Friday, 29 July 2011

More Enterprise Zones

The government has announced the location of four new enterprise zones in Birmingham, Bristol, Leeds and Sheffield. So this seems a useful moment to revisit some of the concerns I raised when the decision to create EZ's was announced in the March 2011 budget.

Enterprise Zones will offer firms five year rebates on business rates, planning regulations will be simplified, Local Authorities will be able to keep business rate growth and government will ensure superfast broadband is available. To understand the impact it’s useful to distinguish between the effect on “UK plc” (i.e. national employment and growth) and what happens in the Enterprise Zone.

In areas with strong economies, planning certainly acts as a break on business expansion and development and Local Authorities often have few incentives to allow more development. EZ type reforms would help encourage growth in these areas. Some of this growth would come at the expense of other areas in the UK, but much of it could be additional. Overall, we might reasonably expect both local and national employment and growth to increase.

But EZ’s make these changes in areas with weak economies (or in the parts of OK performing areas that businesses don't want to locate in). Misguided local planning policies may not be helping in these areas but the fundamental problem is that these are unproductive places for business investment. Five year rebates on business rates and relaxed planning regimes attempt to offset these disadvantages for businesses. But they don’t address the fundamental problems such as the educational level of the local labour force or the fact that a centre city site is inappropriate for business needs. If EZs allow new development on an appropriate site that has hitherto been undeveloped in an area which is doing OK, these concerns would be mitigated. [This new development / redevelopment trade-off lies at the heart of my main concerns over the new national planning framework]

The evidence on whether this has any effect on local employment is, at best, mixed. Even if it does it is highly likely that much of this growth would come at the expense of other areas in the UK (p.24 of this SERC policy paper provides more detailed discussion). Overall we might hope for some small impact on local employment but should expect little, if any, impact on national employment and growth.

There are many reasons to think that the current planning system acts as a break on growth. Unfortunately, reform in local zones does little to treat this problem and it is hard to see this having much, if any, impact on total growth. In the current climate, spending money (or equivalently forgoing taxes) to shuffle employment around the country may not be the wisest use of funds.

[This is an update version of my post from 23 March 2011]

Wednesday, 27 July 2011

National Planning

The government published its draft National Planning Policy Framework on Monday. As with the announcement on business rate retention there has been little public debate. In turn, some of that debate has been plain silly - a complaint that I made about earlier contributions but that applies equally to reactions to the publication of the draft. In particular I would highlight the national trusts' fantastic before and after pictures (which made me wonder if we were reading the same document). The lack of serious debate is unfortunate, however, because these reforms are important and will have implications for economic growth and the environment for many years to come.

Setting aside the details, I think that the draft gets some big issues right, some wrong. Minor caveats aside, I support the presumption in favour of sustainable development. It cannot possibly be right that local bureaucrats and politicians get to say yes or no to development on a case-by-case basis. Instead, the presumption means that they have to say yes to things that are consistent with their local plan. Many other countries successfully run systems that are (at least) this permissive. But if, as this government does, you believe in localism then you have to give people a strong say in the development of their local plan to make the 'presumption' consistent with localism. The draft framework does this and again, caveats aside, I think this is a good idea. Finally, the government recognise that local authorities will need to be given incentives to agree to new development and have introduced a range of measures to provide these incentives. Whether these incentives will be large enough in practice is still open to debate, but I support the general principle.

So much for the positives, what about the things it gets wrong? I think a fundamental problem is that the planning framework is backward not forward looking. We have a growing population and changing industrial structure and yet the draft framework works to limit us to living and working within an urban footprint that we inherited from the 1940s (if not before). This is particularly evident in terms of policy towards the Greenbelt. Towns expand in to cities by building on countryside and merging with outlying towns and villages. We are told that the Greenbelt policy is specifically intended to prevent this. In other words, the urban system we have now is what we have to work with. This severly hampers the ability of our set of cities to adjust to fundamental structural changes. It assumes that growing cities can expand by recycling old land, but many of the places that have strong growth potential are not existing cities, but larger towns. In short it makes the planning system about redevelopment more than new development. I understand the politics behind this (c.f. the natural trust) but the restrictions come at a cost in terms of economic growth.

The other area where the framework is more backward than forward looking is in its approach to retail. Specifically, the government has decided to place a strong emphasis on town centre first policies. As regular readers will now, evidence suggests that these restrictions imposes substantial costs on households in terms of higher shopping bills. They also have the unintended consequence of creating more clone towns (as chains forced downtown drive out smaller retailers). Sequential needs tests then further limit competition with adverse impacts on employment and the cost of living. As with restrictions on Greenbelt development, these restrictions are also based on a 'zero sum' assumption - if we restrict out of town development than we will automatically get town centre development. But 20 years from now isn't it likely that the internet will fundamentally change the way we shop? Why shouldn't these restrictions on out of town developments hasten the move towards online shopping? Indeed, it is clear that this is already playing a role in what is happening in the high street. Overall, town centre first policies have costs as well as benefits and are based on a (possibly) outdated retail model. As I said, this feels more backward than forward looking and, once again, makes the planning system about redevelopment more than new development.

