course, you might think that this is a second best option. But the evidence suggests that it is likely to be the first best feasible option.

The need to focus spending

But what should government do in terms of the limited amount of expenditure that it is able/willing to make? Given the difficulties in addressing area effects, as discussed above, there's a strong case for trying to build on success. Of course, success can be relative so this might call for focusing investment in, say, Birmingham, Leeds, London and Manchester. Again this is a matter of prioritising, rather than a call for all expenditure to go to a select set of places.

More uneven spatial development: good economics, bad politics?

Investing in more successful cities to either enhance the economy or reduce cost of living clearly exacerbates uneven spatial development. But I have tried to argue that this may make for good economic policy in a world where who you are matters more than where you are and the government can't do much to offset the market forces that make some places perform worse than others. Of course, adopting such a course, and prioritising growth over rebalancing makes for very difficult politics for constituency based politicians.

If you are interested in hearing more on these issues, I'll be considering them and some concrete policy issues in my LSE London seminar. The seminar takes place this Monday at LSE on 'What should urban economic policy do? Lessons for London'. Details on time and location available here.

City Mayors

2012-01-25T13:16:00.002Z

Greg Clark has announced 15 November as the date for the first round of mayoral elections (at least for those cities that say 'yes' in the 3 May referendums).

While broadly supportive of the government's localism efforts I am sceptical about the claims that this will drive economic growth. I outlined the details of my arguments last June. In short, I don't think there is much evidence that mayors increase economic growth. That said, there is not much evidence against this proposition either and I am in favour of experimentation when it comes to government policy in this area.

For some of these mayors, the success of negotiations on city deals will be crucial in determining their power. For those of you that are interested in this particular aspect, SERC's Max Nathan discusses some of the central issue surrounding city deals here.

Cities Outlook 2012

2012-01-24T11:22:00.003Z

Centre for Cities published their latest City Outlook yesterday. As usual, it make for an interesting read. The headline finding is the way in which the recession is reinforcing existing disparities: successful cities continue to do relatively well, less successful cities do worse (all of this, of course, is relative against a background of poor economic growth).

As I have discussed before, much of this can be understood by looking at the underlying structure of places - particularly in terms of skills. Centre for Cities like to argue that this makes for a more complex picture than a north-south divide. I see the point, and there is some variation within regions (e.g. York does relatively well) but I still think the broad north-south divide is pretty clear. You can judge for yourself by taking a look at the very useful maps provided in the report.

The marked difference in city's youth unemployment rates identified in the report are a little more of a puzzle - although it's not clear to me the extent to which these persist if one were to control for underlying differences in skill levels. If city differences are not just structural, Centre for Cities argues that this makes the case for local variation in labour market policy. While supportive of much of the localism agenda, I have to say that I remain to be convinced on this particular aspect of it. It's not clear to me why individual level interventions are not the appropriate level at which to conduct most labour market policy. Centre for Cities suggest, for example, that in some places language might be a specific barrier. But presumably this is only because of a concentration of people with language problems. Individual level policies address that (and have the benefit of still addressing language issues for people who have those difficulties but in areas where others don't). I guess there might be some scale aspects on the provision side resulting from concentration of workers with specific characteristics, but it's not clear the extent to which that benefit of localising policy would offset the other disadvantages. As I say, I remain to be convinced.

There's plenty more in there to digest, but that will have to wait for a later date.

Cities: regular, large, and supersize

2012-01-23T15:27:00.007Z

Posted by Dr Max Nathan, SERC and LSE Cities

Yesterday’s Observer ran a great piece on megacities and city growth in China and India. Both countries are urbanising rapidly: China has just become majority-urban, and India’s population is predicted to be 40% urban by 2030. The authors also make great play of two countries’ urbanising trajectories: top-down and massively resourced in China, slower and more organic / chaotic for India.

Despite the rather misleading headline, the piece also correctly points out that megacities will be the exception, not the norm. This is a crucial point for policymakers. Rather than a world of super-size cities, large and regular-size places will be far more common.

Some numbers. The count of megacities (with 10m people or more) is rising – from two in 1950, three in 1975 to 19 in 2007. By 2025, the UN predicts there’ll be 27. But the number of ‘large cities’ – five to 10m people – is already bigger, and growing faster. In 2007 there were 30: the UN suggests there’ll be at least 48 by 2025. More importantly, half the world’s urban population live in much smaller cities, of around 500,000 people. These may be the most common of all. So in fifteen years’ time we’ll see far more Liverpools (around 400,000 people) and Londons (8m people) than Tokyos (26m people).

Paradoxically, the very biggest urban settlements are now hard to recognise as cities at all. Across the world cities are merging into mega-regions: notably China’s Pearl River Delta, the US Eastern seaboard, even the Greater South East.

Some of these numbers are difficult to take in. An estimated 120m people live in the Pearl River Delta, the largest urban zone on the planet – China is now planning to merge nine cities in the Delta to create a single sprawl of 42m people. The Tokyo-Nagoya-Osaka-Kyoto-Kobe region may comprise 60m people by 2015, almost the entire population of the UK.

All this may suggest that urbanisation is accelerating. In fact the opposite is true. Globally, cities grew fastest in the 1950s and early 60s: growth rates have been slowing ever since, from 4.1 percent to 2.5 percent today, and a predicted 1.8 percent by 2030. Developing countries are also on the same downward trend.

Urbanisation runs in parallel with economic development, and so as developing countries industrialise, their urban systems tend towards steady state. Of course there is a lot of city by city variation. For example, the UN predicts Dhaka will keep growing – from 15.9m in 2007 to 22.8m in 2025. But Lagos, which has grown from less than half a million people in 1950 to over 13m in 2007, is predicted to reach just 16m in the next fifteen years.

Like many researchers, the Observer piece spends some time on the growth of urban slums. Again, the picture is complex. Over the past decade the share of urban slum dwellers has actually fallen from 39 to 32 percent, due to economic growth and policy interventions. But as people are flowing into cities faster than infrastructure can keep up, the absolute number of people in informal settlements is growing, and will keep growing. Ed Glaeser describes slum neighbourhoods as ‘private energy, public failure’: the development challenges of poor public health, chaotic infrastructure and urbanised poverty remain considerable.

Finally, we need to factor in the geography of climate change. Many megacities are coastal, and will be threatened by rising sea levels. Many will also be increasingly water-stressed in the years to come.

In his excellent book The New North, Laurence Smith explores the economic rise of the NORCS – cooler, resource-rich regions stretching across Canada, Scandinavia and parts of the US, Russia and China. He predicts new ‘hydrocarbon cities’ appearing across Canada and Russia, and new mega-regions like Cascadia – spanning Portland, Seattle, Vancouver and parts of NorCal.

Megacities are a great symbol of the global urban shift. But our urban future is going to be much richer and more complex than this. The sooner we recognise that, the better we’ll be able to plan for it.

A version of the piece first appeared on the squareglasses blog.

Local Public Sector Pay

2012-01-19T13:37:00.002Z

Interesting piece from Chris Giles at the FT on the debate around local public sector pay. The big issues here are around what we mean by fairness, the impact on public sector services and the wider spatial impacts.

On fairness, as I've explained before, I prefer to think of equal reward for equal work, rather than equal pay. The difference is that the former takes in to account local differences in the cost of living.

Chris Giles suggests that the main argument in favour of reforming public sector pay concerns the second of these issues - the impact on public sector services. As he says: "There is little reason why Britain should tolerate that a nurse, teacher or police officer should live towards the top of the local income distribution in the north-east or south-west of England, but be stuck well down the pay scale in London and the south-east." In the low real wage areas, equal pay translates in to low reward with subsequent consequences for public services (at the extreme, this difference kills people as explained by CEP colleagues investigating the impact of national pay in the NHS).

The FT is more dismissive of the impact on the wider spatial economy: "The simple argument deployed by Mr Osborne, that high public sector pay in poorer regions crowds out private sector enterprise, is also suspect." This is a bold claim given the lack of evidence in this area. The crucial issue here is whether the demand stimulus provided by higher public sector pay offsets the supply distortion in the labour market. Very little is known about either of these effects.

Preliminary finding from ongoing research suggests that there is some evidence of distortion in the labour market - at least from public sector jobs (we haven't yet looked at pay). Specifically, we seem to be finding that areas receiving more public sector jobs see no obvious effect on overall total employment, but do see lower manufacturing employment. This would be consistent with a story where public sector jobs crowd out 'tradeable' manufacturing while providing a demand stimulus to local services. A little more work to do till we are more confident on this finding, but suggestive of the fact that it might be a little early to completely rule out such labour market distortions.

Helping the Elderly Downsize

2012-01-17T14:24:00.002Z

I was pretty critical when the Intergenerational Foundation called for the government to adopt measures to stop the 'hoarding' of housing by older people. More recent efforts by Grant Shapps to get councils to help the elderly move if they want to have a better feel to them.

The BBC describes the new voluntary scheme as working as follows:"Under the scheme, the council will arrange for elderly people to move into rented accommodation, and then take responsibility for maintaining and letting their property at an affordable rate. The rental income is then passed back to them [...]" Providing the scheme is truly voluntary, then lowering transaction costs in this way may be a relatively cheap way to increase the supply of space (a pilot in Redbridge suggests that this is indeed the case).

But, and it's a big but, this is likely only to lead to a small increase in effective supply. Why? Because it turns out that not that many people appear to be 'trapped' by moving costs - according to the Telegraph "Government analysis of the Redbridge project suggested that 200 people in the borough were considering moving, but felt that they could not afford to." And this presumably represents the 'stock' of people who feel trapped rather than the annual flow. If so, the scheme may be helpful, but doesn't offer a radical solution to the housing crisis. My preferred radical solution remains to build more housing.

Skyscrapers and financial crashes

2012-01-11T12:31:00.002Z

I see that the Barclay's Capital Report suggesting that skyscrapers are linked with financial crashes has attraced a lot of coverage. Just as with city rankings it's a little hard to know what to make of these type of reports. Being generous, they at least provide food for thought.

Conceptually, it seems quite possible that there is something in this for the simple reason that most financial crashes follow booms and booms are generally associated with over investment in capital assets - factories, inventories, housing, so why not building height? That said, if someone wanted to seriously assess this claim, they could do worse than start with this wikipedia list of the worlds 250 tallest buildings. The correlation with financial crashes was far less obvious to me as I looked down that list.

