Flaws in the ‘Northern Powerhouse’

Derelict factory 156There have been various attempts to regenerate the cities of the North over the last fifty years or so. All have failed to transform the region. As a Policy Exchange study put it, ‘attempts to regenerate British cities over the past ten, twenty or even fifty years have failed. The gap between struggling and average cities, let alone between struggling and affluent cities, has continued to grow. Geographical inequality is growing’. Once-thriving northern cities are now heavily dependent on central government subsidies. The ratio of public spending to ‘gross value added’ is around 50 per cent higher in the North of England than in London and the South East.

The cost of failed regeneration efforts has also been substantial. Stronger regions have been weakened due to the additional tax burden imposed on them to pay for such initiatives. And weaker areas have become trapped in state dependency, with high levels of government expenditure and national pay rates crowding out the private sector – for example by absorbing skilled labour – thereby hindering entrepreneurship and the production of wealth.

There is also a heavy indirect cost from distorting the UK’s economic geography and leaving it maladapted to current conditions. Essentially government policy has attempted to fossilise patterns of development that grew up in the Industrial Revolution, even though many of the reasons for economic activity concentrating in northern cities have long since disappeared. The result is that capital and labour have been misallocated to suboptimal locations. For example, subsidies to the North have reduced the incentive for people to seek more productive employment in other parts of the UK, once again harming the stronger regions and the economy as a whole.

In this context, this government’s plan to re-invent regional policy through the concept of a Northern Powerhouse would appear to be ill-conceived. As with previous attempts at regeneration, the plan is built on vast taxpayer subsidies from central government, imposing significant costs on the wider economy. And rather than allowing patterns of economic activity to evolve through voluntary exchange, this represents a top-down attempt to push development into favoured locations. Unfortunately there is a high probability that politicians will once again end up ‘picking losers’ rather than winners, and that the policy will squander resources on areas whose deep-seated problems will not be solved by yet more state intervention.

A key component of the Northern Powerhouse plan is the idea that by improving transport links between major centres such as Leeds, Manchester and Sheffield, the North can benefit from the kind of ‘agglomeration economies’ enjoyed by London. In other words, the hope is that better transport links will enable the region to behave more like a single city, with, for example, residents of Leeds and Sheffield easily able to work in Manchester and so on. The government hopes to achieve this by building High Speed 3, a multi-billion-pound, trans-Pennine rail link that will cut journey times between the city centres of Manchester, Leeds and Sheffield to around half an hour.

There are indeed substantial economic benefits from such clusters of economic activity. For example, thicker labour markets may lead to the better matching of workers to jobs and increased firm density may lead to greater knowledge sharing and to increased specialisation in supply chains.

However, it is also clear that current government plans will fail to produce most of these benefits. The population of the north is far more dispersed than that of Greater London, with many of its conurbations fragmented into smaller centres and a high degree of suburbanisation. This means that high-speed rail links between the major city centres will not deliver fast enough door-to-door travel times to enable the region to function as a single economic unit. Typical commutes will remain too time-consuming and too expensive for the labour markets to combine.

To give a practical example, take someone who lives in the wealthy suburbs of north Leeds and works in Manchester. The bus trip to Leeds station takes say 35 minutes in the morning peak, but in practice the commuter has to allow 50 minutes to give some leeway for transfers and the walking involved. The 30-minute high-speed trip to Manchester takes the total up to 80 minutes, and then the worker faces say a 10-minute walk to his office – making a total of 90 minutes or a 3-hour round trip (about three times the average).

Such long journeys would be unacceptable and/or impractical for the vast majority of potential commuters, effectively adding 40 per cent or more to the length of the working week. Moreover, the cost – about £3,500 a year based on current fares and possibly much more if HS3 charged a premium – makes this option prohibitive for many workers.

Moreover, high-speed rail will be almost entirely useless for the many businesses that rely on road transport to move goods and equipment. Building the kind of dense public transport network seen in London in the more sparsely populated North would be prohibitively expensive and not economically viable. The obvious flaws in the HS3 proposal are symptomatic of centrally planned, big-government projects that are driven by politics rather than commercial imperatives.

An additional obstacle to the success of the plan is the mediocre level of human capital in many areas of the North. Poor levels of education, skills and entrepreneurship, as well as local cultures that are not always conducive to wealth creation, often mean that the benefits of improved transport infrastructure are not forthcoming. This perhaps explains why Doncaster remains one of the poorest towns in the UK, despite its fast rail links to London and excellent road connectivity.

