Re-heating regional policy: flaws in the ‘Northern Powerhouse’
4 June 2015
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There 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. 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.
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. 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.
12 thoughts on “Re-heating regional policy: flaws in the ‘Northern Powerhouse’”
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At last, common sense. No longer should we hold onto the coal mining areas of Wales for example when the people of Wales deserve a lot more.
Let us move on, without redistribution of income to a system of regional economic activity that is sustainable without subsidies.
It can be done if the politicians let hold their grip on the belief that change is to be resisted at all cost
Cogent analysis. Delivered like a laser guided weapon at hypersonic speed.
I particularly like the closing broadside… “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.”
.
Kaboom.
I would like to provide a counter-analysis, which I think is equally plausible. Government subsidies to ‘the North’ and national wage bargaining in the public sector have meant that these areas have higher costs, e.g. housing and private sector wage costs (because the private sector is trying to attract the same workers) than they otherwise would, and this has hindered their ability to compete on cost grounds This nips growth in the bud in these areas and keeps them dependent on subsidy.
@HJ – I’m not quite sure why you describe it as a counter-analysis, as it’s another aspect of the ‘crowding out’ hypothesis mentioned briefly in the post. Nonetheless, this is clearly a major problem, with the North suffering from an unhelpful combination of high costs and mediocre human capital. Obviously state regulation also contributes to the former.
Richard – I was thinking that at the time I posted it. It’s not mutually exclusive with your analysis. I’m just saying that it might be a more significant factor, perhaps very significantly so, hence my description of it as a counter-analysis of the the main cause. They could both be significant causes, in any proportion, of course..
All very well allowing the SE to grow. But hard to see the area’s creaking infrastructure keeping pace. Transport, water, schools will only be expanded with central funding, which brings us full circle. Market forces acting alone will create shanty towns.
Why would market forces create shanty towns? This didn’t happen in the late 19th century or the 1930s, when vast private-sector suburbs were built on the edge of British cities. And providing the state gets out of the way, there is no reason why the private sector cannot also provide infrastructure, perhaps funded by a combination of property development and ongoing revenues such as fare receipts. There are numerous historical examples of this in the UK, before the state-planning era, and in other countries today.
In a fair and thus optimally efficient economic system, wealth creation wouldn’t be taxed and Land rent would be used for public revenue instead. Under such a system, simple calculations show that regions outside London and the SE would be paying around £100bn per year less than they are now. A real boon for investment into those areas. Or to put it more bluntly, landowners in London and the SE are parasitizing £100bn per year of wealth and welfare from the rest of the UK. End that, and regional inequality, among numerous other negative symptoms take care of themselves. Good things happen when incentives are aligned. All without the need for any State intervention.
@Benji – Do you have a source for that figure? It would be interesting to know more about how it was calculated.
http://www.standard.co.uk/news/london/london-property-prices-citys-property-worth-1000000000000-perhaps-they-ought-to-redraw-the-monopoly-board-7819766.html. Location values weighted for London and the SE (75%) gives them around 60% of total land(rental) values. Here are the tax tables. http://markwadsworth.blogspot.co.uk/2014/03/regional-inequality-lvt-will-sort-it-out.html
Under the ATCOR principle (all taxes come out of rent) liabilities go from 35% to 60%, or around £100bn per year when taxes on income/capital are substituted and eliminated(as rental values rise) by shared land rent and other monopoly fees.
Shanty towns develop whenever there is migration from poor to richer areas. A mini example was ex miners sleeping in their cars and working building the channel tunnel.
In a totally free market, with no planning restrictions, I would predict a great deal of low quality housing for people working on London building sites earning less that what is now the minimum wage. In fact just like those farms employing mainly immigrants today.
There will be better quality housing too, but probably not affordable by those sleeping in cars, tents and old containers.
@Benji – Do have data on the current spatial tax distribution if public sector employees (widely defined) are taken out? I suspect the pattern would be closer to the projected LVT distribution.
@Adrian – Transaction costs and regulations on landlords help explain the temporary accommodation issue. Deregulation would dramatically lower the cost of providing good quality housing. Once again, I point you to the huge construction before the 1947 Town and Country Planning Act.