Microsolutions to megaproblems

I have a chapter in this nice new Policy Press book, After Urban Regeneration, expertly edited by Dave O’Brien and Peter Matthews.

Here’s the intro [pdf].

The book takes a critical look at urban policy in the UK, particularly in the post-crash period, and explores the way thinking  about regeneration has changed under austerity, and under localism.

It tests the idea that we’re now in a ‘post-regeneration’ era; it also takes a close look at the way communities and ideas of ‘community’ have been used to design, deliver and justify programmes on the ground.

My chapter covers the recent history of UK economic regeneration, sets out what we can expect programmes to achieve given the mega-trends shaping urban economies and communities, and also explores how the ‘what works’ agenda can help, both in developing the evidence base and in hands-on policy design. Cities and communities have been in tough times for years now, but I try to find some grounds for cautious optimism.

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The editors put together a strong and diverse team: we have excellent contributions from Stuart Wilks-Heeg, Antonia Layard, Kate Pahl, Liz Richardson and Chris Speed, as well as my Birmingham colleagues Catherine Durose and Phil Jones.

You can get the paperback here, or the hardback for a terrifying cost.

How did London get away with it?

A lot of people predicted London would be hit hard during the recession. In fact, London did better than the rest of the UK. Why?

Henry Overman, Director of SERC, delivered the answer at the first LSE Works lecture last night (with some help from me on numbers, trends and jokes). In case you couldn’t make it, here’s a post on LSE’s Public Policy blog which gives the main story.

LSE should be putting up a podcast in the next couple of weeks. Watch out for that here. Meanwhile, the next event in the series is CEP Director John Van Reenen, on ‘Where is Future Growth Going to Come From?’ That’s on 17 February.

In March we have both Lord Stern (on the low carbon economy) and Bruce Katz from Brookings Metro Program (on the ‘next urban economy’, some joint work with me and colleagues at LSE Cities).

Devolution on crack

Ten days in at Berkeley and I’ve already had my first walkout: picket lines went up last week to protest against University budget reductions.  Spending cuts have already arrived here. Most buses now run only once an hour; bins are collected once a month. And Governor Schwarzenegger has announced a giant fire sale of state assets (an idea suggested to him via his Twitter feed).

For urban obsessives like me, the California fiscal crisis is fascinating (and depressing) stuff.  The politics of cuts is highly localised. American states and cities have a range of tax, spend and money-raising powers (in 2005-6 California and its cities raised $200bn in bonds [pdf]; in 1916 a bond issue financed the Golden Gate Bridge). Washington’s willingness to bail out localities is also limited: since 1937, at least 543 American cities have gone bankrupt.

So there’s been an intense debate here about the mix of tax rises, borrowing and spending needed to balance the books. But the state’s unique system of direct democracy make it much more fraught.

Since 1911 California has used three types of referendum to decide major issues, or ‘Propositions’. The State Legislature in Sacramento can pass proposals, which citizens then vote on. Citizens can propose new laws; if they can raise signatures for 5% of registered voters, the proposal goes to a referendum. Voters can also recall elected officials via a petition of 12% of voters (this happened to Gray Davis in 2003, bringing Schwarzenegger to power).

The Economist calls these ballot initiatives ‘the crack cocaine of democracy’. As my Berkeley colleague Malo Hutson told me earlier, it’s an apt comparison. If Propositions with spending implications pass, Sacramento has to find the money. Conversely, it’s tough to pass anything perceived as raising taxes (only about a quarter of bond issue propositions succeed). Worst of all, while most Propositions need a simple majority to pass, a 2/3 majority is required for any tax increases or other revenue-raising measures. This is the notorious Proposition 13, itself passed by referendum in 1978.

The results are dire. California’s main revenue streams are choked off, with a heavy reliance on volatile local income and sales taxes. Long term planning is very difficult, with only 25% of the budget under legislators’ direct control. But repealing the measure is seen as political suicide: after one kit-flying exercise, Arnie famously told supporter Warren Buffett to do 500 sit-ups if he mentioned it again.

This also means some very peculiar tax laws survive – for instance, local property taxes are based on initial purchase price, not the current value. (Malo explained that when his girlfriend bought a 50% share of a house, the two halves of the property were taxed at different rates.) Since land value is not properly captured, the result is a massive transfer of wealth from young to old, and huge windfall gains to property owners.

Some policy innovation arises from all of this – it turns out Tax Increment Financing was invented in California in the 1950s. But right now, extreme devolution is making it almost impossible to solve the State’s budget crisis. Voters have rejected everything proposed by Sacramento, forcing the State into emergency service cuts.

