What should urban economic policy do? Lessons for London

Prof. Henry Overman (LSE & SERC)

Introduction

Introduction

• Conflicting objectives for London– Maximise economic growth– Less financial services– Geographical rebalancing (north-south)– Reduced intra-city inequality

• This seminar: How economists think about urban policy and the lessons for London on (some of) these objectives

Outline

• Drivers of city performance• Relative role of ‘people’ and ‘place’• Implications for wellbeing (QOL)• Policy implications

Understanding cities

Basic idea

• Cities as places of production– Wages and productivity higher in cities

• Cities as places of consumption– More choice in cities (spread fixed costs)

• Costs of cities– Price of scarce resources (land)– Congestion– Other negative externalities (crime, pollution etc)

Drivers of city growthIndustry Group Agglomeration

Average all manufacturing 0.077

Publishing, printing reproduction of media 0.105

Advertising 0.137

Average all services 0.197

Motion picture, video and TV 0.222

Hotels and restaurants 0.224

Finance and insurance 0.251

Public services 0.292

Business and management consultancy 0.298

Transport services 0.325

Manufacture radio, television and communication

0.382

Opportunities and Challenges

• Opportunities depend on changing structure of the economy (feedback?)

• Challenges are on consumption and costs side– Land use planning– Impact of cuts

• Plus issue of uneven performance

Evidence

Empirical implementation: areas

Area disparities are persistent

Difference between raw area disparities and area effects

Distribution of area effects

Max/Min

p90/p10

p75/p25

Raw 67% 26% 11%

Full control

s

16% 7% 4%

People ‘sort’

Area-effects persistent

Real disparities and QOL

QOL/real earnings estimates

Costs (r)

Wage (w)

Willingness to pay/QOL/ or minus-disposable-earnings for place B relative to A

45 degree

B

Reference place A

j j jr w q

j j jq r w

Real disparities and QOL in Britain

Discussions and conclusions

• Who you are much more important than where you live

• Understate costs of high-wage places if ignore sorting of workers

• Controlling for this makes high-wage places look more expensive

• For cities, costs rise 1:1 with earnings

• High-QOL (i.e. expensive) places are predominantly southern and coastal

Neighbourhoods

Sorting more important in cities

• Because people are more mobile within than between cities sorting more important for area disparities within cities

• Robust evidence on mixed communities limited

• Not ruling out the possibility that there may be small neighbourhoods with very bad area effects

Urban and regional policy

Area effects: LEGI

Pre Treatment Emp

Impact of LEGI on Emp 1km rings

Area effects: Commercial buildings (SRB)

Impact SRB buildings

• Comparison groups– Similar EDs– Nearby EDs– Early and later treatments

• Building commercial space (£5bn) in deprived areas has no effect on employment; no indication of job displacement

• Other components SRB may be affecting ER

Area effects: RSA

1988 2000

Impact RSA

• Comparison group– Firms/areas that would have been treated (more

intensively) if map of assisted areas had not changed

• Increases employment in treated firms and treated areas

• But treated firms lower productivity and RSA no effect on productivity

Costs of living: Housing

0

1

2

3

4

5

GERMANY

SWITZE

RLAND

JAPAN

SWEDEN

FINLA

NDUSA

NORWAY

FRANCE

ITALY

CANADA

DENMARK

AUSTRALIA

NEW ZE

ALAND NL

BELGIU

M

IRELAND

SPAIN GB

Annual average real house price growth 1970-2006

House price effects of planning

• If planning system were relaxed in av. LPA:– House prices in av. LPA: -35%

• and developable land were abundant:– House prices in av. LPA: -45%

• and LPA were completely flat:– House prices in av. LPA: -48%

• Underestimates – e.g. ignores effect of planning on size of houses

Costs of doing business: offices

(mean 1995-05 as % mark up of price of

space relative to marginal costs of

construction).

Excludes cost of compliance.

