High Speed 2: Tarzanomics vs. Economics
In a discussion on BBC Radio 4 on 12 November and in a follow-up lecture at the Royal Town Planning Institute (RTPI), Lord Heseltine explained his view that he is a better appraiser of grand projects than other, lesser, mortals. Indeed we are informed by him that:
Cost-benefit appraisals of the HS2 project are all ‘mumbo jumbo’, done by ‘ladies and gentlemen with slide-rules’; they leave out of consideration ‘consequential growth’, enabled by public subsidy; instead of this ‘slide-rule nonsense’, we need to evaluate major projects via a ‘sense of adventure’; in particular, the HS2 project ‘could help to restore a feeling of well-being in the North (of England) by ‘rebalancing’ the economy.
I have to say that I find this ‘Tarzanomics’ deeply wrong: both at a technical level and in the more general sense of economic ‘perspective’. At the technical level, Lord Heseltine does not seem to appreciate the nature – and necessity – of (so-called) Benefit-Cost Ratio (BCR) calculations in government investment decision-making. Such calculations are widely used in UK central government: indeed, they are mandated by the Treasury’s ‘Green Book’ rules. However, the resulting BCRs are not ‘true’ ratios of total benefit to total cost, as understood in ‘more proper’ economic/cost-benefit-analysis appraisals. What is being computed here (no doubt, without any benefit of slide-rules!) is actually some ratio of measured benefits — as allowed under Treasury regulations – to the required taxpayer subsidy (and not, I note, the true economic/opportunity cost of the project).
Whilst such calculations are not ‘perfect’, either theoretically or in practice, they at least provide some sort of guidance to the allocation of potentially vast sums of public subsidy…which otherwise might be very badly misspent. Need I remind us all of the of the giant IT catastrophes in the NHS during the noughties?
Without some ‘anchor’ in BCR calculations all public sector investment decisions are ‘blowing in the wind’/subject to the vagaries of Cabinet (etc.) political decision-making. I have previously lambasted the BCR calculations supplied by the DfT about HS2, but such calculations are not entirely dispensable (as Lord Heseltine jokes about).
Moreover, it is completely wrong for him to say that such calculations ignore possible ‘consequential’ effects of this proposed public investment. A major, ongoing, argument is about the realistic size of these effects (labelled ‘wider economic impacts’ or WEIs). We have reason to be cautious about the proclaimed size of the HS2 WEIs, as emphasised by Professor Henry Overman of the LSE. There is no firm statistical foundation for the boldest (‘Tarzanomic’) assertions in regards to this matter.
My deeper worry concerns not the foregoing technical/economic calculation matters – important as they are – but, rather, Lord Heseltine’s overall economic perspective/analysis. The Heseltine view of the (UK) economy seems to be that it is rather like a (‘misbalanced’) plate of buffet grub. The plate is well loaded up, but one has, unfortunately, dolloped too much of the sauce/gravy on one side of the plate (behind a stodge of carbs or veg). What to do?
One reaction might be to use your spoon to ‘reallocate’ the gravy/sauce across the plate, to its more ‘appropriate’ location. This is, essentially, in economic terms, the case for regional policy: move the ‘gravy’ (geographically) via the ‘spoon’ (government). Lord Heseltine has for long been a proponent of such endeavours; as, most recently, witnessed in his recent (2013) submission to the current government: No Stone Unturned: In Pursuit of Growth.
There is, however, an alternative approach to the ‘dammed-up-gravy’ problem on your buffet-lunch plate: cut a sluice-channel through the wodge of carbs/veg, with your knife, to allow the gravy to flow from one side of the plate to the other. This appears to be now the underlying ‘economic rationale’ of HS2 according to Lord Heseltine. He suggests that this one, singular, investment will ‘rebalance’ the British economy, allowing the North to share the ‘gravy’ of the South.
This whole way of thinking, this economic perspective, is fundamentally flawed and wrong. Economies are not like ‘gravy-on-plates’ situations at all. Moreover, the reason for the (relative) decline of the North of England compared with London and the South-East has much to do with its lack of economic connectivity with the rest of the world and not the speed of its train connections with London. The latter is doing reasonably well due to its enormous economic interconnections (i.e. business) with other parts of the planet. This is something that Manchester and Birmingham have fallen (relatively) behind London at.
The ‘Tarzanomic’ solution for this disparity – the current discrepancy between London and midland/northern city economic performance – via a vast public subsidy of high-speed rail between these English cities, somewhat misses the basic economic reality of their (currently) differing global economic and business ‘connectivities’ to other major economic agglomerations across the globe…and not just London.