Even if there tall building booms do precede financial crashes, it's important to remember that serious research tells us they play an important economic role - in helping make the best use of a scarce resource (land) and in generating agglomeration economies which help make firms more productive. These longer term benefits are likely to outweigh any short run effects so I remain convinced that UK cities (and London especially) could do with more tall buildings not less.

High Speed Round Up

2012-01-09T11:29:00.006Z

Just back from annual leave and slowly getting my brain back into gear. Given that we are told the HS2 decision is coming soon, I thought it might be useful to pull together some of my previous blogs on the issue:

Extra tunneling costs, the finance black hole and the problems with predicting demand growth from 6th December 2011.
Why it's OK to support some large infrastructure projects but not others (following criticism of the ASI's position as purely ideological)
HS2 and NIMBYism (some findings from related academic research)
HS2 and the North-South divide
Benefits and costs both highly uncertain.
Environmental benefits limited.
People are in favour of high speed rail, providing they don't have to pay for it.
The opportunity costs of the project are large (i.e. we could better spend the money on other things)

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

CLG select committee report on planning:The good, the bad, the ugly

2011-12-21T11:15:00.006Z

An early Christmas present from the CLG select committee - it's report on the national planning framework. My assessment - part good, part bad, part ugly.

The good(ish):

Parts of the NPPF could be clarified, either by making the document longer or cross referencing to other things
Importance of local plans and a presumption in favour of sustainable development consistent with the plan (I always assumed that was the intention of the draft)
Transition should allow a little more time for LAs to get their act together and current planning guidance to continue to apply until new guidance in place (something we suggested in our recent assessment)
Clarify what is meant by affordable housing
NPPF is placeless, allow local variation where there is evidence to support this
Local authorities to set own targets for brownfield first (again, something we called for in our recent assessment)

The bad:

The committee's suggestion that NPPF makes the economic dimension appear predominant. For too long the planning system has essentially ignored the economic dimension. It says a lot that NPPF tries to partially redress this balance and is immediately accused of going too far.

The ugly:

The unwritten assumption underlying the select committee report that the problem with the planning system is the process rather than huge constraints imposed on the use of greenfield sites. In keeping with this implicit assumption, the select committee wants to strengthen brownfield targets and reinforce town centre first. These are exactly the policies that tie us to our existing urban footprint and create many of the problems we experience in adjusting to the structural changes occurring in the UK.
The continued insistence that constraining us to our existing urban footprint is somehow costless. The committee claims to have 'found no conclusive research, however, that planning policy or guidance is a particular constraint on economic development'. This is misleading because it relies on a very narrow definition of 'economic development' (oh the irony). As SERC has documented, there is evidence that the UK planning system:
- Increases house prices (with a regressive impact on low to middle income families)
- Increases housing market volatility
- Increases office rents
- Lowers retail productivity
- Lowers employment in small independent retailers
- May not properly assess the true social costs of brownfield versus greenfield development.

I certainly accept that this evidence is not 'conclusive', but neither is it irrelevant. Taking proper account of it should be central to striking the right balance between the costs and benefits of our planning system. The fact that the committee chooses to ignore it and focus instead on reforming the NPPF to perpetuate the status quo - at least in terms of outcomes, if not process - is a deeply depressing reminder of just how biased is the debate on the future of our planning system.

Business Rate Retention Proposals (the X factor)

2011-12-19T16:10:00.006Z

The government has published its response to the consultation on allowing Local Authorities to retain some of their business rate growth. CLG's website provides both mind numbing details and a plain English guide. Unless you have a very specific interest in the details of local government finance, I'd recommend a quick read through the latter.

As I wrote in July last year, the key tension here is the tradeoff of equity versus growth: the scheme will give incentives for growth at the cost of some equality in funding across councils. Some aspects of the announcement today (10 year fixed terms for resets, no cap on the amounts that can be retained) favour growth incentives, others (the system of tariffs and top-ups, uprating of baseline by RPI, levys for highly 'geared' councils) favour equity.

Of course, the final balance in terms of the strength of the growth incentive will depend crucially on the share of business rates growth that local authorities are allowed to retain. According to CLG "In addition to retaining the local share of their business rates baseline, councils will also be able to keep the local share (x percent) of all their business rates growth. This means that the more an authority grows its business rates base the better off it will become."

What is X? To be determined in Spring 2012 we are told. So a little longer till we get to figure out how exactly where the balance lies.

City Deals: what next?

2011-12-15T09:06:00.002Z

Posted by Dr. Max Nathan, SERC and LSE

Last Thursday’s Cabinet Office paper ‘Unlocking Growth in Cities’ got rather swamped by what happened in Brussels the following night. That's a shame. Nick Clegg and Greg Clark laid out some important, potentially profound shifts in the way local and central government work together. This is very clear from the obvious buzz in the room as Ministers delivered their speeches in Leeds, and the flurry of comment since.

As Tim Leunig has explained, Ministers hope that by granting cities more powers urban economic performance will improve. SERC's evidence (here, here and here) tells us that devolution’s direct effects on economic growth aren’t clear-cut. However, the indirect effects are likely to be more important, as new ways of working emerge and local challenges tackled. In theory, that could trickle through to better economic outcomes.

Thus City Deals. The deal-making process has already begun, with the eight core cities submitting draft asks, and an ‘illustrative menu ‘ in the paper showing what’s up for negotiation. Ministers recognise, rightly, that deals should look different in different places: an annex highlights the very different challenges the big conurbations face.

This round of deals is also just the beginning. Further down the line, Ministers are likely to broker further talks with ‘free-standing cities’ such as Derby or Chester.

So how’s it likely to go? Here are three critical points, and some constructive suggestions.

First, this is a long game. If city deals are the real deal, they’re a major shift in centre-local ways of working. In the jargon, they will trigger fundamental changes within Whitehall and local government institutions and institutional cultures, as well as in their working relationships with each other.

These deep shifts will take time to work through. In France – which adopted a big bang approach to devolution – it took 10 years for the system to fully bed down. There’s no reason to suppose England will be any faster.

So it’s essential that Ministers are in this for the long haul. City Deals may be delivering real benefits by 2015, but it’s unlikely they will achieve full potential until some years after.

Second, there are some reservations from cities themselves. To succeed, City Deals need vertical co-ordination (between cities and the centre) and horizontal co-ordination (between Departments). We don’t yet know whether Ministers can deliver the latter. The DPM’s Ministerial working group is broad, but some Departments – notably DWP – are known sceptics on the devolution agenda.

Whitehall capacity is another issue. The Cities Policy Unit is full of very smart people but there are only 15 or so of them. Do they have the capacity to handle the kind of complex, tricksy bargaining / monitoring that’s going to be needed? Greg Clark’s immediate ambition – to have eight city deals locked down by Budget 2012 – certainly looks ambitious (especially if those deals are to be substantive).

Third, there are some worries from the Whitehall side. There’s been some official grumbling about a lack of local ambition in core cities’ draft deals (I suspect city leaders would vigorously dispute this). In part this may reflect tangled local governance. LEPs have emerged as key players in the bargaining process – but of course of they lack a direct democratic mandate. Ministers would like to see big city Mayors in place soon – but by passing up the option of Metro Mayors, the Coalition may have dug a hole for itself. It’s possible none of the planned referenda will pass; alternatively, the Leeds city region might end up with three Mayors – covering Leeds, Bradford and Wakefield.

All of which suggests four pointers for the coming months.

First, as Henry and I have pointed out before, localising economic development requires strong, clear local incentives. Ministers are starting to put some of these in place. That process now needs to accelerate, starting with a decision on Tax Increment Financing and some rapid prototyping on the ground.

Second, some institution-boosting may be needed. City Deals have transformed the position of LEPs. From being close to written off six months ago, LEPs are now at the heart of localism. They now have core funding through the Growing Places fund, most will have EZs and many RGF money. But as expected, a gap is opening up between big city LEPs and the rest. If city deals are to be rolled out beyond the Big Eight, Whitehall will need to think about laying on further resources.

Third, some Deals will work out faster than others. The Government’s ambition to oversee eight front runners at once may need to be revisited in a year or so, with some cities paused and others accelerated. By emphasising the need for cities to ‘show real progress’, Ministers have given useful themselves room for manoeuvre.

Finally, civil servants should get out more. City deals need to accelerate the pace of devolution from its glacial tempo under Gordon Brown. For Whitehall officials, an important part of the process will be building trust and demonstrating empathy – not easy to do from Whitehall, especially now that Government Offices are being wound up. Embedding staff in town halls may sound corny, but it would be instructive for officials to see how cities are run at street level – and to see what their own policies look like from the sharp end.

The Portas Review

2011-12-13T11:28:00.009Z

The Portas review has published its 28 recommendations for saving the high street. The report's a mixed bag - some of it innovative, some of it marginal and some of it (a couple of great big sticks aimed at out of town developments) pretty depressing.

There is a serious issue to consider here - arguably 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. A number of Portas' recommendations - e.g. town teams and business improvement districts - are about managing those externalities.

Part of the problem, of course, is that managing these externalities is difficult. Indeed, high streets are already highly regulated. In fact, the Portas review suggests that in some areas they are over-regulated - hence the call for the removal of unneccesary regulation, for the reform of the use class system (which governs change of use) and for the freeing up of redtape. But at the same time the review also calls for the introduction of a whole lot of new red-tape - betting shops in their own use class, large retailers forced to support local businesses and report on their activities, landlords to have new responsibilities for contract of care, new restrictions on vacant units, banks forced to sell assets, a public register of high street landlords. It's hard to see whether this leaves the high street more or less regulated. I guess one could argue that this would leave the high street better regulated, but you'll have to forgive me some scepticism on this (given the speed with which the report has been pulled together).

Finally, of course, we come to the policy recommendation which is most likely to have real bite - the NPPF to make explicit the presumption in favour of town centre first policy and the need for the secretary of state to sign off all new out-of-town developments. I struggle to express how depressed this makes me, so let me simply repeat my arguments from May this year:

"What worries me, however, is how incredibly one sided debates about this issue have become. Reading much of the commentary you would think that intervening was essentially costless and that everyone agrees out of town shopping and clone towns are bad.

Clearly, however, this is not the case and there will be substantial costs to pay to further support the high street. Supermarkets [and out of town developments more generally] offer cheaper prices, more diversity and convenience. So regulating them further will increase costs of living and reduce choice. Indeed, SERC research estimates that existing planning restrictions may already reduce supermarket productivity by 20%. If saving the high street requires further restrictions these costs will rise. High grocery prices hit the poor harder than the rich so the impact of this may also be regressive. Tax subsidies to support the high street (as proposed by some [including Portas]) are not costless either. What expenditure should we cut (or which taxes raise) to fund this? If the proposal is to somehow pass these costs on to supermarkets then that raises prices with the regressive impact just highlighted.