Source: Cheshire & Hilber, EJ, 2008

0

City of London 488 London West End 809 Canary Wharf 327 Manchester 230 Newcastle upon Tyne 97 Croydon 94 Reading 203 Bristol 157 Birmingham 250 Leeds 193 Amsterdam 202 Frankfurt 437 Paris – City 305 Paris – La Défense 167 Stockholm 379 New York (Manhattan) 0-50

Measuring the Regulatory Tax on

Cost of Office Space

Costs of shopping: retail

13.52

13.54

13.56

13.58

13.6

13.62

13.64

13.66

13.68

1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Sales per unit area controlling for all other factors by year store established

Representative store:

All values at sample mean except… Predicted weekly

sales per sq ft Loss in

productivity

Store built in 2006 – but annual productivity growth since 1986 assumed at estimated rate for 1966-1986

£20.85 (Base)

Store built in 2006 (post introduction of Town Centre First Policy) £17.52 -16.0%

Store with lowest level of regulatory restrictiveness (based on sample) £19.21 (Base)

Average of all stores in sample £18.39 -4.2%

Total Impact on TFP -20.2%

Total impact town centre first plus restrictiveness

Policy effectiveness

Policy impacts

• Very hard to change area effects– Giving money directly to firms (RSA) appears

more effective than indirect area-based interventions (LEGI, SRB)

– Productivity effects transport interventions limited

• Much ‘easier’ for policy to affect costs– Planning big impact on house prices, office

rents, retail productivity

What should London do?

Ask for more powers?

• No evidence that this will help growth

• No evidence that it won’t help growth

• Plenty of theoretical reasons to think it could help on public goods– Experimentation– Fit to local needs

• Ensure London benefits from Local Government Finance Review

Reform land use planning

• National planning framework matters– Localism versus growth– Restrictions on mixed use, brownfield– Town centre first– Size of NHB and Business rate retention– National planning (mixed comms; brownfield)

• Radical– Land auctions– Drop town centre first policy

Olympics legacy

• Shiny building syndrome

• View as public good provision– Space– Sports facilities– Some housing

• Recognise won’t do much for local people in terms of jobs etc

Transport

• Difficult to detect impact on productivity, but does affect employment within areas– Responsive & based on reasonable projections– Congestion charging– Transport objectives first (social deprivation?)

• More radical:– SCRAP HS2– Use £33bn for smaller high impact schemes

within London and other cities (based on reasonable CBA)

Focus spending• Realism needed

– Some areas of London better off than others– Much of that to do with people not place– Very difficult to change (and no money)

• Radical– Focus investment on places that have potential to

create private sector jobs– Build houses/offices in those places (or transport

links)• More radical

– Lobby govt to SCRAP Regional Growth Fund & spend £2bn on ‘best’ projects in terms of return

People versus places

• Area differences mostly driven by sorting• Benefits to people who move, or commute,

to better areas likely to outweigh loses to people not willing/able to do so

• Commuting dampens effects and extent to which mobile people benefit from improvements in other places

• Other policies (e.g. local wage variation) interact with this

Focus on people

• Policy should focus on, and be assessed by, impact on people not places.

• Policy too heavily focused on public expenditure to “turn around” declining places

• While paying too little attention to individuals.• At the individual level, interventions need to

come as early in life as possible (pre/primary school)

• Later in life, policy should focus on encouraging labour market activity and removing barriers to mobility.

Conclusions• Specific cities may offer an effective strategy for

delivering regional growth …• … but this may widen spatial disparities• Whether we should worry about this depends on

impacts on people not places• Talked about some of the ways could achieve

this in practice• Policy should be focused on people not places

(more skills, less shiny buildings)• Not a view shared by constituency based policy

makers!

References• Who you are as/more important then where you live, raw

disparities overstate area effects; area disparities and area effects persistent despite intervention:– http://www.spatialeconomics.ac.uk/textonly/SERC/

publications/download/sercdp0060.pdf• Evidence on ineffectiveness of mixed communities:

– http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercpp002.pdf

• People trade off wages, costs of living and amenities:– http://www.spatialeconomics.ac.uk/textonly/serc/

publications/download/sercdp0065.pdf

References• Evaluations of LEGI, SRB, RSA and new transport

schemes – coming soon– http://www.spatialeconomics.ac.uk/

• Impact of planning on house prices– http://www.communities.gov.uk/documents/housing/

pdf/1767142.pdf– http://www.spatialeconomics.ac.uk/textonly/SERC/

publications/download/sercpp004.pdf

References• Impact of planning on office rents

– Hilber and Cheshire, Economic Journal 2008• Impact of planning on retail productivity

– http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0066.pdf

• Evidence on devolving powers and city ‘performance’– http://www.spatialeconomics.ac.uk/textonly/SERC/

publications/download/sercpp005.pdf

Disclaimer

• This work was part of the research programme of the independent UK Spatial Economics Research Centre funded by the Economic and Social Research Council (ESRC), Department for Business, Innovation and Skills, Communities and Local Government, and the Welsh Assembly Government. The support of the funders is acknowledged. The views expressed are those of the authors and do not represent the views of the funders