Wednesday, 25 June 2014

HS3 and a Northern Powerhouse

[Posted by Prof Henry G. Overman]

 I have finally had a chance to take a look at George Osborne's 'Northern Powerhouse' speech in which he suggests that a better connected collection of northern cities could take on the world. It's an interesting (and not entirely new) proposition. But would it work? Could joining up northern cities replicate London's success?

Crucial to answering this question is the role that scale and physical proximity play in driving London's success. The evidence suggests that these are pretty important - agglomeration economies arising from scale and proximity help explain London's success.

Once we recognise this, it has fundamental implications for what a more balanced UK economy might need to look like. If creating similar opportunities to London requires similar scale and physical proximity, could we get anywhere near this by 'joining' up our Northern cities through greater infrastructure investment? I remain sceptical - not least because our work for the Northern Way estimating the impact of quite substantial reductions in travel times between Manchester and Leeds suggests only modest economic gains.

In our work, we looked at the impact of a 20 minute reduction in travel time between Leeds and Manchester. We find that closer integration between Manchester and Leeds could be expected to have a positive effect on wages. Our largest estimate, for a 20 minute reduction in train journey times between Leeds and Manchester, has average wages increasing by between 1.06% and 2.7%.

These numbers come with some important caveats (discussed in more depth here). First, they are certainly not additional for the UK as a whole because a lot of this effect would come from the fact that Manchester and Leeds will be attracting activity that would have gone elsewhere (and not necessarily to London). Second, and related, the effects for an individual worker, with given and unchanging characteristics (often called place-based effects), are smaller at somewhere between 0.20 and 0.50 of a percent.

In short, joining up our Northern cities (particularly Manchester and Leeds) using HS3 would help, but it would be expensive and it's unlikely that it would be enough to provide an effective counterbalance to London.

It is also important to note that a project like HS3 to link cities may not be as effective as other interventions. For example, in the detailed report for Northern Way (rather than the more widely quoted summary) we tried to use the same methodology to compare the effect of a 1% reduction in travel times within Manchester or Leeds to the effect of a 1% reduction between those two cities. In all cases, within city reductions in travel times lead to larger increases in 'economic mass' (sometimes two to three times larger). As it is these changes in economic mass that underpin any estimated productivity effects, this tells us that a 1% reduction of within city costs would have a larger effect than a 1% reduction of between city costs. Of course, that doesn't tell us whether we should prefer one over the other - that would depend on the relative costs of achieving these cost reductions (which we didn't look at). But it does serve to reinforce the point that it might be difficult to replicate London's advantages from scale and proximity simply by joining up different cities. It also highlights the crucial point that we need to consider the alternatives before rushing headlong for the HS3 solution. I'd argue that this was a mistake we made with HS2 - best not to repeat it.

Of course, part of the attraction of creating a northern powerhouse by joining up cities is that it dodges a very difficult political problem. If balancing the effect of London requires, instead, somewhere 'big and Northern' that raises the very difficult question of where that place might be? Politics being what it is, I can see why many people (myself included) would prefer to dodge that particular question

Wednesday, 4 June 2014

Spatial Inequalities in Commuting Times

[Posted by Prof Henry G. Overman]

My bus journey in to work this morning took 90 minutes for 5 miles (due to arrangements for the Queen's Speech). Usually it takes around an hour on the bus. I can run it in 40 minutes and ride it in 25 (my preferred modes of transport).

My reasons for mentioning this is that it got me thinking about my comments yesterday on transport spending across different areas. Towards the end of that piece I wrote as follows: "Why do we care about the balance of infrastructure expenditure per se? Surely we care about the provision of transport services, broadly defined. Is it fair to invest in areas with low congestion at the expense of investment in areas with high congestion just to ensure that expenditure is equal? Why should we invest equally in places with no or slow population growth at the expense of places that are seeing high and continued growth in population? Why do we need as much investment per head in towns with a population of 100,000 as we do in cities with populations of millions?"