Overall then, pluses and minuses, and much to debate over the coming months (the consultation closes in October).

Monday, 25 July 2011

Summer Blogging

It appears that summer has finally arrived (at least briefly). With many colleagues away, and fewer policy announcements, we'll be blogging less frequently over the next weeks (we'll probably post two to three times a week).

We will continue to blog on relevant news and policy announcements. For example, we should have something on the national planning policy framework (assuming that the publication of Greg Clark's forward signals its imminent arrival). And we'll continue to provide links to previous blogs that are relevant for current stories. For example, here's some thoughts on the likely economic impacts of John Lewis' new town centre store format. Finally, we also have some pieces lined up with further thoughts on business rate retention, high speed rail and the impact of the Olympics (drawing on our work on Wembley and Emirates Stadium).

So please continue to check for posts and remember that you can keep up-to-date with our activities by following us on twitter (@lse_serc).

Friday, 22 July 2011

Extreme localism: local taxes and tax competition

Posted by Dr. Teemu Lyytikäinen, SERC

The government’s consultation on Local Government Finance leaves many details still to be determined. But there is one thing the document is very clear on: the government has no intention of allowing councils to set their own business tax rates. Why might that be?

It’s partly political. Localising business rates was in the Lib Dem manifesto, and both Nick Clegg and Vince Cable pushed strongly for it earlier this year. However, the Treasury and Eric Pickles apparently weren’t so keen – and neither were many business groups. The Coalition compromised on retention. And while this has been pushed as ‘setting Councils free’, the reality is that they could be much freer.

The bigger issue is that it’s not clear what the effects of full localisation would be. There are two main fears. The first is that some councils would set very high tax rates and waste the revenues on useless programmes and bureaucracy. The second fear is of the opposite scenario – local authorities undercut their competitors, with ‘tax competition’ producing a race to the bottom.

Let’s consider the evidence. Tax competition should show up in positive relationships between tax rates in neighbouring areas, results confirmed in a lot of empirical studies. But measuring these interaction effects robustly isn’t easy. Some recent SERC research [pdf] manages to do so using recent Finnish experience. Specifically, I isolate the causal impact of neighbours’ taxes (as distinct from confounding factors) by looking at responses of municipalities to forced property tax rate changes in their neighbourhood. Unlike previous studies, I find the average effect of a change in neighbours’ tax rates is close to zero.

The Finnish system may partly explain this – all local areas set taxes, but central Government takes a share of the cash to give to poorer areas. For councils that dampens incentives to outcompete the neighbours via tax cuts. (This incentive/equity trade-off will be central to the main debate about local finance reform.)

If localisation plus equalisation avoids tax competition, then some worries about a race to the bottom are groundless. But it still leaves substantial variation in local taxes – and thus, the lack of certainty the business community worry about.

And we still can’t rule out more subtle forms of tax competition. The results may mask a situation where neighbours with similar socio-economic characteristics could engage in a race to the bottom while tax rates could diverge in dissimilar neighbours. For example, two areas with low demand for social care could keep cutting taxes (and services); a high-demand neighbour receives more social care cases and has to raise its taxes even further. The resulting misallocation of resources across authorities is a big efficiency loss.

That still leaves us with the high tax and spend scenario. My research with SERC colleagues suggests this may not have been a major issue in the recent past (because councils appear to have spent increases in central grants on things that home buyers value) but it was a major worry in the years before that.


PS: For those of you interested in methodological issues: my research applies the standard spatial econometrics methods on the Finnish data and compares the findings with our more robust policy change based estimates. This comparison suggests that the standard methods are not to be trusted. More SERC thoughts on the pros and cons of spatial econometrics are here.

Thursday, 21 July 2011

The law of unintended consequences: business rate retention and house prices

Posted by Dr Christian Hilber, LSE and SERC

Most analysis of Monday’s local government finance proposals has focused on the shiny new stuff – retained business rates and Tax Increment Financing (TIF) – and the winners and losers reform might create. That’s not surprising. But it’s also not the whole story. Changes to business rates are also likely to affect local house prices – in ways that are actively unhelpful for Ministers’ housebuilding agenda.

Imagine a country where local government gets most of its funding from central government. There are two local areas, A and B, which are identical and receive the same amount of money. Now imagine that for some reason Ministers decide to double A’s cash. A can either improve local service quality, invest in infrastructure, or decrease local taxes. In each case, A becomes more desirable than B and demand for housing rises. If there are planning constraints, house prices in A go up.

SERC colleagues and I test this empirically for England, using council grant data for 2001 – 2008. (Our paper’s just been published here.) We exploit the fact that grant settlements sometimes change for reasons other than local need. We find that changes in grants are largely capitalised into local house price changes.

To see what business rate retention might do, repeat the thought experiment with a couple of changes. Ministers are essentially gifting some local areas with more money by allowing them to retain the local business tax take. Even if no local authority is directly worse off from this change – as Nick Clegg has promised – some areas will be better off than others.

For better-off councils, that translates into better services or lower taxes. That makes the winners more attractive places to live in – putting upward pressure on house prices and rents.