There are also strong elements of hypocrisy and double standards in the government’s plans. At the same time as policymakers are attempting to deliver agglomeration economies in the North, their policies actively undermine them in London and the South East. In particular, strict planning controls, including green belts and other ‘zoning’, are hindering the growth of the capital. This has a knock-on effect on labour mobility. By pushing up rents and house prices, planning policies deter people from moving from the North to London, even when such relocation would enhance their opportunities to succeed in the labour market. Accordingly, such controls have a highly negative impact on productivity and output, since workers are less likely to find employment that fully reflects their skills. Reduced labour mobility will tend to increase unemployment and underemployment, thereby raising welfare spending.

Rather than focus on a flawed attempt to produce agglomeration economies in the North of England, fighting against the logic of economic geography and pools of mediocre human capital, it would make far more sense to remove the barriers to a greater clustering of activity in London and the South East.

Such a laissez-faire policy would not require the vast subsidies associated with the Northern Powerhouse. As shown in the 1930s, deregulation would suffice for the provision of housing, while market pricing would enable far more efficient use of already dense and high-capacity transport networks. Land development could also help fund new infrastructure, built on a commercial basis without subsidy.

In terms of agglomeration economies, it makes far more sense to allow activity to cluster than to disperse it artificially to suboptimal locations. In particular, giving London the freedom to expand much more rapidly could see its population far outstripping other centres in Western Europe, facilitating the thicker labour markets, knowledge sharing, niche services and specialised clusters that attract talent and encourage high productivity.

Whether some kind of Northern Powerhouse develops, London expands, or both, should be determined by market processes rather than the whims of politicians. There may well be a revival of the North, but if it happens it will be despite government intervention, not because of it. Unless successful cities are allowed to grow and unsuccessful ones to decline, the UK’s economic geography will become increasingly maladapted to current conditions, with ‘zombie cities’ dependent on state handouts draining the life out of the more productive areas of the economy.

 

 Further reading:

Failure to Transform: High-Speed Rail and the Regeneration Myth

A shorter version of this article was published on the IEA Blog, 4 June 2015, where a comment thread is also available.

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High Speed 1: how taxpayers were taken for a ride

Eurostar 203High Speed 1 (HS1) would never have been built if the decision had been made on commercial criteria, or indeed on rational economic grounds. While the high-speed-rail lobby promotes the scheme as a success story, it was in fact a financial failure, marked by cost increases, repeated bailouts, disappointing passenger numbers and failed objectives.

The cost of the final HS1 scheme was far in excess of original estimates. In November 1985, British Rail’s preferred high-speed option was costed at about £1 billion in 2015 prices, while the final cost of the project has been estimated at approximately £11 billion in current prices.

Moreover, after the line opened below-forecast passenger numbers meant that the operator, Eurostar, had to be bailed out by the Department for Transport. Further government support for the struggling route was obtained via the access charges for (subsidised) Kent commuter services.

In addition to substantial operating subsidies, HS1 appears to have been artificially supported by the manipulation of the rail market. Some services from Kent stations to convenient London termini such as London Bridge, Cannon Street, Charing Cross and Victoria have been cut, while others have been slowed down, in an apparent attempt to drive passengers onto HS1. Commuters across the Southeastern franchise area also faced steep increases in fares to pay towards the high-speed services, whether they used them or not.

Many of the objectives of HS1 have also yet to be achieved. Plans to run international services from Stratford in London and through services to the Midlands and the North did not materialise due to low demand. At the time of writing, Eurostar trains do not stop at the £250 million Stratford International station. And notwithstanding exceptional traffic during the 2012 Olympics, it appears that the stop is only lightly used by commuters from Kent, often handling fewer than 1,000 passengers per day in each direction.

HS1 also provided a rationale for the construction of additional transport infrastructure at further expense to the taxpayer. A £250 million (2015 prices) extension to the Docklands Light Railway (DLR) was constructed largely to improve the accessibility of Stratford International. The line also provided a major justification for the redevelopment of Kings Cross St Pancras Underground station, at an additional cost of roughly £1 billion (2015 prices).

It should also be noted that much of the ‘regeneration’ along the route has been state-funded. The subsidised public sector and ‘crony capitalists’ dependent on government privileges dominate the post-Olympics redevelopment at Stratford. Major tenants will include the bloated bureaucracies of Transport for London and the Financial Conduct Authority.

Similarly, the government has sought to kick-start the stalled redevelopment of Ebbsfleet – a highly undesirable site, much of which is at risk of flooding – with the injection of at least £200 million of public funds.

The development of land near Kings Cross – also partly government funded – could well have been viable without the link, given the artificial scarcity of opportunities produced by strict planning controls in Central London. Indeed, the redevelopment of such areas may be delayed by the uncertainty and planning blight associated with major transport schemes.

Even if one makes highly optimistic (and questionable) assumptions about the wider economic gains from HS1, it is clear that the project represented very poor value for money compared with alternative investments in transport infrastructure. Indeed, when the deadweight losses from the tax bill and off-balance-sheet spending are included, it seems likely that the costs of the scheme have outweighed the benefits.

