Letting succesful places fail.

Tom Forth,

Why does the state keep forcing places to grow that don't want to, and what's the alternative?

In 2008 Policy Exchange published what will forever be one of their most covered papers. "Cities in northern England such as Liverpool, Sunderland and Bradford are 'beyond revival' and residents should move south" was the BBC's summary of the piece.

That summary was a bit unfair. The paper is better than that simplification. It makes a strong classical liberal economic argument focused firmly on improving the lives of the most people possible.

It is similar to arguments I hear most weeks on my favourite economics podcast, EconTalk by Russ Roberts. On this issue, the logic of that US-focused podcast is simple,

Opportunities in the USA have always been unevenly distributed. In the past American families were much more likely to move to those opportunities. Today American families move less, partly because housing in the cities with the best jobs is so expensive. This is largely because restrictions on the growth of housing stock in those cities restricts supply. So succesful cities should change their zoning laws to let more housing be built.

That was pretty close to the argument in the Policy Exchange paper,

We've tried for over a decade of a Labour government to create lots of good productive jobs in Liverpool, Sunderland, and Bradford and we've failed. There are lots of good productive jobs in Oxford and Cambridge and London that the people who are unemployed or in poor jobs in those places could take. But Oxford and Cambridge and London aren't allowing enough houses to be built for the people to move there. We should remove restrictions on building more houses in the succesful places, so that they can expand quickly. Then we should use the extra productivity to provide good lives and good educations to those people who don't move.

The liberal problem with making places grow.

I like liberal economists like Russ Roberts and the authors of the report for Policy Exchange. I agree with them on most things, and when I disagree I can understand why.

I agree with them on their desired outcome, given their assumptions, on this issue. We agree that it would be good for people if London, Cambridge, New York, San Francisco, Stockholm, Barcelona, and all the rest built lots more homes and welcomed even more internal migrants looking for a better life. But those cities choose not to grow, and that is where I struggle to see the value of their line of argument.

If a place chooses not to grow then I, as a democrat and a liberal (using the old UK definition of both), don't think that central government should force them to. Building more houses in places with succesful economies would be good, but the central government forcing that on a place will almost always be worse.

So what is the alternative? I think that the answer is the one that liberal economists love to fall back on, markets. Specifically, markets for cities. We need to work much harder on understanding why cities refusing to allow growth doesn't seem to hurt them or their current residents. For all the talk of San Francisco pricing out its tech entrepreneurs, we have seen almost none of that. And for all the talk of cheaper cities attracting talent and fast-growing business, we see little of that too.

Markets require failures as well as successes. But I see few failures. Is the market in cities working? If not, why not?

The power of markets: learning to let succesful places fail.

For the rest of this blog post I'm going to pick on the small English city of Oxford. The data below comes from previous blogs by me on R&D spending in Oxford and from the Centre for Cities' Cities Outlook 2020: City Monitor section. There will be the usual calls for more detail, complexity, and nuance that lower the quality of policy debate in the UK, and I am happy to engage in that when I get time in the future. But not now.

Oxford refuses to grow. In 2017 (the latest data) its population fell. This is not because people left to find other jobs, Oxford has the 5th lowest unemployment of all cities in the UK (1.9%). There is effectively full employment.

People left Oxford because they could not afford housing. The city's average house costs over 17 times the city's average wage, the highest ratio in the UK. This is partly caused by the city's refusal to grow, it added homes at the 5th lowest rate in the UK, just 190 in 2017.

Wages in Oxford are well above the UK average, the 10th highest of all the UK's cities, and jobs are being created. Oxford is 8th in the UK for rate of job creation, 3rd in the UK for patenting intensity, and top for level of education of its residents (63.2% have a degree). But Oxford refuses to grow.

So why doesn't Oxford fail? A city that refuses to grow is not a good place to move to for work, or a good place to start or expand a business. Why doesn't the market cause the city to fail?

I think that one of the biggest reasons is that the state is propping Oxford up. It has the highest proportion of its residents working in public sector jobs of any UK city. The UK state funds research & development in and around the city at an astonishing rate, almost five times the rate of Greater Manchester for example. This is despite businesses in and around Oxford spending little more than in Greater Manchester on research. Within the past decade the UK state built the city a new railway line to London while it was upgrading the first with faster, longer, and more efficient trains. The UK state is now planning a brand new railway line to join Oxford with towns and cities all the way to Cambridge.

The UK state is not letting Oxford fail. It is propping up a city that refuses to grow and obstructing the market from playing its role. And because of that the market in cities works less well, poor places that would outcompete Oxford and turn their fortunes around cannot do so, and the residents of those places cannot move to where opportunities are.

In 2008 Policy Exchange started a discussion about listening to market signals telling the state to abandon failing places. In 2020 we should talk about listening to market signals telling the state to abandon succesful places that refuse to grow. I'm even willing to come to Oxford to do so.

 

I've had an extremely exciting and busy 2019. New businesses, expansions of existing businesses, fantastic new products and new employees. I've not been blogging much as a result. But I said no to a lot of work towards the end of last year and I'm hoping to have more time from March. And I'll be working on this problem more then.

 

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