In turn, that creates further winners and losers. In ‘winning’ areas local property owners (homeowners and landlords) are better off as the value of their assets rises. Renters enjoy better local services and/or lower local taxes but they will have to pay for these via higher rents. Overall, therefore, there is no effect on renters – unless, as seems likely, many are frustrated would-be homeowners. Immobile would-be-homeowners are likely the main losers among the group of current renters. For renters with an attachment to their place of residence, owner-occupation becomes even less affordable. Also, some immobile renters may not value the improved services but they may still need to pay for them via increased rents. Other losers will be the property owners in the ‘losing’ areas as the value of their assets will decline.

In theory, developers should step in to build more houses in the ‘winning areas’. But there are obvious reasons for local homeowners to resist new development – not least since the value of their homes partly depends on relative scarcity. The political power of NIMBYs and BANANAs on local councils can be very strong.

To sum up – localising business rates creates an incentive for local authorities to approve commercial developments. This is desirable in itself. But it also produces a disincentive effect on residential development, via house price shifts.

So the interaction with planning rules and incentives is crucial. The last government’s reliance on top-down targets was ineffectual in increasing housing supply. However, the Coalition’s New Homes Bonus also seems too weak to generate any significant positive effects on the supply side.

So while there are many reasons to cheer moves to give councils more financial freedom, the unintended consequences could make the UK’s housing supply shortage even worse. This Autumn’s Local Government Finance Bill needs to make sure business rate reform and TIF properly joins up with the wider package of growth incentives. Doubling or even tripling the size of the New Homes Bonus and making it permanent, as the Centre for Cities recommends, would be one helpful step.

Wednesday, 20 July 2011

Minister for Cities

The government have announced the appointment of Greg Clark as Minister for Cities. Here are some thoughts on the issues and my suggestions for priorities in terms of economic growth.

There is no clear evidence of a direct link between decentralisation to local government and improved economic outcomes. Passing powers to city leaders limits central government’s ability to affect urban economic performance. The coalition’s approach to this is to combine decentralisation with incentives for growth. Fundamentally, if we want successful cities to grow the balance between decentralisation and pro-growth incentives has to be right. Here are some suggestions for priority areas for the new minister to think about this balance and the wider policy issues.

Planning: As recognised in the local growth review, in many areas the current planning rules work to constrain development. Ministers aim to tackle these issues with a presumption in favour of sustainable development, incentives for councils to adopt pro-growth planning frameworks, dropping brownfield targets and piloting land auctions. However, the extent to which these changes will be successful is not yet known.

Housing: Planning also affects the supply and cost of housing. Regional plans tried to force local areas to build more housing. The Coalition favours decentralisation, coupled with incentives. But, giving residents more say in planning (e.g. through neighbourhood plans) may reinforce anti-development tendencies. There is, as yet, little evidence on whether New Homes Bonus-type incentives will be sufficient to outweigh them.

Local Government Finance: The structure of local government finance provides a further barrier to development. The government is trying to address this through the New Homes Bonus, TIF, changes to business rates and a review of local government finance. It is unclear whether these changes will remove the fiscal disincentives – and the electoral disincentives remain large.

Education and Skills: There is strong evidence that more skilled cities grow faster, so to be successful cities need to be able to attract or educate and retain skilled workers. Cities also house a disproportionate share of poor families, placing considerable stress on urban school systems. The interplay between education, skills and success raises crucial policy questions for cities.

Innovation: An important driver of cities’ long term economic development but the minister should be very sceptical about calls for local innovation policy. Instead, focus on other policy areas (e.g. the supply of skills and business premises) that may be indirectly limiting innovation.

Transport: Growing cities need to invest in transport and to consider other ways to limit congestion, particularly through the introduction of charging. This raises questions about the appropriate governance arrangements for transport policy.

Decentralisation from central to local government has the potential to help city leaders raise urban economic performance, and help their citizens improve economic wellbeing. Decentralisation also raises important questions for central government – which needs to set frameworks and incentives that will help cities drive future economic growth in the UK. I've highlighted a few areas where the minister might like to start working.

Tuesday, 19 July 2011

Business Rate Retention: Growth vs Equity

The government has launched its consultation on allowing local authorities to retain business rates. The problem: Commercial development imposes costs on local authorities (to provide services to businesses) and to local homeowners, while the benefits are spread more widely. In other words, commercial development generates benefits for others (externalities) that are ignored when making decisions on whether to allow development. This means that local government will tend not to provide enough sites for businesses. The obvious solution (if you believe in decentralised decision making) is to allow local authorities to retain some of their business rates. This will provide better incentives. But these incentives come at a cost - some councils where the business base doesn't grow will be worse off than they would be under a system which redistributes all business rate growth.

Before introducing such a change, it's important to know if these disincentive effects matter. Research by my SERC colleagues Paul Cheshire and Christian Hilber show that they do - when business rates were centralised this reduced the supply of land for commercial development.