 

This analysis of High Speed 1 is partly based on research published in The High-Speed Gravy Train: Special Interests, Transport Policy and Government Spending.

HS2 regeneration claims are economic quackery

High Speed 2 is not the first transport project to have ambitious aims. Back in the 19th century the US government subsidised vast transcontinental railroads to bridge the east-west divide, rebalance the country’s economy and unify the nation.

But the situation on the ground presented challenges for this grand vision. Harsh conditions meant many construction workers fell ill or even died. This created a business opportunity. Entrepreneurs travelled to the railroads to sell ‘snake oil’ to the labourers. They claimed it would treat a whole range of conditions from infections to joint pain. The only problem was that it didn’t work. Customers were being misled.

HS2 is being sold as a modern-day elixir. At first it was promoted on the basis of faster journey times. Then it became an essential means to increase rail capacity. Politicians now argue the project will transform the North of England, bridge the North-South divide and turn northern cities into ‘world leaders’.

The scheme is therefore much more than a railway. It’s an economic cure-all that supposedly will rebalance the economy and create, depending on the lobby group, tens of thousands or hundreds of thousands of jobs.

It would be wonderful if HS2 really could make such an enormous impact. But in reality these assertions reflect a combination of blind faith and political spin. The economic evidence casts serious doubt on the ability of high-speed rail to deliver regeneration on a grand scale.

Take the example of East Kent. Back in the 1990s the government was pushing through the Channel Tunnel Rail Link, Britain’s first high-speed railway. The business case was very poor but regeneration claims were crucial in overcoming Treasury opposition. In particular, ministers said the line would transform the struggling old mining area along the Kent coast.

High Speed 1, as the line became known, did deliver impressive journey times. After fast services began in 2009, Central London could be reached in around an hour, compared with almost two hours previously.

Yet despite this major transport boost, East Kent is still economically depressed. Indeed in the period after the high-speed trains arrived, the region has performed worse on key economic indicators than the rest of Britain.

In the borough of Thanet, which includes Margate and Ramsgate, the employment rate has fallen to 61 per cent – 10 percentage points below the national average and similar to struggling old industrial cities like Liverpool. Median weekly pay for full-time workers is just £446, 14 per cent lower than the national figure.

East Kent has many advantages over the North of England. It’s just an hour’s drive from the M25 and close to prosperous areas in the South East. The Channel Tunnel gives the region easy access to the Continent and it is the closest part of the UK to Europe’s economic core. High-speed rail’s failure to transform the area augurs badly for the ability of HS2 to rejuvenate northern cities.

A second example is Doncaster. 125mph trains to London were introduced in the late 1970s, with electrification of the East Coast Main Line completed in 1991. The fastest trains to London take a little over 90 minutes to reach King’s Cross. Yet despite excellent transport links, Doncaster was ranked 42nd worst out of 318 boroughs in England in the 2010 Index of Deprivation. If the town itself were measured rather than the much wider area of the borough, it would be one of the very poorest places in the UK.

Big cities such as Leeds and Sheffield are of course different from smaller towns. High Speed 2 will make their journey times to London broadly similar to those enjoyed by the West Midlands today. Yet on most measures Birmingham performs far worse than Yorkshire’s major cities. Its employment rate is just 59 per cent, compared with 68 per cent in Leeds. Birmingham comes in the bottom ten districts in the Index of Deprivation.

Clearly improved rail links to London are no panacea. Other factors such as skills, education and entrepreneurship are more important determinants of economic success. But despite the evidence that HS2 won’t deliver the promised gains, it would be unfair to describe its promoters as snake oil salesmen.

For certain sectors and some localities there will indeed be benefits from the project, even if the enormous tax bill means they’re likely to be at the expense of other areas and the wider economy. However, assertions that high-speed rail will deliver a major transformation are far-fetched. HS2 is not an economic cure-all for the North of England and politicians that claim it is are indulging in economic quackery.

1st May 2014, Yorkshire Post (edited version)

London 2012: don’t forget the economic costs

The hype is building as London prepares to host “the greatest show on earth”. The government has urged everyone to come together to support the games, while dissenting views have been deemed unacceptable and unpatriotic. But no amount of political pressure can hide the fact that the 2012 Olympics are an economic failure. The claimed benefits are largely bogus, while the costs to taxpayers are immense.

Indeed, even East Londoners — supposedly major beneficiaries of the largesse — are often sceptical about the games. Residents have put up with years of disruption, with closed roads, traffic jams, dirt and noise. Pretty Victorian terraces have been overshadowed, first by construction cranes, now by the concrete blocks of the Olympic Village.

Urban planning always reflects the ideologies of the time. The architecture of London 2012 would not look too out of place on the outskirts of Moscow or Bucharest. This is not an environment that grew organically through voluntary transactions and freedom of choice; it is the embodiment of brutal, authoritarian central planning.