These costs may be worth paying. But the public debate too often ignores them. I am no media expert, but my major worry is that the commentary around this issue mainly reflects the concerns of the better off who have strong preferences for independent retailers (and disposable income to take advantage of them) . Let's hope the review takes a more balanced approach to identifying the costs and benefits so that we can properly decide whether the latter outweigh the former."

With the report in front of us, it appears that my final piece of optimism was, as usual, misplaced. I am still hopeful, however, that the government will see how massively these two recommendations conflict with their localism agenda. Much better, for many reasons, to allow local authorites to decide on their own priorities for town centres. First, we would get more experimentation and a better idea of what works. Second, we would hopefully find out whether local communities think the costs of these policies (assuming they actually work) are worth paying for the benefits of livelier high streets.

Read more:

Protectionism and the high street (why existing retailers like to restrict entry)
Be careful what you wish for (why town centre first policies might have hurt independent retailers)
More supermarket bashing (on the costs and benefits of further restrictions on supermarkets)

More housing please

2011-12-12T12:49:00.004Z

In all the debate around the government's planning reforms, we are in danger of losing sight of the fundamental problem - the current system has failed to deliver enough houses, of the kind people want, in the places where they want to live. Solving this fundamental problem requires us to build more housing. Every other 'radical' solution so far proposed is either insufficiently radical to make much difference (empty homes) or sufficiently radical that it's hard to believe it represents a good solution (empty bedrooms).

For those who would like more detail:

My post outlining the problems with proposed radical solutions.
Some reflections on the recent housing strategy.
SERC's Max Nathan on the government's planning reforms.
A criticism of the alternative planning proposals from the National Trust.
Joseph Rowntree Task Force on the Housing Crisis.
Martin Durkin's enjoyable rant against the Telegraph's 'Hand's off our land' campaign.

Enjoy.

Unlocking Growth in Cities

2011-12-09T10:16:00.001Z

Posted by Tim Leunig (LSE, SERC and CentreForum)

Deputy Prime Minister Nick Clegg and Minister for Cities Greg Clark today launched the Cabinet Office paper Unlocking growth in cities. This is the evidence base for the proposed city-led transfer of powers from London to England’s largest cities.

Clegg was passionate and Middlesbrough-born Clark as cerebral as an LSE PhD should be. Labour’s Chuka Umanna was supportive, so in short, it will happen.

Unlocking growth is concise, readable and contains a high ratio of evidence to blather. The team who wrote it deserve praise.

The startling fact is that only 1 of the 8 largest places outside London has an income above the national average. In Spain it is 2 places, in France 3, in Italy 6 and in Germany 8 out of 8. Noting that cities elsewhere have much more power, the government rightly proposes to extend more powers to our cities.

Whether this will deliver growth is another matter. Unlocking growth also tells us that places with more skills than their national average have higher incomes than their national average, and vice versa. This is true for 28 of the 32 places across Europe listed, including all 8 UK cities. Bristol is the only top-8 city with more graduates than the UK average, and is the only top-8 city with a higher income. Birmingham is poorer than Bristol primarily because people in Birmingham have fewer skills and therefore earn less.

In this context the new cities agenda looks weak. It is sensible to give cities unified capital budgets – how could it not be? But if what really matters is education then this is not a game changer.

Education is already controlled locally. National government is not holding schools back in Manchester and Newcastle, although locally determined pay may allow smaller class sizes in many lower cost regions.

Schools in England’s big cities fail far too often. Across the country 32% of kids whose parents are in the bottom 20% by income get 5 good GCSEs including English and Maths. London does much better, at 44%, with excellent performances in a range of boroughs including Hammersmith, Hackney and Redbridge.

All other big cities do much worse. The equivalent figures are 29% in Liverpool and Manchester, 26% in Sunderland, 24% in Bradford, Leeds and Sheffield and 22% in Newcastle. These figures take into account ethnicity, place of birth and other characteristics. If every Borough in London can beat the national average, these cities have no excuse: they are failing their kids, and destroying their long term economic potential.

If our cities are serious about improving their position they need to concentrate on making sure that they educate their students much more effectively than at present. Skills attract higher value added companies, and provide local residents with more options in downturns. Education is not a perfect answer, but it is the best one we have.

Unlocking Growth in Cities was launched at an IPPR North conference on 8th December at which the author was a speaker. This blog is based on my speech to that conference.

SERC at City Hall

2011-12-08T10:42:00.004Z

Posted by Dr Max Nathan, SERC and LSE Cities

Earlier in the week I gave evidence to the London Assembly's Economy, Culture and Sport Committee, which was holding a session on the Tech City initiative.

On the panel with me were Eric van der Kleij (Tech City UK), Kulveer Ranger from the Mayor's office, Theo Bertram (Google), Georg Ell (Yammer) and Jeff Lynn (Seedrs).

You can see the whole thing on this 'webcast' (very web 1.0). There's some entertaining political to-and-fro between Ranger and some of the Labour members for the first 20 minutes or so, then a good hour of discussion after that.

A version of this post originally appeared on the squareglasses blog.

Local Government Finance and the Glencore IPO

2011-12-08T09:16:00.005Z

The FT reports that the Glencore IPO has resulted in an unexpected 'bonanaza' for the small Swiss village that is home to a number of Glencore executives. The payouts to these executives, as a result of the IPO, have been sufficiently large that residents have been able to vote to reduce the local income tax rate.

Contrast this with the UK where, as things currently stand, growing local incomes have essentially no effect on local revenue. Likewise, increasing the number of businesses. For new homes, councils do see some increased revenue from additional council tax (doubled for six years with the New Homes Bonus). The government consultation on business rate retention, which closes soon, is also looking to provide incentives on business rate retention, although it's not yet clear how strong these will be.

I can only assume that the Glencore story makes Local Authorities in the UK (who want greater tax raising powers) green with envy.

High Speed Rail Delays

2011-12-06T08:50:00.011Z

The debate on high speed rail rumbles on. The latest round of arguments has been partly inspired by the Transport Secretary's decision to delay a decision until early next year so that she can decide whether to spend an extra £500m on another tunnel under the Chilterns. To put that figure in perspective, note that it's three times the amount announced in the Autumn spending review for local transport projects once again raising the issue of priorities. Another way to think about it is as a 3% increase on the £17bn budget. That makes the already quite weak cost benefit just that little bit worse.

At the same time as the tunnel decision was announced, a new report suggested that ministers will be left with an £8.5bn black hole if they go ahead with the route. I haven't had time to read the report itself and it was commissioned by 17 councils along the route, so comes with a health warning. According to the Telegraph the report reveals 'that the benefits of the scheme to the taxpayer could be as little as half the costs'. This seems an odd point to emphasise, because the fact that the costs exceed revenues has been known for a long time (for example, in March 2010, I noted 'the second certainty is that any new route will not be commercially viable and will need large government subsidies'). It's also the case that lots of government expenditure fails this test because it's standard to take in to account the benefits to tax payers as well as the revenues that go to the exchequer. The fact that total benefits are likely to exceed costs is not in (that much) doubt for HS2. The point is that these total benefits don't add up to much compared to other things the government could spend money on.

The other point central point raised by the report directly addresses the issue of total benefits and concerns the government's projections about the level of demand. Figuring out the level of demand involves making predictions about growth and predictions about how quickly rail demand will increase as the economy grows. The first of these numbers is certainly open to debate (DfT claims that the figures it uses - the 'elasticity' - are conservative; this is certainly not an opinion shared by all experts in this area). You would imagine that the second number - the growth rate of the economy over the period - might also usefully be revisited (given the Autumn statement last week) but I haven't yet seen anyone do this.

The growth rate in passenger numbers matters because HS2 makes journeys faster and relieves capacity constraints on the existing network. The benefits from higher speed depend on the number of passengers that will use the service, if you project smaller numbers you get smaller benefits. The capacity constraint depends on how fast passenger numbers grow relative to capacity. Figures released this week have thrown some doubts on that problem as well, suggesting that peak time trains are only a little over half full. Again, these figures come from opponents so are subject to the usual health warning but they do raise the issue of whether other options (e.g. pricing structures, existing capacity) could be used to deal with this problem. In addition, in the Eddington study there were capacity constraints all over the transport network (road and rail) by 2025 so the case for HS2 is not unique in that sense. Finally, note that the easing of capacity constraints is also well captured in the traditional cost benefit analysis (providing that passenger numbers aren't over estimated) and as I have said before that case looks weak relative to alternative transport investments.

Is the New Homes Bonus Working? (Part 2)

2011-12-01T15:51:00.005Z

DCLG have just announced that this year's New Homes Bonus payment will be £430m. As DCLG point out 'this is more than double the first year's payment'.

At first, this sounds like great news, until you remember that the bonus is paid for 6 years on any new build, so this year's figures include the second year of payments for last year's house building. According to DCLG: "This year's larger payment includes £210 million for new and empty homes delivered in 2010 -11, a second instalment of almost £200 million for homes built in 2009 -10, and the first premium for affordable homes totalling £20 million"

A better comparison comes from looking at the actual housing numbers. The first year's payments were for a 150,000 increase in the effective housing stock. This year's are for a 159,000 increase in the effective housing stock.

Several things help put those numbers in to perspective. First, as I have discussed before last year's increase of 150,000 in effective housing stock included the worst net addition figures for the last 5 years. So the 159,000 increase this year makes for the second worst figures in six years. Second, the NHB was announced sufficiently late last year that it was hard to imagine that it would have had much impact on the numbers to October 2010. One way to view the 159,000 number therefore is that the NHB resulted in 9,000 additional completions (because this was the first year that it had bite on decisions). That doesn't sound like very many. Two caveats. One is that starts might be a better measure for tracking the impact of NHB than completions (because its those decisions that will have been made since the NHB was introduced). But according to DCLG: "Annual housing starts reached 96,070 in the 12 months to September 2011, down by 7 per cent compared with the 12 months to September 2010". The other far more significant factor is, of course, the dire economic situation. If we could net out the effect of that, the impact would look better than 9,000 additional completions, although it's hard to figure out how much better. [If anyone has seen an attempt to do that I would be very happy for any pointers.]