So, in principle, business rate retention could help. Whether it will depends on the details. Two broad points to note. First, this is not a return to the old system where local authorities set rates (look at for a post on that thorny issue by my colleague Teemu Lyytikainen later in the week). Second, it's also part of a wider set of reforms, so assessing the effect of this one change will be difficult. Now to some details:

1) Baseline: The government will use the current formula to establish the baseline, so there are no winners and losers at the start. After that, however, the government will need to decide whether the base grows as described in the spending review (which has the benefit of providing certainty on the retention of business rates) or whether the funding formula should be tweaked over the spending review period (presumably with a view to giving more certainty on total revenues, while increasing the uncertainty on how much business rate would actually be retained)

2) Redistribution: The government will introduce tariffs and top-ups to ensure that the redistribution embedded in the baseline continues (while allowing for unevenness to develop as a result of retention). There are a couple of ways to do this one of which offers stronger growth incentives than the other.

3) Incentives: Depending on the details of (1) and (2) local authorities will retain some business rate growth providing an incentive to work better with businesses. However, they will not retain all growth because the government will impose 'levies'. The government suggests a few different options for how they might do this. The bottom line, however, is that the higher the share retained the bigger the growth incentive. Centre for Cities have some analysis which suggests this figure should be between 40-60%. That is a starting point but, in truth, I don't think anyone has good evidence on what should be the share retained.

4) Using the levy: The money raised from the levy could be used to cushion big shocks or to protect those councils that can't achieve growth. The problem with the latter, as the consultation acknowledges is that it limits the incentive effect of the changes.

5) Revaluation: One way for a local authority to increase business rate retention is actually to restrict supply and raise prices. The government wants to avoid this by redistributing all of the proceeds from revaluation so that the incentive only comes from growth as a result of new development. I think this is problematic because it conflicts with the idea that the scheme is about the wider relationship between local authorities and business. Things that local authorities do to provide better business infrastructure, e.g. through TIF, could easily be capitalised in to prices. This way of dealing with devaluation removes the incentives to do this. More thought needed on this one.

6) Reset: The government will periodically reset the system. This has huge implications for how strong are the growth effects. I don't think we have strong evidence on what would work best although full resets on a non-fixed basis would weaken incentives and appear to create incredible uncertainty for local authorities trying to make long run decisions. That leans the argument towards fixed term, partial resets. But do not believe anyone that says that we, as yet, have clear evidence on the best thing to do on this question.

7) Pooling: Local authorities would be allowed to pool resources under the new system. In keeping with the government's decentralisation agenda, all pooling would have to be voluntary. This is another difficult area, where the uneven distribution of commercial development across local authorities in the same broad geographic area could make for some very difficult negotiations.

The consultation provides more details on each of these points as well as how this will interact with other policies (e.g the new homes bonus). Some thoughts on those will have to wait for another day.

Overall, I think the tradeoffs are increasingly clear - the scheme will give incentives for growth at the cost of some equality in funding across councils. The opposition are calling for the government to ensure that 'no council will be worse off' under the new scheme. I can't see the proposal being able to deliver that in either absolute or relative terms. However, for reasons that I have discussed before, I think this is the wrong equity question. In the end, we care about people and the assessment of the fairness of this depends on how it will affect individuals. It's clear that there will be winners and losers but it is way too simplistic to imply that all the losers will be in council areas that 'lose' (what about those who can commute to new jobs created in neighbouring LAs) nor will all the winners by in council areas that 'win' (what about homeowners near unwanted new commercial development). Don't expect constituency based politicians to see it this way ...

Monday, 18 July 2011

Local Government Finance

If the rumours are correct, we may get more details on the government's plans to allow local councils to retain some of the (growth in) business rate revenues.

There has been plenty of discussion on what needs to happen if this is to provide 'growth incentives' to local authorities. I discussed some broad principles a few weeks ago. The reforms need to be transparent and simple (so they can be explained to local voters). To affect growth, retention must be sufficient to provide a strong and permanent incentive. But for all kinds of reasons, the government will somehow need to balance these needs against a desire to ensure 'losing' local governments don't get left too far behind. A recent Centre for Cities report provides considerably more detail as well as advocating for local government to keep a fixed percentage of growth.

Perhaps because this is a resources review, there has been much less discussion (as yet) on what should happen on the expenditure side. What items of expenditure should be the responsibility of local government and how much variation across areas can we accept?

There is a link to resources, because to avoid reducing the incentive effect it is clear that redistribution to provide specific services can't be based purely on the available resources of the local authority (because this negatives any incentive effect). This suggests that, as far as possible, money will need to be follow the individuals that the service benefits (as it does with the pupil premium). In this way, it should be possible to specify minimums for some services. But to do this, there will need to be serious debate about 'postcode lotteries'. What are the areas in which we are happy to see the level of service provision vary? Primary education? Social care for the young? What about for the old? Sports facilities? Libraries? Refuse collection?

In the past, any suggestion of postcode lotteries has been enough to raise temperatures. If it is to provide strong growth incentives, then the Local Government Resources Review must reignite this difficult debates.

Friday, 15 July 2011

Rising Rents

This morning the Guardian reports on the LSL Buy-to-let index suggesting that rents have hit a record high.