Major sporting events have often been associated with coercion and the threat of violence. It is estimated that 700,000 people were forced from their homes in the lead up to the 1988 Seoul Olympics; Beijing 2008 saw as many as 1.5 million relocated; the recent World Cup in South Africa was scarred by mass evictions of poor residents and informal businesses; riot police and bulldozers are clearing people off land in Rio de Janeiro for the 2016 Games.

The forcible removal of businesses and residents from London’s Olympic Park is seldom mentioned. An estimated 350 firms, employing several thousand workers, were thrown out. Some did not survive the move. Others suffered massive losses after relocating to less convenient or more costly sites.

Mass compulsory purchase of land also denied owners the profits from redevelopment. Had private owners been granted permission to redevelop their industrial sites as residential or office space, the land would have been worth perhaps ten times what they received in compensation. To add insult to injury, firms had to wait several years to obtain money owed to them.

The destruction of local businesses is just one way in which the Olympics are damaging the economy. Indeed, the frequent claims in the media that the games will provide an economic boost are blatant propaganda that defy economic logic and a wealth of empirical evidence on the impact of major sporting events.

Any perceived benefits must be set against the huge cost of the event. Projected at £2.4 billion at the bidding stage, the final government funding package will exceed £9 billion. Overall expenditure — including all the security, transport costs and so on — is likely to be significantly higher.

To put it into perspective, the London 2012 budget would be enough to reduce the basic rate of income tax by 2p in the pound (for one year) or to take hundred of thousands of low-paid workers out of income tax altogether. Inevitably the games are diverting resources from far more productive uses. Investment and consumption in the wider economy will decline as a result. This also casts serious doubt on job creation claims. For every job created by the games, it is likely that more than one job is lost in the wider economy as resources are redistributed. And unlike alternative investments, the event won’t contribute to increased living standards by raising productivity. In fact, it will destroy wealth, particularly given the long-term costs of maintaining the Olympic Park.

Even the notion that the games will encourage tourism is questionable. Tourists who would otherwise have visited Britain will avoid doing so this year, fearful of overcrowding, disruption and inflated prices. The theatres of London’s West End are particularly worried about the impact. Evidence from similar major sporting events suggests overall visitor numbers in 2012 may be disappointing.

Then there are the arguments that the games will bring regeneration to east London, which according to some indicators, remains one of the poorest parts of the UK. Undoubtedly transferring billions of pounds to this area will provide a short-term economic boost. And all that money is also likely to encourage additional private investment in the locality.

Nevertheless, it is important to recognise that plans for the development of the Stratford Rail Lands – now the major part of the Olympic Park – long pre-date the bid for the games. As early as the mid-1990s proposals were in the pipeline for the development of a commercial centre to rival Canary Wharf, based around the proposed station on the Channel Tunnel Rail Link. Indeed, it could be argued that the allocation of large amounts of land to sport has prevented more valuable uses such as shops, offices and apartments.

Moreover, public funding means resources are being sucked out of other areas to pay for it. This means regeneration in Stratford will lead to degeneration elsewhere – and that includes other parts of east London.

Areas can be regenerated but people can’t. Stratford may improve as higher socio-economic groups move in — as happened with earlier gentrifications in Notting Hill and Islington. But higher rents mean it will no longer be as attractive to the low-skilled immigrants that have populated the district in recent decades. Local councils will also have strong incentives to house problem households some distance from the Olympic Park. They may even succeed in relocating existing council tenants to exploit the profits from redevelopment.

As Stratford rises up, other districts will go downhill as poorer groups are displaced. This is already happening. Barking, four miles to the east, is probably the most shocking example. Previously respectable working class areas on the fringes of Essex are gradually being overwhelmed by the crime and squalor of the inner city, partly as a result of gentrification elsewhere and partly due to unstoppable demographic trends.

Government is playing a disingenuous role here. Significant sums are being spent on so-called regeneration projects in the Thames Gateway. But many of these initiatives are bringing decline. In contrast to Stratford, a high proportion of the new housing constructed has been for social tenants – in effect, a means of dumping families on benefits in outer east London.

There are advantages for our political elites of course. Displacing the poor to the peripheral parts of cities helps keep social problems out of sight. And highly visible renewal schemes such as the Olympic Park can create the illusion of prosperity, even though their high costs are, in reality, speeding up Britain’s rapid relative decline.

If the money wasted on London 2012 had been invested productively or used to cut taxes, it could have made a significant contribution to a much-needed recovery. As it is, the games will be a lasting burden on a near-bankrupt country. Unfortunately it is now too late to cancel the Olympics, but there is at least an opportunity to learn lessons. This economic failure should never be repeated. Never again should jobs and living standards be sacrificed for the pride of sportsmen and the vanity of politicians.

17 May 2012, London Society Journal