In short, it remains difficult to tell how much impact NHB is having on the willingness of local communites to allow more building.

Rebalancing versus Growth

2011-11-30T11:58:00.004Z

As regular readers will know I tend to steer away from commenting extensively on the overall macroeconomic position. This reflects the fact that I know my limitations. Or, if you prefer David Ricardo to Dirty Harry, my comparative advantage is in the economics of cities and regions.

For what it's worth, I came away from yesterday depressed by both the economics and the politics. The economics is self explanatory (for anyone that was listening). In terms of politics, and at the danger of stating the obvious, it seems this crisis is capable of bringing out the worst in everyone. The Labour Party continue to imply that this is all Osborne's fault for pursuing austerity. But as Evan Davis argued so coherently on the Today Programme, is Ed Balls really claiming that a 1% extra stimulus last year would have had such a large effect on medium term growth rates? The OBR certainly doesn't appear to agree with this assessment (blaming revisions to forecasts on price inflation and the eurozone). On the other side, Osborne's absolute insistence that we are currently at the limit of bond market tolerance (with no wriggle room) certainly deserves closer scrutiny in the light of changed circumstances.

Turning to my more usual remit, what about the urban and regional elements of the statement? Here, my fundamental question remains one about priorities. In a world where it would be good to have growth coming from anywhere how much emphasis should the government place on 'regional rebalancing'? The (as yet untested) regional growth fund receives another 1bn to help the areas most affected by public sector job cuts. Why not focus on the people most affected by job cuts which helps focus on the fact that other areas might best be placed to generate new jobs for those people? On broadband we will see ten ‘super-connected cities’ across the UK. I think it's reasonable to ask whether (for example) Belfast should be a priority for this kind of investment? More generally, the national infrastructure plan will 'invest in all parts of the UK'. Again, does this make sense in terms of priorities? To take just one example (although one of my favourites) is now the moment to halve tolls on the Humber Bridge through a debt write down of £150m? At the same time, local transport projects only receive an extra £170m. And then there's the tricky issue of billions on HS2.

Even in better times, SERC argued that it might make sense to focus investments so that government was working with market forces at least within regions. A discussion around these issues appears more important than ever, if we want policy to be as effective as possible in helping those worst hit by the downturn. Of course, the politics of this are awful, so I am realistic about the likelihood of any serious discussion. That's a pity, because politics aside, it's possible (although unlikely) that the economics of this could be awful as well and you would hope that some free and frank debate might help figure out if this was the case.

Infrastructure Options

2011-11-28T14:45:00.003Z

The government hopes to invest money (from the Chinese and others) in 'shovel-ready' infrastructure projects. The FT tells us that tomorrow's announcement will be 'long on good intentions, but short on signed contracts'. Translating intentions in to money will thus depend on the portfolio of projects that are shovel-ready. The quality of this portfolio will depend, in turn, on how effective DfT and others have been in generating project options.

Unfortunately, when Eddington looked at this issue, it was clear that the system in the UK was better at generating options for some types of schemes than for others. Indeed, if I remember correctly, for some types of intra-urban schemes, there were so few schemes on the books that it was hard to assess the spread of possible returns (these are the numbers that I have used in the past to make comparisons to HS2).

One concern here is the political difficulties about the location and nature of projects. Following Nick Clegg's LSE speech earlier this year, I discussed the new focus on infrastructure: "This will start with the regional growth fund, where round 2 will, we are told, prioritise infrastructure projects. I don't think this is necessarily a great place to start because much of the economic literature is generally sceptical about the role of infrastructure in boosting local economic activity in struggling areas. After all, as population in these places is historically declining, they likely have plenty of infrastructure relative to people. How is adding more going to help? [...] Delivering transport infrastructure investment on time and on budget (another commitment) is generally a good thing, although unrelated, as far as I can tell, to fiscal stimulus. After all, overspends and overruns still involve government expenditure. I would welcome a genuine move to prioritise transport projects in terms of bang-for-buck (how about dropping HS2 in favour of the kind of smaller high benefit schemes that Clegg highlighted in his speech today)? I might even welcome more infrastructure spending. But with net capital expenditure set to fall dramatically (even if plans are in line with Labour's projections) this prioritisation will take place within a significantly smaller pot.

These worries remain. At least, post-Eddington, DfT put a considerable amount of effort in to improving option generation. Let's just hope that work had some impact in generating the current portfolio so that we don't end up funding lots of schemes like the one discussed in detail here.

Immigration Up, Housing Starts Down

2011-11-24T12:51:00.002Z

The latest immigration figures suggest that 2010 saw the highest net entry on record (252,000). Meanwhile housing starts are at their lowest level since the 1920s (at a little under 100,000). Indeed, those figures look set to worsen given the widely reported 454 affordable housings starts last quarter.

Coming so close to one another, these figures made me thing of Steve Nickell's lecture on immigration and housing from earlier in the year. In that lecture he suggested that we need to build around 150,000 houses per year to cope with the increase in demand that comes from real income growth and another 120,000 per year to cope with changing patterns of household formation. These kind of rates would be needed for price houses to real income ratios to stabilise even if net immigration was zero.

Somewhat ironic then that the (unlikely to be met) short term aim of government is to stimulate demand for new build in the hope that this creates employment in the construction industry, while in the long run the problem remains that the growth in demand will continue to exceed the expansion in supply.

The economics of planning

2011-11-22T15:03:00.009Z

Posted by Dr Max Nathan, SERC and LSE

Yesterday's launch of the Government's Housing Strategy - and some of the reaction to it - have turned the spotlight back on to the planning system. As Henry Overman points out here, planning factors are one of the three factors influencing levels of housebuilding.

Here [pdf] and here [pdf] are two new papers on the economics of planning, written by Henry and I. Versions were also submitted to the National Planning Policy Framework (NPPF) consultation last month. (For those outside the UK, the NPPF, subject of furious public debate during the summer, is part of Ministers' attempt to speed up the English planning system.)

The papers pull together SERC research on planning (paper 1) and assess the Government's proposals for planning reform (paper 2). Henry and I don't agree on all of this - I'm certainly more pro-brownfield than he is - but we both felt that important pieces have been missing from the recent public conversation.

The key messages are:

1) The job of planning is to balance environmental, social and economic welfare. This means tradeoffs, so all planning systems have costs and benefits.

2) Planning's economic effects, especially the costs of the status quo, have been underplayed in recent debates. We summarise evidence strongly showing current rules increase house prices and volatility, increase office rents, probably lower retail productivity and lower employment in small independent shops.

3) Paradoxically, land restrictions in the most popular areas have led to some truly unsustainable development - such as selling off school playing fields for housing. Similarly, brownfield-first policies have delivered some positive benefits for cities like Manchester, but aren't a panacea.

4) The draft NPPF needs to be much clearer about sustainable development, potential tradeoffs and how practical decisions might be made (for example, using the National Ecosystem Assessment).

5) We agree with the National Trust and others that there's a basic tension between Government's desire for localism and some important national objectives. Ministers need to be clearer about what trumps what, or (more in keeping with localism) provide stronger incentives to align interests.

6) The presumption in favour of sustainable development that is consistent with the plan should be retained. But local authorities need time to adjust to the new rules, and the Government should introduce the change gradually.

7) Current incentives to ramp up housebuilding, such as the New Homes Bonus, are probably too weak and need to be strengthened. And one-size land restriction policies (such as town centre and brownfield first) don't work well in practice. Rather, we suggest Whitehall sets the appropriate framework to try to encourage particular patterns of development but then allows local authorities to develop their own land use restriction policies.

This piece was originally posted on the squareglasses blog on 6 November 2011.

Housing Strategy

2011-11-21T16:06:00.002Z

Some initial commentary on the government's housing strategy suggests that there is little coherent vision. Unless you think that the government could be spending lots more money than it is on housing, I think this criticism is a little unfair.

The government has two problems. One is short term. (At least) three things are combining to make current building figures look very bad. First, the recession makes things very uncertain for housebuilders. Second, the debate around the National Planning Framework is reinforcing that uncertainty. Third, the lack of mortgage finance is compounding the problems stemming from this increased uncertainty. There's not much that can now be done about the first two of these (although I did suggest some time ago that the government might regret the haste with which it abolished regional plans in the absence of something to replace it). The new build indemnity scheme will do something to tackle the third problem of mortgage finance - at least for new build. This will have some positive effects on supply, but it is possible they might be quite limited. Not least, because developers with schemes that are not started may be better off exercising the option value of holding on to undeveloped land until the market outlook improves.

On schemes that are stalled, the government has announced a Get Britain Building investment fund. Apart from the more boring description, and the smaller amount of money available, its not clear that this is massively different from the labour government's 'kickstart' programme. As a results, and as with the new build indemnity, the effects are likely to be positive but limited.

Longer term, I think the fundamental problems remain and my take on this is little changed from earlier in the year. The government has a real problem and one that is mostly not of its own making. The under-supply of housing has been a long term problem which the previous government were unable to tackle effectively. Labour were slow to recognise that something needed to be done about the planning system. Once they realised there was a problem they introduced top-down regional plans that tried to force local authorities to build more housing. These were incredibly unpopular with local authorities in parts of the country that needed more housing and were quickly abolished by the coalition. The national planning framework intends to replace this top down system with more localism and a set of incentives to encourage development. For a number of reasons I think these reforms should be welcomed but worry about the short term as discussed above.

In addition to these short term issues, there is the longer term issue of what the government will do if its package of financial incentives are insufficient to encourage more development. With the new system yet to bed in it could be a number of years before the government is able to assess whether the system is working (the recession compounds the problems here). That brings us close to an election where a change in government could see a change in policy. Cue more uncertainty for developers. This suggests that the government might have been better going for stronger initial incentives (e.g. on NHB and local business rate retention) which could then have been scaled back.

Another area which Labour struggled with, was the insistence on high brownfield targets. I have discussed the problems with these targets before but they remain incredibly popular (see, for example, the recent National Trust proposals on the NPPF). There is a real danger here that the coalition will not be able to resist calls to strengthen constraints on building on greenfield land in the national planning framework. They have already committed to maintaining green belts, but there are many other categories of 'protected land' where policy remains uncertain.