Inspired by my journey to work this morning, I went and took a look at the National Travel Survey to find out just how large is the variation in travel to work times by region. I've copied and pasted them below (where I've also added times for the average business trip). The variations across regions are pretty striking. The average Londoner spends around 41 minutes commuting compared to 23 minutes in the North East. Assuming 252 business days and 30 days annual leave that equates to a difference of 7992 hours (or 5.5 days) per year. These numbers aren't perfect (I'd like to see them income adjusted for example) but they point to huge variations in journey times. I am not in an way suggesting that these figures are 'unfair' but they paint a very different (and arguably more informative) picture than that coming from the figures on transport expenditure per capita.
Commuting Business
Region of residence:
North East 23 37
North West 25 35
Yorkshire and The Humber 25 38
East Midlands 23 35
West Midlands 25 40
East of England 29 43
London 41 44
South East 30 41
South West 23 37

Tuesday, 3 June 2014

Local Transport Expenditure

Lots of coverage for the Transport Committee's latest report on local transport expenditure.

I've had a quick read through of the report. Some of it makes sense. For example: there's been lots of change in funding schemes so it would be a good idea of DfT makes sure this isn't delaying delivery or reducing accountability. They also make the point (which I have made before in the context of Heseltine) that: "It is questionable whether bidding for pots of central government money that will be allocated via rules set by central government amounts to genuine devolution." No arguments from me there.

But the headlines all pick up on the recommendation that transport outside London should be funded better: "The under-funding of transport projects outside Greater London in recent years cannot be allowed to continue. Ministers must use the new funding arrangements, via the Local Growth Fund, to ensure that there is a fairer allocation of funding to transport projects beyond London, and not just in city regions, City Deal areas and current enterprise zones. No area across our nation should be second class in relation to the allocation of transport infrastructure funds".

The evidence for this under-funding comes in two parts. The first part quotes Baroness Kramer on actual expenditure - London gets about twice as much public expenditure per head as the rest of the UK (part of which is due to cross-rail). This figure is probably misleading because it compares a specific city to a set of regions. If you took, say, expenditure in Manchester it would be interesting to see how much closer it got to the London per capita level. No matter, because the second part of the argument uses the incredibly misleading IPPR North figures which talk about disparities in future funding streams of £2,500 per head in London to £5 per head in the North East. No adjustment would make those look equal.

Regardless of the exact amount, let's take at face value that there is some spatial unevenness in public expenditure in transport spending per head. The transport select committee implies that this is a bad thing and that the government should be seeking a more equal distribution. This begs the question, "why should funding be more equal"? The answer to that can come in two parts - either the current allocation is inefficient or it is inequitable.

In terms of efficiency a big part of the disparity between total and public expenditure (which would be larger than the two to one figure that I reported above) comes about because private sector expenditure goes disproportionately to London and the South East. Government doesn't have much control over those private sector flows but it's clear that public sector expenditure is more evenly spread. Taking a narrow view of the economic returns on public sector transport investment this suggests that it might be efficient to have it more concentrated, not less.

Of course, government doesn't take a narrow view. It thinks about the social returns as opposed to the private returns that drive private sector investment. Might the social returns be larger outside of London and the South East justifying a more equal distribution? Again, the answer is probably no from an economic cost-benefit point of view - the wider economic benefits that are captured in transport appraisal tend to occur in more dense, productive places. In contrast, on a project-by-project basis it's almost certainly the case that there are some London schemes that look poor value for money relative to non-London schemes and vice-versa. But I haven't seen any evidence that this is true on average (which is what we should focus on if we care about shares of expenditure).

We could construct an efficiency argument for greater spending outside of London and the South East if we thought that this was vital for improving economic performance (or for turning economies around). But as Ed Glaeser has observed, places which have seen declining or low population growth usually have relatively high per-capita infrastructure stocks. [As evidence of this, note that journey times and congestion levels are significantly lower outside of London and the South East]. If this is the case, then further investments in transport will experience decreasing returns and won't do much to increase growth. To put it another way, if the problem comes from structural change, poor educational outcomes and skills that are no longer needed - why should increased transport investment provide a solution? Transport may be an issue in some of the more successful economies outside London and the South East - Manchester, Leeds, etc - but surely not everywhere?

If the efficiency arguments are weak, the equity arguments aren't great either. Why do we care about the balance of infrastructure expenditure per se? Surely we care about the provision of transport services, broadly defined. Is it fair to invest in areas with low congestion at the expense of investment in areas with high congestion just to ensure that expenditure is equal? Why should we invest equally in places with no or slow population growth at the expense of places that are seeing high and continued growth in population? Why do we need as much investment per head in towns with a population of 100,000 as we do in cities with populations of millions?

Worrying about the efficient and equitable use of transport expenditure is incredibly important. I'm certainly not arguing that we currently have it completely right. But simply asserting that we must have more equal expenditure does nothing to help us figure out whether and how we should be changing the current balance of funding.