The paper correctly identifies that the fundamental problem underlying the rise in rents is the lack of supply ('102,750 news homes completed last year at a time when the UK's population increased by nearly half a million). Through the New Homes Bonus (and other changes), the government is trying to do something about this under supply. As I explained a few months ago, it is too early to tell whether the NHB is working, but if supply figures continue to be as low it is clear that the government may need to consider changes sooner rather than later. Indeed, in an interesting report published earlier this week Centre for Cities are already calling for a substantial increase in the payments, before the scheme has even got going.

The other thing which I find interesting in the rental figures is the fact that the price effects are being felt quite strongly in a number of places across the country. London saw the highest increases, but was quite closely followed by the North and Midlands. This is in strong contrast to what is happening with house prices. The most recent land-registry figures show that in the year to April 2011 house prices in London rose 5.0% and in the South East by 0.5%. Every other region saw house prices fall in the same period: down a little over 2.5% in the East and West Midlands, down over 4% in Yorkshire and the North West, down over 8% in the North East. The average for England and Wales was a 1.3% fall.

The difference between the two trends likely has a few explanations. First, as house prices fall people decide to rent rather than buy so switching demand from owner occupation to the rental side of the market. Second, to the extent that this changes the composition of the rental market (e.g. towards houses) the characteristics of the properties underlying the index improve, mechanically driving up house prices. Third, within the regions, there's presumably a similar effect with some sample selection in the underlying rental data towards areas where the rental market is currently more active.

These caveats aside, it's clear that even with the recession, housing supply constraints continue to bite and that government will need to be ready to act quickly if current policy reforms turn out not to be effective in addressing this problem.

Thursday, 14 July 2011

Crime nudge

Posted by Dr Steve Gibbons, LSE and SERC

The Government is a fan of open data, arguing that transparency keeps the public sector on its toes. Ministers also like ‘nudges’, light-touch interventions that push people towards the ‘right’ decision.

The two came together unexpectedly this week in a survey from insurance firm Direct Line. Earlier this year Oliver Letwin unveiled street-level crime maps, a flagship open data initiative. However, Direct Line found 11% of people had since not reported a crime – because they were worried about the effects of mapping higher crime on local house prices.

It’s always worth checking exactly how survey questions like this are phrased. The question actually asked was:

“Have you been affected by a crime that you did not report to the police because you feared it would show up on an online police crime map, making it more difficult to rent/sell your house?”

Of 3000-odd people polled, 11% of respondents said yes. Around 75% of these had turned a blind eye to anti-social behaviour, and 45% to vehicle crime. Smaller fractions had either witnessed, or been a victim of assault or street robbery – but had not reported this.

We will have to wait until more recent official data is available on trends in recorded crime – relative to the victimisation survey data from the British Crime Survey – to see whether the Direct Line research really stacks up.

Assuming it does, two points follow.

First, for spatial and real estate economists none of this is very surprising. In 2004 I published this paper in the Economic Journal, based on identical data to that used in the street-level crime maps, showed that incidents of criminal damage (vandalism, graffiti etc.) had big effect on house prices across London. A 10% increase in crime pushed house prices down by 1.5%.

Second, for policymakers this is an unwelcome reminder that it’s easy to ‘nudge’ people in the wrong direction. The Home Office told the FT that providing local information on crime will push crime down, by encouraging people to ‘hold their local police to account … pushing police to tackle crime’. Perhaps. But the Direct Line survey suggests that detailed online crime data could have some serious unintended consequences, given the economic incentives for home-owners to conceal the true level of crime in their neighbourhood. It also follows that policies which attempt to bring crime down by publicly revealing its true extent may not be very successful.

Wednesday, 13 July 2011

Sports Stadiums and Regeneration

Why is it that so many smart, well meaning people continue to think that massive stadium projects will bring big economic benefits to poorer communities who happen to live near them?

In the US, local politicians spend vast amounts of money to attract sports teams despite remarkably little evidence that this has any positive effect on the local economy. In London, these claims about benefits to local communities are made for the Olympics, just as they were for the East End of Manchester and the Commonwealth Games stadium. The latter is now the home of Manchester City Football club [Disclosure: I am not a fan] who plan to change the name of the stadium to that of a new sponsor.

Paul Hayward writing in the Observer, provides details of the deal and the new development: "[...] more intriguing than the passing of a stadium built with public money for the Manchester Commonwealth Games into the hands of a middle-eastern sheikhdom, is that a new Etihad Campus will transform a huge swathe of land around Eastlands (as was) to encompass a relocated training ground, youth academy, sports science facility, Etihad call centre and City Square retail space."

How any of this will provide significant benefits to poor households living nearby is not clear. I assume that the local government will extract some cash from the deal which can be used to fund local community projects. There will be direct benefits to the club (and fans?) and some improvements to the built environment. But the only other likely effect is an increase in local house prices. Indeed, research by Gabriel Ahlfeldt at SERC, looking at stadium re-developments at Wembley and at Arsenal, found that those schemes had a significant positive effect on house prices. This will be good news for local home owners, bad news for local renters. Aside from these changes don't expect a big turnaround in the economic fortunes of those residents 'lucky' enough to live near these new developments.