So much for some of the problems on the supply side where, as I have said, many of the problems are long term and not of the government's making. As already discussed, I think the short run effect on the demand side will be limited. In the long run, I just don't think policies on the demand side will help and may well create more problems than they solve. Setting aside the big demand side issue (the fiscal stimulus) the government continues to spend money on policies that try to 'help people on to the housing ladder'. Such policies to boost demand exacerbate the price problems caused by supply constraints and only help those lucky enough to get assistance from a scheme. This will always be at the expense of someone similar who doesn't benefit from the scheme and does nothing much to address the fundamental problem. The politics of this are tricky because it allows the government to say they are 'doing something to help' but the money would be much better spent on increasing incentives on the supply side. The government should certainly resist calls for further measures on the demand side.

In short, today's announcements might do something (although likely not much) to help in the short run but the longer run problems remain. Worse for the government, those long run problems (particularly around uncertainty and the resulting option values for developers) may well dampen any response to the short run policies.

De-industrial revolution

2011-11-17T12:15:00.003Z

BIS have launched their 'Make it in Great Britain' campaign highlighting the best in British Manufacturing (presumably with a view to getting more of it). Aditya Chakrabortty also had an interesting piece on the Guardian yesterday on the de-industrial revolution asking why Britain doesn't make anything anymore. Both of these things had me reflecting on what, if anything, policy can do about this.

Let's start with what caused the decline in British manufacturing. The economists explanation of this is pretty simple - Britain's comparative advantage lies in services rather than manufacturing so as the world globalised, we shifted towards services away from manufacturing. Of course, comparative advantages are generally created, rather than god-given, so it's reasonable to ask whether there are things policy could do to change this. For example, two popular prescriptions are that we could introduce more apprenticeships or different ways of funding businesses. In short, we could be more like the Germans. Unfortunately, these kinds of explanations muddle cause and effect. Who says that these parts of the system haven't developed in response to the fact that manufacturing in Germany got big because of some other comparative advantage - e.g. the fact that Germany is more centrally located in the EU than the UK (which makes it a better place to manufacture heavy machine parts that need shipping around). In short, we have no idea if replicating bits of the German system would make any difference.

Similar problems apply for calls to spend 'more on innovation'. We already have an R&D tax credit and various other BIS run schemes that try to do exactly that. Perhaps we should 'invest more in manufacturing'? Trouble is, the Regional Selective Assistance scheme has been making big investments directly in manufacturing firms since the 1970s. In short, even if the government had the money, spending more of it wouldn't necessarily shift our comparative advantage that much. At the end of the day, the UK is relatively good at services for many reasons.

Of course, there is always the argument that the structure of our economy is 'distorted' because of what happens in the financial sector. I have some sympathy with these arguments and have considered them in more detail in a previous post. But even if we removed some of these distortions - e.g. by changing the pay structure in financial services - why think that the rebalancing is towards manufacturing over other service activities that the UK is good at?

The issues are further complicated by the fact that the debate often assumes that these changes would benefit lower skilled workers or declining places. Both of these assumptions are highly questionable. Even if we did manage to improve our manufacturing share, lower skilled workers would still be hit by the double whammy of competition from China and technological change. For a long while, research suggest that the latter had actually been far more important than the former in explaining the widening pay gap. More recent evidence suggests that intense competition from China may now also play a role, especially for the lowest paid. Unless people are seriously willing to consider much more trade protection (or some sort of ban on technologies) then 'more manufacturing' is likely to be able to do relatively little for the lower skilled. If restrictions on trade are out, we either need to increase skill levels, or get the lower skilled to provide non-traded goods. But when economists say 'non-traded' goods they often mean services (cleaners, builders etc) so that doesn't necessarily equate to more manufacturing either. Of course, in non-traded goods lower skilled workers often face intense competition from immigrants, but suggestions of restrictions there run in to both political and practical difficulties (lots of this competition is from EU workers). Again, evidence on the magnitudes of these effects on wages and employment are mixed, although moving towards finding larger effects in periods when immigration has been larger.

Similar arguments apply to whether a move towards manufacturing would help declining places. Who knows where these new manufacturing jobs would be created. In addition, here, I share Aditya Chakrabortty's intense scepticism about calls to change the skill composition of places (get more high tech jobs) as a means of indirectly helping the lower skilled.

It should be clear that I do not think this is an area where there are any easy answers. My gut feeling is that there is no reason to think that the UK is going to generate lots of additional manufacturing jobs anytime soon. In fact, I worry that this continued focus on the structural composition of the UK economy is a considerable distraction from the tasks at hand. In the short term this is all about finding sources of demand. The longer run issue may be even trickier. How do we improve the labour market outcomes for lower skilled workers? 'More manufacturing' is simply not an answer to this question.

Displacement Zones

2011-11-15T09:57:00.002Z

Back from the Urban Economics Association sessions that are organised as part of the annual NARSC meetings. As well as the session on cities and the public sector that I described last week, there were also a couple of great sessions on policy evaluation of Enterprise Zones. Covering US, French and UK experience, one common theme was that these schemes appear to need to be expensive to have much impact and, even then, the impact comes mainly in the form of displacement from nearby areas.

Matt Freedman (Cornell) looked at the effect of the New Market Tax Credit in the US. This scheme mostly provided support for commercial development and involved billions of dollars of expenditure, mostly spent on commercial development. Matt's paper gets at the effect by comparing eligible to non-eligible areas (what's known as a discontinuity design). My take on Matt's results is that the scheme (at least around the threshold) had no effect on home values, median income, unemployment rate or employment. There does seem to be some effect in reducing the poverty rate, but household turnover is up so this may well just be a composition effect. It's also not clear where this effect is coming from given the absence of effects on employment or house prices (which might conceivably drive this effect)

Matt's paper didn't explicitly consider the issue of displacement, but this is considered by Andrew Hanson and Shawn Rohlin. Their paper looks at areas just outside successful enterprise zones and compares them to areas just outside unsuccessful zones and find substantial evidence of displacement (areas just outside unsuccessful zones do relatively better because they don't experience the displacement). In preliminary work, Elias Einio and I show that the only effect of the UK Local Enterprise Growth Initiative was to move employment from an area approximately 1km outside the boundary of the scheme to 1km inside the boundary. Aside from this displacement we can (so far) detect no other net effects.

Florian Mayneris and co-authors look at the French EZ scheme which spends a big amount of money (something over 300 euro's per person if I remember correctly). They find that this scheme can have a significant effect on firms tendencies to locate inside scheme boundary, but no effect at the level of the municipality as a whole. That is, the scheme shuffles firms from the non-eligible to the eligible part of the municipality.

Of course, policy makers may want to claim that all this displacement of jobs is what they are trying to achieve -but it is certainly not consistent with the rhetoric that is usually used (which usually talks about 'creation' rather than displacement).

One final thought, the French paper is part of a series of four projects due to report early 2012 to help inform the French government's decision whether or not to renew the scheme. The problem? The scheme was already extended for five years in 2011. Another depressing example of evidence based policy making in action?

Beaches, Sunshine and Public Sector Pay

2011-11-10T20:15:00.002Z

I'm in Miami for the Urban Economics Association sessions that are organised as part of the annual NARSC meetings. Interesting session first thing this morning on Cities and the Public Sector.

Given the location (we're about a mile from Miami Beach) it seemed appropriate that the session started with Jan Brueckner's great paper on beaches, sunshine and public sector pay. Jan's research looks at whether or not public sector workers are able to get higher pay (relative to private sector workers) in high amenity cities. Jan's research shows that this is indeed the case, with the effect being particularly strong for unionized public sector workers. Jan's NBER paper gives more details.

In the same session, Giulia Faggio presented some of our work on the impact of public sector employment on private sector employment. Those results are still a little preliminary for a proper public airing. But one thing that did strike me is the fact that in the US the major controversy appears to be around pay, while in the UK the current concern is much more about employment. More to come on our substantive findings for the UK in a few weeks time.

[PS: For those of you based in London, Jan Brueckner will be presenting his work on Sub-Prime Mortgages and the Housing Bubble at the LSE on Monday 5th December.]

Economic Impacts of HS2

2011-11-08T13:30:00.005Z

I haven't had time to go through the transport select committee report on HS2 in much detail. The committee has chosen to focus mostly on the capacity issue as making the case for HS2 (as the wider environmental and other benefits are widely disputed). One thing that immediately strikes me, however, is that the 'capacity constraint' argument that they use may not be as strong as the report makes out.

The capacity constraint arguments revolve around the BCR, which the report gives as follows:

Appraisal date:	March 2010	February 2011
	London-West Midlands	London-West Midlands	Y network
BCR without WEI	2.4	1.6	2.2
BCR with WEI	2.7	2.0	2.6

On the basis of these numbers, the select committee conclude that HS2 represents "high" value for money because HMT classifies BCRs above 1.5 as good, above 2.0 as high.

But this is a little misleading, because the BCR for transport projects tends to be higher than for other investments (part of the reason why some people argue that we tend to underinvest in transport in the UK). Here's the picture for a bunch of DfT projects taken from Eddington's 2006 report (figure 3.1):

These figures include some wider benefits (Eddington doesn't have a figure for the traditional CBA) so you need to compare to the second row of the transport select committee table. To read these 'box and whisker' plots notice that the box captures the 25%-75% range of project BCRs with the big horizontal line capturing the average. On my reading, a wider BCR for HS2 of 2.0-2.6 puts it, at best, in the bottom 10-15% of projects that DfT had on its books at the time of the Eddington report. I am not sure that these numbers are 100% comparable, but I think that they are roughly right. If so, that suggests that the case for HS2 remains weak when compared to many other transport projects.

The Beginnings of the US Housing Boom

2011-11-07T10:22:00.002Z

Posted by Dr Christian Hilber, SERC and LSE

Joe Gyourko, (from the Wharton School) gave a great SERC seminar on Friday. The NBER paper - An Anatomy of the Beginning of the Housing Boom: US Neighbourhoods and Metropolitan Areas - attempts to figure out when the boom began in different US cities and neighbourhoods and whether any fundamentals were moving in the ‘right direction’ to help explain timing and magnitudes.

The research provides pretty convincing evidence -- using some amazing data -- that housing markets are 'local' (i.e., metro area) phenomena and are to a large extent driven by income as the main fundamental on the demand side and by regulatory and physical/geographical constraints on the supply side. Supply constrained cities boomed earlier and the research explains pretty convincingly that strong income growth occurred at the same time and offers a plausible explanation of house price booms in those cities. This is essentially ‘Economics 101’. Even more interesting, however, are the places that experienced substantial house price booms that were not explained by high income growth and tight supply; those in places such as Las Vegas or Phoenix. In these places Joe finds no evidence of the boom coinciding with a positive income shock nor is supply very tight. One further thing we know from Joe’s paper: The housing booms (or bubbles) in Las Vegas and Phoenix emerged much later and both the boom phase and the bust phase were very steep. So how can these phenomena be explained?

