1. What should urban economic policy do? Lessons for London Prof. Henry Overman (LSE & SERC)

2. Introduction

3. 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

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

5. Understanding cities

6. 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)

7. Drivers of city growth Industry GroupAgglomeration Average all manufacturing0.077 Publishing, printing reproduction of media0.105 Advertising0.137 Average all services0.197 Motion picture, video and TV0.222 Hotels and restaurants0.224 Finance and insurance0.251 Public services0.292 Business and management consultancy0.298 Transport services0.325 Manufacture radio, television and communication 0.382

8. 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

9. Evidence

10. Empirical implementation: areas

11. Area disparities are persistent

13. Difference between raw area disparities and area effects

14. Distribution of area effects Max/Minp90/p10 p75/p25 Raw67%26%11% Full controls 16%7%4%

15. People ‘sort’

17. Area-effects persistent

19. Real disparities and QOL

20. 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

21. Real disparities and QOL in Britain

23. 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

24. Neighbourhoods

25. 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

26. Urban and regional policy

27. Area effects: LEGI

29. Pre Treatment Emp

30. Impact of LEGI on Emp 1km rings

31. Area effects: Commercial buildings (SRB)

32. 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

33. Area effects: RSA

34. 1988 2000

35. 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

36. Costs of living: Housing

37. 0 1 2 3 4 5 GERMANY SWITZERLAND JAPAN SWEDEN FINLAND USA NORWAY FRANCE ITALY CANADA DENMARK AUSTRALIA NEW ZEALAND NL BELGIUM IRELAND SPAIN GB Annual average real house price growth 1970-2006

38. 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

39. Costs of doing business: offices

40. (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 Measuring the Regulatory Tax on Cost of Office Space

41. Costs of shopping: retail

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

43. Total impact town centre first plus restrictiveness

44. Policy effectiveness

45. 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

46. What should London do?

47. 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

48. 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

49. 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

50. 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)

51. 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

52. 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

53. 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.

54. 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!

55. 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.pdfhttp://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.pdfhttp://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.pdfhttp://www.spatialeconomics.ac.uk/textonly/serc/publi cations/download/sercdp0065.pdf

56. References Evaluations of LEGI, SRB, RSA and new transport schemes – coming soon –http://www.spatialeconomics.ac.uk/http://www.spatialeconomics.ac.uk/ Impact of planning on house prices –http://www.communities.gov.uk/documents/housing/p df/1767142.pdfhttp://www.communities.gov.uk/documents/housing/p df/1767142.pdf –http://www.spatialeconomics.ac.uk/textonly/SERC/pu blications/download/sercpp004.pdfhttp://www.spatialeconomics.ac.uk/textonly/SERC/pu blications/download/sercpp004.pdf

57. 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.pdfhttp://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

58. 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