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 growth
Industry Group
Agglomeration
Average all manufacturing
Publishing, printing reproduction of media
0.077
0.105
Advertising
Average all services
Motion picture, video and TV
Hotels and restaurants
Finance and insurance
0.137
0.197
0.222
0.224
0.251
Public services
Business and management consultancy
Transport services
Manufacture radio, television and
communication
0.292
0.298
0.325
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
controls
16%
7%
4%
People ‘sort’
Area-effects persistent
Real disparities and QOL
QOL/real earnings estimates
Costs (r)
Willingness to
pay/QOL/ or minusdisposable-earnings
for place B relative
to A
B
rj  w j  q j
q j    rj  w j 
Reference place A
45 degree
Wage (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
5
4
3
2
1
0
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
City of London
London West End
Canary Wharf
Manchester
Newcastle upon Tyne
Croydon
Reading
Bristol
Birmingham
Leeds
Amsterdam
Frankfurt
Paris – City
Paris – La Défense
Stockholm
New York (Manhattan)
0
488
809
327
230
97
94
203
157
250
193
202
437
305
167
379
0-50
Measuring the
Regulatory Tax on
Cost of Office
Space
(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
Costs of shopping: retail
Sales per unit area controlling for all
other factors by year store established
13.68
13.66
13.64
13.62
13.6
13.58
13.56
13.54
13.52
1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Total impact town centre first plus restrictiveness
Representative store:
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%
All values at sample mean except…
Total Impact on TFP
-20.2%
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/pu
blications/download/sercdp0060.pdf
• Evidence on ineffectiveness of mixed communities:
– http://www.spatialeconomics.ac.uk/textonly/SERC/pu
blications/download/sercpp002.pdf
• People trade off wages, costs of living and amenities:
– http://www.spatialeconomics.ac.uk/textonly/serc/publi
cations/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/p
df/1767142.pdf
– http://www.spatialeconomics.ac.uk/textonly/SERC/pu
blications/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/pu
blications/download/sercdp0066.pdf
• Evidence on devolving powers and city ‘performance’
– http://www.spatialeconomics.ac.uk/textonly/SERC/pu
blications/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