As Joe was careful to emphasize; the paper he presented does not provide an answer and at this point we can only speculate (although he is promising much more research to come). One plausible explanation to me is the following: Irrational exuberance needs some sort of ‘convincing story’ to emerge. Strong house price growth in places such as SF, NYC, Boston, LA etc. – that were supply constrained and at had good fundamentals – coupled with the extremely low interest rates created the “story” that the house price boom was being driven by historically low interest rates (or other changes in the economy). People started believing in this story. I would imagine that there may have been some spatial contagion effect. This is at least what the ‘spatial history’ of the US boom suggests – and is consistent with some maps on timing that Joe showed during his seminar. Essentially the belief in ever growing house prices may have spread from places such as SF and LA to places such as LV or Phoenix, even though the fundamentals in those places - apart from the interest rates - were extremely different. Now, in the places where it is easy to build (e.g., in Las Vegas or Phoenix) developers started to build like crazy. In places such as SF or NYC perhaps irrational exuberance started to contribute to the price increases originally driven by fundamentals. But how can prices increase at all in LV or Phoenix if supply is elastic? Perhaps the explanation is that supply is only very elastic in the long-run but not in the very short run; this is due to various planning, development and construction lags. So in the very short run if price growth expectations are (too) high this may encourage developers to add a lot of new housing stock. This pushes up house prices in the short-run but once supply adjusts in the medium and long-term prices come back to the pre-boom levels or may even fall below those. Because overbuilding can easily happen in LV or Phoenix but not in Los Angeles or SF, this can explain why the house price levels in SF and LA are still significantly higher than before the boom started, whereas this is not the case in LV and Phoenix. The downward adjustment was much steeper in LV and Phoenix.

Again, Joe’s research doesn’t yet prove any of this – so this is only informed speculation on my behalf. But SERC research shows that elements of this story – e.g. that planning constraints and physical/geographical constraints in conjunction with strong income growth explain the strong increase in prices – are certainly consistent with UK data. There are likely other explanations and the above may be too simplistic to explain everything. After all, on our Real Estate masters we spend several lectures on the fundamentals of housing markets and house price dynamics and there are numerous factors that contribute. Still the above may be a rough explanation of the fascinating picture Joe painted about the timing of the boom across different US metro areas.

Falling house prices and the planning system

2011-11-03T11:08:00.015Z

Posted by Philippe Bracke, LSE and SERC

In periods of economic distress it is natural to think in terms of cycles. Reaching the bottom of the cycle is a painful experience but at least gives some hope: from that point onward, things can only get better. UK house prices, however, look still far from their bottom.

In a recent research project for the IMF, I have studied the house price expansions and contractions of 19 OECD countries since the first quarter of 1970, and identified 55 expansions (of which 6 are ongoing) and 62 contractions (of which 13 are ongoing). On average, expansions last 6 years and produce a 60% house price increase in real terms; contractions last 4 and a half years and produce a 30% real price decline.

These numbers give the impression that real house prices are increasing in the long run, because expansions are longer than contractions and entail bigger absolute price changes. If one removes the most recent house price boom from the sample, however, this impression largely disappears. Other studies, which have a more restricted geographical focus but a broader temporal window, show that over the centuries real house prices are fundamentally flat. (Piet Eicholtz, for instance, has studied three centuries of house price data for the Herengracht canal in Amsterdam and has found their average real annual growth has been fairly low, at about 0.5%).

If there is such a thing as a pattern for house prices in the long term, it is not that they are increasing; it is that they are cyclical. All the countries I examine in my research have gone through multiple expansions and contractions of national house prices. These fluctuations are not just due to randomness – in the paper I show that the probability of ending a house price expansion increases with its duration. In other words, longer expansions are more likely to terminate: what goes up has to come down.

What does this mean for the UK? The figure below shows the real house price index and the corresponding peaks and troughs for three countries of my sample: Germany, the UK, and the US.

A couple of things stand out from the chart. First, the last house price boom did not involve all countries. There are a few cases of advanced nations, like Germany (or Japan), which did not experience any substantial price increase. For Germany in particular, over the last 40 years real house prices have stayed constant or declined slightly. Once again this is proof that real house price growth should not be taken for granted, even in productive and well-functioning economies.

Second, if history is any guide, countries like the UK and the US will continue experiencing real house price declines for some time. This adjustment process is already under way. According to the Land Registry, nominal house prices in England and Wales are down 2.6% on a year-on-year basis. Taking into account an inflation rate of 5%, real house prices have fallen by almost 8% in the last 12 months. However, there is surely potential for more substantial drops, especially considering that US house prices (which have grown less than in the UK during the boom) have already fallen by more than 30% from their peak.

Third, and most importantly, while some degree of up-and-down in house prices is unavoidable, the range of these oscillations should be carefully monitored. Ups and downs are an intrinsic feature of all economic series but booms and busts are not, and this is where the UK compares unfavourably with other countries. Even by US standards, UK house prices look like a rollercoaster: they more than doubled in real terms since the mid nineties; before that, they fell by almost 40% from 1989 to 1995.

For prices to vary so much, quantities must be very sticky. Indeed, a recent OECD working paper shows that the number of new housing units built in the UK is low compared to other nations. A report by the Department of Communities and Local Government suggests that strict planning regulations hold back housing supply and make prices more volatile. Let’s hope therefore that the current debate on planning reform will provide solutions that go in the right direction.

It might seem strange to advocate more house building in a period where house prices are falling. However, the current decline in house prices represents a cyclical adjustment that is not due to abundance of housing units. If this were the case, we wouldn’t see the current rent increases.

This post first appeared on the LSE's British Politics and Policy blog on 1 November. Follow them on twitter @LSEpoliticsblog

London's (shocking?) growth performance

2011-11-02T10:03:00.005Z

Writing about the RGF earlier in the week, I noted "if growth is the absolute priority then you begin to wonder whether the government might be better off dropping the 'R' from the Regional Growth Fund. The economics of that are difficult. On the minus side it might be more difficult to find projects in the 'south' where employment generation is genuinely additional. Offsetting this is the fact that a Growth Fund would expect to be generating those jobs at relatively more productive firms. Of course, while the economics might be difficult, the politics of such a change are far trickier."

I was somewhat surprised, therefore to see Ed Balls making a similar argument in the Evening Standard: "the Government must also act with extra care to safeguard the London economy. For a start, that means making sure London is not excluded from action to support jobs." (He was writing about the National Insurance Holiday, but the same logic could apply to the RGF)

According to Mr Balls, London needs help because "a report last week found London is no longer the fastest growing part of the country and in the past year it has seen the biggest rise in unemployment of any region." Somehow, this manages to make things sound considerably worse in London than is the case. For some period now, London's relative performance (both compared to other regions and to predictions) has been pretty good. I don't think the position has changed that much. Assuming that Mr Balls was referring to the latest BRES numbers they show London as the second fastest growing region after the South East. Anyhow, according to my colleague Ian Gordon, "June-June annual comparisons show London as having the fastest growth rate of any region in just 4 of the last 15 years. More than any other, but hardly a shock when it’s not in the top spot."

What about the unemployment numbers? Again, these are not that surprising because London has large numbers of people (young, lower skilled) who are doing very badly in this recession. In the aggregate, better outcomes for 'higher skilled' workers tend to outweigh the poor performance of 'lower skilled'. There is nothing much new here - those kind of polarised outcomes have characterised London for a long time.

So the relative economic performance of London doesn't actually provide that strong a case for further intervention. Instead, the arguments depend on the extent to which policy in London is actually able to generate additional jobs and what are the ultimate objectives of policy.

Regional Growth Fund (Round II)

2011-10-31T11:12:00.004Z

The government's has announced the next round of projects receiving £950m from the Regional Growth Fund. We are told that this will directly create 37,000 jobs with a further 164,000 created indirectly ('in the supply chain').

As with round 1, with the details provided (severely curtailed by confidentiality requirements) it is impossible to provide any analysis of whether it will achieve this on the basis of the list of schemes agreed. Writing in 2005, SERC affiliate Colin Wren reviewed the available evidence on the impact of Regional Selective Assistance (a competitive scheme for allocating money to firms in depressed areas). The estimated cost per job ranged from £8,000-£21,000 (in 1995 prices). If the RGF of £950 million delivers 201,000 additional jobs that suggests a cost per job ‘created’ by the government of just over £4,700 (the same calculation for round 1 suggested 3,500 per job). In short, if these numbers played out, this would be a pretty effective intervention relative to existing schemes.

There are a number of reasons to think that these figures may be optimistic. First, with incomplete monitoring it is highly likely some of the 'leveraged' private sector funds ('£5 for every £1 of public money') would have been spent anyhow. To the extent that monitoring is imperfect, the RGF will only create additional jobs if it is being given to organisations that are credit constrained. Research that I have done with colleagues at the CEP suggests that this may only be true for smaller firms. We suspect this is because larger firms are better able to game the system (so monitoring is not as good) and are less likely to be genuinely credit constrained.

All of this suggests monitoring will be important for delivering additionality. Here, if I understood Nick Clegg correctly, the RGF is doing something different from the RSA. Specifically, when defending the amounts of money distributed so far he suggested that organisations that know they have the money coming have started activities. With RSA, my understanding was that usually firms need to receive the money first to demonstrate that public money is crucial to the project going ahead. This might suggest that additionality will be less for the RGF.

A separate issue is whether RGF will be more efficient than the Regional Development Agencies. Of course, it is impossible to tell at this stage. The RGF uses a different (competitive) mechanism for deciding on projects. This may lead to better decision making (or it may not). I would expect RGF to be more efficient per pound spent simply because it is spending less money. Civil servants may not be able to perfectly rank projects, but I don't believe that their selection is completely random, so the fact that the fund is smaller means it should achieve higher returns.

A final note of caution on the employment numbers - if all of government truly believed these numbers you might expect to see a lot more spending on RGF (unless they think that the smaller size of the scheme drives the high returns - as discussed above).

What about growth? Here I think there are further reasons to be cautious. In our work on RSA, we were able to find a causal effect of government money in increasing employment and investment, but not productivity. In addition, assisted firms are on average less productive, so RSA expands employment in less productive firms. This is still a 'growth' effect to the extent that these workers would have been unemployed (and we find some evidence, for RSA, that this might have been the case). But increasing the employment share of less productive firms may not be a good long run strategy for driving growth.