[We'll publish Gabriel's report shortly. Look out for a blog post from him in the next couple of weeks]

Tuesday, 12 July 2011

MediaCityUK and the Manchester Economy

I caught a little of Evan Davies on the Today programme broadcasting from MediaCityUK in Manchester. I don't have a strong opinion on the cultural arguments (it's cheaper - a plus, but away from the existing 'cluster' - a plus or a minus depending on whose talking). What about the economic impact?

For it to have much impact, it will need to work. The statistical evidence on this does not look great. Government assisted attempts to create innovative 'clusters' usually fail (often spectacularly). Of course, MediaCityUK may buck this trend (the hope of policy makers everywhere, when they choose to adopt these sort of policies). In a recent blog, Oli Mould argues that it is too early to tell but suggests that there are dangers with the current strategy.

If it did succeed, what then would be the wider impacts? Drawing on our work for the Manchester Independent Economic Review and the wider evidence, I think that the story is as follows. Average wages in Manchester will go up as high paying stars move to Manchester. So will house prices because, in the high demand parts of Manchester, supply constraints bite just as they do in London. All those empty small flats in the centre of Manchester won't help meet the demand for houses outside the centre. These wage and house price changes are likely to leave poorer residents worse off, just as in London where 'affordability' is a major issue for poorer families. Perhaps we wouldn't mind so much if employment increased as a result of the move. Unfortunately, preliminary findings from our ongoing research suggest that one extra public sector job in an area increases total employment by ... one job. So we shouldn't expect large employment effects.

In short, if MediaCityUK succeeds, this will improve the economic performance of the Manchester economy, but do little to help poorer families and households.

Monday, 11 July 2011

More City Rankings

A report from the Business of Cities discusses city indexes. They identify 107 separate rankings.

As I wrote a few weeks ago, I am not sure that these rankings are very useful for policy.

Economists think of households as facing an earnings, cost of living, amenity tradeoff when they think about where to locate. SERC research suggests wage disparities across local areas in Britain are pronounced and very persistent. Earnings disparities between different cities and different labour markets give cause for concern, because they seem to imply differences in standards of living and economic welfare. So, does this imply that places with the lowest wages are the 'worst places to earn a living'. Of course not, because earnings disparities are uninformative about differences in economic welfare and wellbeing unless we take account of differences in the costs of living and the availability of local amenities.

In recent SERC research, we address this question, by considering the extent to which higher post-tax earnings are offset by higher housing costs. Across Britain, our research shows increased living costs (particularly of housing) tend to completely offset increased wages for the average household. In the lowest wage areas, which are mostly rural, differences in amenities drive the cost-of-living versus wage tradeoff. In (mostly urban) higher wage areas, differences in firm productivity drive the results.

Rankings of cities based on one or two characteristics make for interesting stories, but they don't tell us much about the more complex tradeoffs facing households and firms. Multivariate indices (that consider many characteristics) try to get round this by applying arbitrary weights to those different characteristics which likely makes the index not useful for anyone (except those who just happen to have the same weighting as used in the report). In contrast, urban economists start from observed difference in wages and costs of living, assume that people are pretty mobile across space and then try to figure out from actual behaviour what amenities people appear to value. This approach doesn't always make for such nice stories, but it does make for a more consistent way of evaluating the wage-cost-amenity tradeoff that firms and households face when choosing their city.

Friday, 8 July 2011

Putting a price on starchitecture

Posted by Dr Gabriel Ahlfeldt, LSE and SERC

We know that good architecture plays a big role in the appeal of a neighbourhood, even if we don’t always agree on what good-looking buildings look like. What’s even harder to test is how iconic buildings affect the value of other nearby buildings – architectural spillovers, if you like.

For economists this is an important question, as it raises a potential co-ordination problem. Individual developers will not take into account the un-priced external effects that spending on the external appearance of their properties have on other properties. It is perfectly rational keep spending low (as the individual contribution to the overall appeal of the neighborhood is low) and wait for other developers to do the job. Planners would argue an intervention is required to escape this (prisoner’s) dilemma.

Measuring such spillovers empirically is tough for two reasons. First, since a certain architectural design or style may be liked by some and not by others, it is difficult to determine explicitly what constitutes ‘good’ design. Second, many of the most significant architectural designs are found in public buildings such as stadia or museums and in these cases the benefit of the architectural element cannot be isolated from the use of the building.

New SERC research gets around both of these issues by focusing on residential properties designed by Frank Lloyd Wright – the “greatest American architect of all time” according to his peers in the American Institute of Architects.

We use Oak Park, Illinois as a case study. It’s uniquely useful for empirical research, as Wright built 24 homes in the village between 1892 and 1914. The subject residential properties are privately owned and the only benefit to outsiders is their exterior appearance.

Our results show that a significant premium on the price paid per land unit – 8.5% for homes within 50m of a Wright home, and about 5% within 50-250m. Beyond this threshold evidence for positive effects is weak at best. Also interesting is that the ‘iconic effect’ seems to have emerged quite slowly. Land value assessments done after the last Wright buildings had been developed cannot account for the estimated contemporary premium. This phenomenon may be related to Lloyd Wright’s growing reputation over time, or the general public’s gradual acceptance of modernist stylings.