Indeed, if growth is the absolute priority then you begin to wonder whether the government might be better off dropping the 'R' from the Regional Growth Fund. The economics of that are difficult. On the minus side it might be more difficult to find projects in the 'south' where employment generation is genuinely additional. Offsetting this is the fact that a Growth Fund would expect to be generating those jobs at relatively more productive firms. Of course, while the economics might be difficult, the politics of such a change are far trickier.

Crime Maps

2011-10-28T10:15:00.002+01:00

The government has added more crimes to its online crime maps.

The discussion on the Today programme centred around the extent to which the maps, together with new police commissioners might skew decisions on how to use police resources. Back in July, the worry was around whether this would skew incentives to report crimes.

The magnitude of both these effects is unknown. One thing that is certain, however, is that reported crimes have a big effect on house prices. To the extent that this is valuing the costs of crimes (at least to residents) then you would think it should have some bearing on the allocation of resources (independent of the mechanism through which this is achieved). Steve Gibbons interesting post from July has more details.

High Speed Fail

2011-10-26T10:48:00.004+01:00

The Adam Smith Institute's 'high speed fail', represents the latest effort outlining the anti-side of the HS2 argument.

The Campaign for High Speed Rail has already responded: According to the FT the Campaign portrays the ASI's opposition to HS2 is “purely ideological, as they are fundamentally opposed to large-scale infrastructure investment [... begging] the question as to why such groups failed to also dismantle the case for projects such as Crossrail and the Jubilee Line extension, which were based on far lower financial returns.”

My overall position on HS2 remains unchanged - the costs of the project are large and I think that the money could be better spent. I am not, however, ideologically opposed to large-scale infrastructure investment. Indeed, I am more sympathetic to the case for Cross-Rail (and previously for the Jubilee Line extension). This is partly because I think that the (narrow) user benefit case for these latter two projects relies on less extreme assumptions about the growth in passenger numbers (and I don't remember them having 'far lower' CBA figures). But I am also more sympathetic because I think that the wider economic benefits (not captured by traditional analysis) are likely to be larger for schemes freeing up bottlenecks within our more successful cities. In contrast, I am not convinced that the wider economic benefits of HS2 will be large (and consistent with this I would prefer to see the money spent on within city transport schemes with better benefit-cost ratios).

In short, while I am sure that the ASI are perfectly capable of defending their own position, it is not contradictory to be supportive of some transport schemes and not others.

Radical Solutions to the Housing Crisis

2011-10-25T13:49:00.010+01:00

The BBC News Magazine suggests eight radical solutions to the housing crisis. Here are previous SERC blog posts on some of them (or other closely related issues):

My preferred 'radical' solution - build more houses.

Millennium Villages and the Analysis of Place-Based Policies

2011-10-24T10:22:00.004+01:00

Interesting to see the arguments about whether or not the Millennium Villages Project could have been better evaluated (either through random placement, or through careful attempts to identify suitable control villages). Part of the problem, according to those defending the project's approach, is that the use of more rigorous evaluation approaches is not possible for place-based policies. I agree with others that this argument is wrong. Evaluation of place-based policies using these approaches might be harder, but it is still feasible.

As a reminder - the major problem in evaluating the causal impact of these kind of schemes is what would have happened in the absence of the intervention. Random placement helps get round this because villages that are not chosen then provide a suitable comparison (this is the idea underlying many medical trials). Governments find random selection difficult because many policy makers assume that their interventions will be effective. Starting from that assumption, randomly selecting individuals to receive treatment is difficult because you have to deny treatment to others. If, in contrast, you start with the assumption that policy will be ineffective, then you are much more sanguine about allocating it randomly. In addition to this standard problem, it appears that place-based policy makers have even more trouble with randomisation of place-based policy.

But even in the absence of random allocation, place-based policies can still be evaluated by looking for suitable comparision groups (so that treatment is as good as random). For example, the UK government recently ran a competition to see which locations should get enterprise zones. In the first round of the competition 29 sites competed to host the final 10 enterprise zones. For those of us that like to think about the causal impact of urban policies this could be good news. As just discussed, when trying to figure out whether a policy has any impact, part of the problem is figuring out what would have happened in the absence of intervention. With these new EZs, the 19 sites that lose in the competition may provide a reasonable control group for the 10 that win. Comparing outcomes for the two groups may then tell us whether those that won EZs actually do better. We could also compare those that entered the competition to areas that appear to be similar but didn't enter the competition (to see whether those that entered the competition somehow differ from those that don't). The timing of EZs gives another avenue to explore. Those given money in the first round should start improving before those given money in the second. If they don't, that raises questions about whether EZ caused any improvement or instead whether this was caused by some other factor (say a strenghthing economy).

EZs are certainly not unique in this regard. The UK's Regional Growth Fund will not fund all projects that are submitted. Depending on how the decisions are made access to, say, the rankings of projects would allow researchers to compare outcomes for otherwise similar areas that were just above or below the bar when it came to getting funded. The Local Enterprise Growth Initiative had two rounds of funding (allows for the strategy of using the second round as a control group for the first) as well as a discrete cut-off for eligibility (so we can use areas that are 'just' ineligible as a possible control group). In addition, some LEGI applicants weren't funded. Finally, LEGI applied to discrete areas (local authorities) which are somewhat arbitrary in terms of the way the economy works - suggesting that comparisons across LEGI boundaries may provide useful information on the causal impact of LEGI (including whether or not there is displacement or positive spillovers - a worry in the Millennium Villages project). To take another example, the Single Regeneration Budget had multiple stages, successful and unsuccessful bids and some projects that targeted specific areas.

Official evaluations of place-based policies make little, if any, use of these programme features to help identify the causal impact of the policies. I can think of many reasons why governments may not like their policies to be effectively evaluated but how depressing is it to see economists making it easier for them to avoid being held to account by suggesting that rigorous evaluation of place-based policies is not possible.

NHS evidence: seriously flawed?

2011-10-21T12:04:00.003+01:00

Posted by Steve Gibbons, SERC and LSE

You know your research has hit a nerve when it gets described as 'seriously flawed'. The last time this happened to me was when the Church of England complained about my finding that the apparent performance gap between faith and secular primary schools is due simply to the fact that they enrol higher-ability children. This time, it's some medical/public health researchers and campaigners complaining about my research on the effects of the 2006 policy to expand choice and improve competition between NHS providers in England (Cooper, Gibbons, Jones and McGuire 2011, an earlier version of which was published by SERC here). A letter appeared in the Lancet last week, and there have been previous rounds of lambasting in the media.

This research (and a related body of evidence from other teams) has been cited a lot by politicians to justify the current round of NHS reforms. This use of the evidence is what has motivated the quite vitriolic attacks to which the research has been subjected. These criticisms generally arise from ideological positions, prior beliefs, and dislike of the findings - not on any alternative evidence that the findings are wrong, nor on a serious evaluation of the methods we used or the evidence we have provided. The criticisms amount to assertions and opinions, based on a misreading or misunderstanding of the research. This is a pretty sad state of affairs, and disappointing for those of us who value scientific evidence and the importance of evidence-based policy making.

A more balanced reading of the research and serious engagement with what we actually did and wrote would, I hope, lead the reader to a more interesting finding. Allowing patients more choice over where they received elective treatment for hip replacements, cataracts and the like, had consequences for quality of care more generally – in our study, evidenced by improvements from survival rates from heart attacks. Our conjecture (drawing on other theoretical and empirical literature in the field) is that these effects occurred through general improvements in hospital management, for which there were sharper incentives in more competitive places.

Of course no empirical study is perfect, or can incontrovertibly establish causality – although we go a lot further than most to try to demonstrate causality. It is also quite right that our evidence should be subject to scrutiny, and we support peer review and open science. However, for those who don't believe our findings, the way forward should be to objectively look to see what is driving those findings, rather than dismissing our results out of hand.

For those interested we have published a detailed response to the criticisms in the Lancet article here.

Empty Bedrooms and the Housing Crisis

2011-10-19T11:08:00.005+01:00

The Intergenerational Foundation are calling for the government to adopt measures to stop the 'hoarding' of housing by older people. I have some sympathy with parts of their argument, but strongly disagree on other parts.

Let's start with the point of agreement - constraints on housing supply have generated a large redistribution of wealth towards home owners. As home owners tend to be older this has resulted in a large intergenerational transfer from young to old. This is one of the many reasons why I strongly support government proposals to reform the planning system to increase housing supply.

I find the arguments that follow much less convincing. Based on an assessment of housing 'need' the report argues that we should take bedrooms from the people who currently underoccupy their house and give them to those who live in overcrowded conditions. In practice, of course, this means getting people to move from large houses to small.

Ironically, the fact that planning decisions are made on the basis of 'need' but housing allocated through the market is one of the reasons why the housing market in the UK is in such a mess. Markets seeks to balance supply and demand (rather than need) and it turns out that, unsurprisingly, as societies get more wealthy they tend to demand more space, not less.

One response would be to switch to a 'needs' based mechanism for allocating housing. As my colleague Paul Cheshire puts it: one option "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." This is not a serious suggestion, although others appear not to get the joke.

The Intergenerational Foundation suggests something that appears less extreme - a raft of government measures that would encourage homeowners to consume less space. These would be of two kinds. The first would strongly penalize people who 'over' consume space. Such penalties build up from a logic of housing need and are problematic for all the reasons that space rationing would be. Who gets to decide how much space is enough?

The second approach is to remove barriers and distortions that encourage people to 'over consuming' housing. I have no problems with these kind of measures apart from the fact that I think they will be highly costly and remarkably ineffective. Take, for example, the idea of removing stamp duty on people downsizing. At the moment, the huge wealth gain that they would get by moving to something smaller is insufficient to offset the benefits of staying put. Removing stamp duty changes this balance for a small number of people at the margin but at a huge cost to the exchequer. Removing single person allowances on council tax or removal of universal benefits for those in valuable houses will have similarly small impact on the number of people willing to downsize but imposes high costs on a small number of people who are income poor but don't want to move for some reason. For the more wealthy this will essentially be an irrelevance. Changing the treatment of capital gains tax would provide a disincentive for ownership (which may or may not be a good thing) but dampens the incentives to downsize. An annual capital gains tax is a punishment based on arbitrary decisions on how much space is enough and which I object to for the reasons outlined above.