The existence of ‘architectural spillovers’ – at least for buildings designed by top-flight architects – opens the door for some intriguing policies. One could argue that if better architecture were achieved across the board, not only would liveable and enjoyable public spaces be created, but, due to externality effects, homeowners would also benefit from the increased value of their neighbourhoods and eventually their properties.

However, enforcing higher investment into architecture – via regulatory standards, for example – may increase construction costs and potentially discourage (re)development. An undesirable result would be property price increases that are supply- rather than demand-driven, with potentially negative welfare effects. Smart policies need to encourage the production of good architecture while ensuring design standards don't prevent anything being built at all.

Thursday, 7 July 2011

Spatial Mismatch

An interesting Centre for Cities report published yesterday suggests that jobs for the unskilled are gradually moving out of city centres. As large numbers of unskilled live in city centres this raises the possibility that spatial mismatch may partly explain their high unemployment rates.

Given the constraints on housing supply in the UK let's assume that a housing 'solution' to this mismatch is infeasible. Getting low skilled employers back in to city centres is unlikely to provide a 'solution' either. First, because high skilled service activity benefits more from city locations they are willing to pay rents that low skilled employers can't match. Second, because central city locations tend to make low skilled manufacturing firms less competitive than their international rivals. This leaves us with policy interventions aimed at either improving skills, or lowering barriers to work by, for example, better linking the low skilled to job opportunities elsewhere. Cue suggestions for more investment in public transport, better information sharing across local authorities etc.

Unfortunately, there is a big evidence problem for policy making in this area. Forty years of study in the US (where spatial mismatch is considerably more pronounced) has yet to resolve the question of whether low job accessibility increases the risk of unemployment and if so, by how much. There are data issues: how to measure accessibility, the lack of availability of individual data and the need to use aggregated data, small samples when data is available (with poor individual controls). There is also a major methodological problem: how do you solve the endogeneity problem - does residential location drive unemployment or does unemployment drive residential location? This is the same problem as is encountered when trying to figure out if neighbourhoods affect outcomes (as discussed further in SERC policy paper 2)

Academic research continues to address these problems. Overall, my impression is that the best recent studies suggest there may be some causal affect of accessibility on unemployment but that the channels through which these work and the magnitudes of the effects remain uncertain (and are not necessarily large). In short, the role of spatial mismatch in explaining low skilled unemployment and what, if anything, we could do about it remains uncertain. Never a message policy makers like to hear.

Wednesday, 6 July 2011

Open Evaluation: Not Just for Enterprise Zones

Yesterday, I suggested enterprise zones might be amenable to 'open evaluation' because the set up of the competition may make analysis of the scheme attractive to the growing number of academics interested in more rigorous approaches to policy evaluation.

EZs are certainly not unique in this regard. The 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 Entreprise 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. To take another example, the Single Regeneration Budget had multiple stages, successful and unsuccessful bids and some projects that targeted specific areas. The official evaluations of LEGI and SRB made little, if any, use of these programme features to help identify the causal impact of the policies. In contrast, work at SERC is already using these features to help assess the impact of LEGI and SRB.

I think there are several reasons for this, most of which stem from the fact that departments fund and supervise evaluations of their own policies. I think this creates multiple problems. First, convincing evaluation usually requires considerable effort focused on a small number of outcomes. In contrast, centrally funded evaluations are often very wide ranging, covering multiple outcomes. Second, they often have a strong focus on process (how were budget sets, how did the partnerships operate) rather than outcomes. Third, civil servants and ministers do not like negative evaluations of policies that their departments implement. Fourth, consultants and academics that undertake these evaluations want repeat business so they have strong incentives to make sure departments are happy with evaluations. Fifth, there are time pressures to deliver 'quick' answers. This is not an exhaustive list, and these issues certainly do not arise for all evaluations and all departments equally. Despite that caveat, I do think these issues present major problems for department funded evaluations of departmental policies. As the resulting evidence base is often poor, I suspect this also partly explains why governments often feel that they can ignore the results of their own evaluations when it comes to policy design.

So what is to be done? In depth analysis of processes (how money is spent, how are decisions made?) will still, I suspect, need to be funded by government departments. I think it would help to distinguish such process evaluation/audit from outcome evaluation. I also think that decentralisation means that learning much from these exercises may became harder. So we will need to come up with more innovative ways of helping organisations learn from one another on what process work. For outcome evaluation, I think department funded evaluations should have much more external oversight. Perhaps that could be a role for an independent national evaluation office (or an expanded audit office). I also think outcome evaluations should be much more closely targeted on a few key outcomes where it is possible to evaluate the causal impact of policy. Finally, as I wrote yesterday, transparent and much more careful documentation of the policy making process would allow 'open evaluation' of many policies (local as well as national). Such open evaluation has the potential to be focused, much cheaper and independent of governement, with all the benefits that entails.

Tuesday, 5 July 2011

Open Evaluation and the Future of Evidence Based Policy Making

The government has announced that 29 sites will compete 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. 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).