Just as with empty homes, reallocating empty bedrooms do not represent a long run solution to the housing crisis. The best way to improve the outlook for younger generations? Build more housing.

Planning Policy Roundtable

2011-10-18T09:36:00.013+01:00

The consultation period for the government’s draft National Planning Policy Framework ended yesterday. LSE London recently held a planning roundtable discussion of 15 academics from a range of social science disciplines to discuss the reforms and try to clarify its objectives. While broadly agreeing with the objectives of the reform, the planning roundtable found that the incentives they provide may often not be enough to overcome local concerns and to reflect differing benefits in certain areas.

Our objectives

The reform of planning legislation and particularly its impact on housing has been an epic controversy for decades. At one extreme, many argue that planning is the core reason why so few homes have been built particularly since the 1990s. At the other, it is seen as saving our green and pleasant land from being overrun by sprawling and environmentally inefficient development. The current National Planning Policy Framework (NPPF) proposals by the coalition government have again brought these irreconcilable views to the fore and generated an aggressive debate based more on anecdote and attitude than evidence.

It was in this context that LSE London brought together some fifteen academics from a range of social science disciplines, mainly but not exclusively from LSE. The group included members with vastly different views along the spectrum set out above. The objective was not to build a consensus – this would have been impossible – but rather, given our different starting points, to clarify both the objectives of reform and the potential means of achieving these objectives. The discussion concentrated mainly on housing, but it was recognised that many of the issues relate as much to other forms of development – with equally important implications for economic growth and social welfare.

There were three main areas of consensus, which were around:

The starting point – the problem and the need for change
Objectives of the government reforms
Elements of the reform process

The starting point

There was clear agreement that there is a problem for at least 30 per cent of households, who have low or modest incomes and need more reasonably priced housing.

The whole housing market is too tight and the housing balance is getting worse with declining output. The Barker Review of Housing Supply showed long-term relative house price increases against our international competitors. Employers regard housing costs as one of the most important constraints on new building and investment– at all levels, not just for the 40 per cent on the lowest incomes.

The source of the problem is far more than just tight planning legislation. But it is an important part of the story – and we can move forward without full consensus on all the reasons.

We are in favour of change – the top-down system did not work well and inhibited valuable development. It is fundamental that decisions should reflect local wishes. The proposals on the table are more positive – and make a strong case for the development of local plans within the NPPF.

Government reforms

Those who took part in the LSE exercise want broadly the same thing from government reforms: to increase housing supply and economic activity, while balancing other social and environmental objectives. To achieve this it is necessary to address market failures in the allocation and use of land. The most important of these failures relate to spatial and intergenerational externalities – i.e., the costs and benefits to those not directly involved in decisions. The main objective of planning constraints should be to offset these failures.

The core objective is therefore to support development in places where the benefits to individuals and the economy outweigh the costs. Decisions should be based on benefit-cost analysis of a wide range of impacts rather than simply based on designation.

As we have already stated, housing should be a local decision – but there must be incentives to develop because any negative impacts of development usually affect the local community while benefits are more widespread. These incentives should ideally reflect the extent of pressure for increased housing and other development – i.e., the benefit to the economy of enabling that development to take place. The local government Resource Review and the New Homes Bonus both move towards providing such incentives and are therefore steps in the right direction.

Local decision-making should be based on effective local plans that reflect the identified, evidence-based needs of communities. Within these clearly defined plans, we agree that the system needs to be more permissive than it has been since the early 1990s. In other words there should indeed be a presumption in favour of sustainable development based on benefit-cost analysis.

There are many myths that are being repeated as part of the debate – in particular, there have been some exaggerated estimates of how much land might be affected by increasing development, which have led some to question whether England can remain ‘green and pleasant’. But this reform should not be seen as a move towards a US-style sprawl model. Rather it involves identifying areas where additional housing and development more generally is required and can be achieved while taking careful account of losses in amenity value.

There are also myths about the relative costs of development on both green and brownfield sites in both directions–again, evidence-based decisions should take full account of both direct and indirect costs and benefits. This requires the use of an accepted and consistently applied methodology for assessment.

The main concern about the current proposals must be that the incentives are not enough to overcome local concerns and to reflect differential benefits. Indeed in some cases the New Homes Bonus could produce perverse results because it is defined in terms of numbers. So it may prove easier to build in areas where there are relatively low costs to the community – but the benefits of development are equally limited.

Linked to this is the issue of who benefits from the incentives. The money flows to the local authority, although it is intended that this should generate compensation at the neighbourhood level. But even if this does happen in the end, there will be long delays – and reasonable concerns that communities in the immediate vicinity of developments will suffer in the short to medium term while benefits will be spread more widely. The proposal is a lot better than the current system of no such compensation – but it could mean less development especially in richer areas

The reform process

Our most immediate concern is that the government’s planning reform proposals are unclear. Brevity is not the same as clarity and at the moment the NPPF only achieves the first. The core positive messages could easily get mired in confusion/legal challenge, which will lose the impetus for change. In particular, there is no adequate definition of many important terms, notably the presumption in favour of development, sustainability in the context of land use, the lack of a completed local plan and the requirement to consult with neighbouring authorities. A great deal of ill-informed debate has been generated, often based on anecdote or intuition unrelated to the objectives and processes of the NPPF. This means that many of the positive aspects are likely to be lost – or held up for years.

There is also a concern that, if there is not more clarity, a Secretary of State with different objectives would be able to use the system in very different ways than currently envisaged. Ideally the approach would be piloted in a range of different areas. However this would almost certainly slow the process of change and let the once-in-a-lifetime opportunity slip. Implementation must therefore be carefully monitored across a range of localities to clarify process, outputs and outcomes.

Another important issue which remains unclear is how cross-boundary relationships are expected to operate – particularly at the city-region level. This is also an area where incentives are likely to be necessary to encourage more effective collaborative actions which take careful account of necessary mobility.

What is needed now?

A clearer statement of the objectives of the planning reform
An agreed factual background about the existing development of urban, rural and suburban settlements
More concrete language about what local authorities need to do to make local plans that are consistent with the NPPF and robust to appeal.
Similarly concrete proposals about how to incentivise brownfield/greenfield decisions to take account of both direct and indirect costs and benefits
An agreed pro-forma for assessing sustainability (i.e., costs and benefits of particular developments)
Greater clarity on how the incentive payments provided by the New Homes Bonus and non-domestic rates can be used to ensure that neighbourhoods which see developments benefit directly from the incentive payments
A real-time review of how these incentives are operating on the ground to generate housing required
A commitment to use the evidence of this monitoring to fine-tune reform over time
Development of incentives for city-regions and other groups of authorities to work collaboratively

The issue will remain controversial, but a war between extremes cannot lead to good decisions. However, there is a general acceptance of the need for additional housing as well as of the need for a more nuanced approach to the use of land. A better understanding of the reality of existing urban and rural settlements, coupled with wider benefit- cost analysis should deliver better decision-making

The planning roundtable

Michael Ball, University of Reading; Centre for Real Estate Research; International Centre for Housing and Urban Economics
Kate Barker, Author of ‘Housing Supply Review’
Paul Cheshire, LSE Department of Geography & Environment; SERC; European Institute; Greater London Group
Alan Evans, University of Reading, Centre for Spatial and Real Estate Economics
Melissa Fernandez, LSE London
Ian Gordon, LSE Department of Geography & Environment; SERC; LSE London
Nancy Holman, LSE Department of Geography & Environment; LSE London
Tim Leunig, LSE Department of Economic History; SERC
Alan Mace, LSE Department of Geography & Environment
Geoff Meen, University of Reading; Centre for Spatial and Real Estate Economics; International Centre for Housing and Urban Economics
Sarah Monk, Cambridge Centre for Housing and Planning Research
Henry Overman, LSE Department of Geography & Environment; SERC
Anne Power, LSE Social Policy Department; LSE Housing and Communities; STICERD; CASE
Kathleen Scanlon, LSE London
Phillipp Rode, LSE Cities
Fran Tonkiss, LSE Cities Programme; Sociology Department
Tony Travers, LSE Government Department; LSE London
Christine Whitehead, LSE Department of Economics; LSE London

[This post first appeared on the LSE's British Politics and Policy blog on 17th October; Follow them on twitter @LSEpoliticsblog]

House swaps to help the jobless?

2011-10-17T12:02:00.006+01:00

According to the Observer, the government are 'to launch a "house swap" programme [...] in an attempt to encourage people to move around the country to find work.'

The opposition suggest that this is somehow inconsistent with the changes in the housing benefits system (which will effectively force some poorer families to move out of more expensive housing). Remember, however, that those reforms are about (i) reducing the overall cost to the state of providing housing and (ii) increasing the incentives to work, by reducing the penalty that gets imposed as people move in to work (when moving in to work reduces benefits). It will also, by the way, have the effect of improving housing conditions for middle income families that work but don't receive housing benefit (something which no one seems to be pointing out in the debate over the squeezed middle). This is only inconsistent with the idea that housing swaps might help the jobless if you think that living in the expensive parts of a city are important for your job prospects. Once you control for individual characteristics, however, the evidence suggests where you live within a city has limited impact on your job prospects.

Unfortunately, this very same fact, offers cold comfort for the government about the likely impact of any house swap scheme on unemployment. As I wrote last week, when who you are matters much more than where you live, schemes that get people to move around don't have the large impacts that simple comparisons would suggest. That's not an argument against greater mobility (and, in particular of building more housing in relatively successful places) but it does urge caution when thinking about the magnitude of any impact. The overall impact of social housing swaps are likely to be smaller still, for reasons that I explain in more detail here.

In my opinion it really is hard to see why anyone should object to a swap scheme (because agreeing to the swap must mean that both sides of the deal benefit) but it may have relatively little impact on the problem.

Youth Unemployment

2011-10-14T12:51:00.003+01:00

A busy day today - politics in the morning (talking at HMT about planning reforms) and research all afternoon (SERC's weekly and work in progress seminars).

In between meetings, I was interested to see the Mayor of London's comments concerning the need to do something about youth unemployment in the capital.

First, I am not sure that pleas to landlords to retrofit properties is likely to do much to deal with the immediate problem. Second, and more substantively, it's striking that the young appear to be doing badly across the country. This reinforces my impression that spatial differences in unemployment outcomes are being driven mostly by compositional differences across places. Another case where who you are matters considerably more than where you are living?