Undertaking a policy evaluation of this kind would substantially improve our understanding of whether EZs generate or mainly displace economic activity. This would help future governments when they decide whether to maintain or re-introduce such a scheme (and remember EZs aren't exactly a new phenomena).

Even better, I suspect that the government could get this analysis for free (or very cheaply) because this kind of evaluation has the potential to be published in top academic journals (in fact, the strategies that I suggest are taken from a paper evaluating US EZs published in one of the top economics journals). This won't work for all policies (because the degree of academic interest will depend on the policy 'design') but will work for a good proportion of them. When it does work, policy evaluation of this kind doesn't need to be big expensive and centralised, it can be outsourced, by using open evaluation in the academic (and wider non-governmental) community.

A first step in moving towards this open evaluation model would require good information to be recorded for all bids whether successful or not. This step would involve a small amount of expenditure - although nearly all this information will be processed when appraising the bids before a decision is made. The only additional cost here involves doing this in a consistent, well documented manner.

A second step would be for the government to be transparent about the decision making process. How were the winning bids selected. I am sceptical that this will happen. Fortunately, while this doesn't help evaluation it certainly doesn't rule it out.

Next the government needs to make details of the scheme, decision making process and the information on accepted and competing bids 'publicly' available. Of course, some of the information may be confidential (more so when it comes to individuals or firms than areas), in which case publicly available may mean that people have to apply to use the data in one of the new secure environments (the ESRC funded Secure Data Service, the Office for National Statistics VML). Again, there will be some small cost to maintaining this data and providing access to it.

Finally, government needs to be patient. To perform the kind of analysis laid out above will require data on firm performance, employment, unemployment etc for a lot of areas across the UK. That data is usually only available with a time lag of several years. But once the data becomes available, researchers will then spend many (unpaid) hours figuring out whether the policy in question had any causal impact on outcomes that we care about.

So, with a little patience and transparency, open evaluation has the scope to significantly increase our understanding of the causal impact of government urban policy at very little cost. If you like, it's the 'big society' approach to evidence base policy making.

Monday, 4 July 2011

Building on the Green Belt

The debate continues about what the government mean by "presumption in favour of development" and the implications for the greenbelt.

While writing about this a couple of weeks ago I said: "Some commentators are reading these changes as a green light for development. In practice unresolved tensions at the heart of the government's approach to planning, nature and economic growth mean it is difficult to say which way the balance will swing." If reporting about a leaked version of the national planning policy framework is to be believed, the balance appears to be swinging towards economic growth.

Some commentators are arguing that even this wouldn't be enough and that we need local communities to vote on specific schemes after direct negotiations with developers. The argument is that this would allow those most affected to be directly compensated thus reducing opposition to developments. This must be the case, but local votes on all schemes may swing the balance too far in the opposite direction. Why should those most affected capture all of the gains when these may exceed the direct costs to them? Especially as other costs are spread more widely across the community (e.g. through the need to provide new schools, roads etc). In addition local votes on all development proposals also raise considerable uncertainty for developers.

If we have neighbourhood plans that genuinely reflect local preferences, then I think there will need to be strong financial incentives that benefit households close to new development if those plans are going to allow for growth. But other mechanisms could achieve this without the move to local votes on all proposals (with the distributional and logistical problems that entails).

Friday, 1 July 2011

Productivity: every little helps?

Posted by Prof Paul Cheshire, LSE and SERC

In current economic circumstances, one would assume most people would want to increase UK productivity. After all, as the Director of CEP writes in the current issue of Centrepiece: ‘in the long haul the basic determinant of material wellbeing is the growth of wages, which is determined by productivity growth.’

If some well meaning group wanted to restrict working hours in manufacturing to 28 a week, reducing productivity by 20 percent, they would not get far unless they could demonstrate overwhelming gains in environmental or social terms. Yet a recent SERC study (summarised here) estimates that planning policies combine to reduce productivity in supermarkets by more than 20 percent. Retail is the UK’s second largest industry. Poorer households spend a disproportionate share of their incomes in supermarkets. Moreover, unlike the output of manufacturing competing foreign imports are all but unavailable (discounting day trips to Calais).

So if productivity in the retail industry suffers so does the welfare of society. But somehow British planning policies are taken by us British as an apparent fact of the natural world.

Having an international perspective helps put this in context, as the March 2011 OECD survey of the British economy makes clear. We do mean well with our planning system in the UK: but these good intentions come at really serious costs. Not just to the price of housing but increasingly, the evidence shows, to the productivity of our economy.

Some earlier SERC work already showed we were imposing the equivalent of a 250% tax on the costs of office space in even depressed economies like Birmingham. Now we find we are suffering a 20% loss of productivity from what is on reasonable measures the second largest industry in Briton.

Of course, retail and town centre planning rules were partly designed to protect small shops. So we might not object to costs on supermarkets if the benefits to independents outweighed these. But it turns out that small shops have lost out too. As supermarkets have reacted to planning restrictions by moving into town centres, many small stores have been out-competed or out-priced. Mary Portas, take note.