Californians seem confused about how to fix things. According to a 2008 survey, 64% favour some reforms to the system, and 78% think ballots are often too complex to understand. But 60% believe they make better public policy decisions than elected officials.

There are some resonances here for British debates about localism and public spending cuts. As Dermot points out, Labour and the Tories are still playing chicken on spending reductions. Tony Travers recently suggested that Whitehall should ‘delegate the axe’, avoiding the blame for cuts by giving local authorities the power to make their own. But centralism is so engrained in the UK that in the short term, Ministers would still face the kind of protests we’ve seen in Berkeley.

As Tim Williams argues, ‘casting off the Whitehall shackles’ should encourage British cities to develop more innovative ideas. But unlike America, I don’t think Brits would be up for city bankruptcy. There are cultural, as well as practical limits to localist self-reliance.

The California crisis also highlights the importance and limits of strong leadership. The Governor really has to direct the public conversation, but even popular leaders like Arnie have found it hard to push their favoured measures through. Still, if The Governator might be running for President in 2012, Californian  democracy is clearly a gateway drug to something much harder.

Right-sizing cities

It must be the Obama effect. Last year my LSE colleague Tim Leunig became a national hate figure for suggesting that residents of  northern British cities should move south.

Now the US Government is thinking about ‘bulldozing entire neighbourhoods’ in up to 50(!) struggling US cities. But instead of being howled down, ‘shrink to survive’ is being taken quite seriously.

This is a debate we need to have. Full credit to Tim for starting it (though I don’t agree with everything he suggests). In years to come regeneration funding will be severely squeezed. There won’t be enough cash to do everything everywhere – so we have to think through the feasibility of managing decline.

Two things stick out from the US coverage. First, the scale of abandonment in some American cities is scary.  Buffalo’s population fell from 580,000 in 1950 to 279,000 in 2005. Rolls in Flint, Michigan have dropped from 196,000 in 1960 to 120,000 today: up to 25% of land is now abandoned.

Second, the policy response is a twist on ‘green growth’. As explained by Dan Kildee, Governor of Genessee County, he takes as much abandoned land in Flint as possible, largely through foreclosures. County-wide Tax Increment Financing is used to leverage the land bank, forward-funding demolition, refurbishment or conversion into parks, urban meadows and gardens.

Few British cities are as badly off as Flint. The historical data suggests Stoke-on-Trent’s population dropped just 25,000 between 1961 and 2001. Hull’s fell from 303,000 to 243,000 over the same period. Liverpool’s has declined massively – from 746,000 in 1961 to 439,000 in 2001 – although the economy and population have been stabilising in the past few years. Liverpool’s right-sizing may already have happened. By contrast, poorer cities and towns in isolated places – like Stoke, Hull, Barrow or Easington – are still struggling to find a role.

Could we run ‘shrink to survive’? The model won’t easily transfer, since TIF and city-regional tax bases are some way off. The UK’s own experiment in right-sizing – the Housing Market Renewal programme – relies on Whitehall cash and now-vanished private sector investment.

More importantly, what would it achieve? Proponents suggest greening an area helps stabilise house prices. It also improves quality of life for residents. But it’s not clear this provides a real basis for growth (Kildee optimistically suggests ‘entrepreneurial agriculture’).

What about encouraging people out? This might not be welfare-maximising. We would need to weigh up the economic gains (moving people to jobs, savings on physical regeneration) against the economic costs (moving people) and social losses (damaged social capital etc).

Urban economics tells us that spatial equilibrium occurs when wages, prices and quality of life all clear. Local reactions to the Policy Exchange report – ‘I like it here, and it’s cheap’ – suggest that people in supposedly failing cities often don’t see them that way.

A sensible ‘shrink to survive’ strategy for the UK would involve: removing overcapacity in local housing; improving the local environment (which could include some US-style ‘greening’); levelling VAT rates on refurb and new build; developing local skills, access to employment and transport links to stronger labour markets; new funding tools; and as Dermot suggests, some honest repositioning. The Pennine Lancashire Pathfinder ticks most of those boxes.

In practice, this feels like an evolution of Housing Market Renewal. But since physical transformation is now largely done, the funding priorities should be (mobile) human capital, not (immobile) housing.

Which way is up?

In my day job – well, one of them – we’re spending time thinking about how the recession is playing out in different places, and how cities will look in years to come. It’s not easy to find useful tools for working through this.  The most promising of the lot looks like Carlota Perez, the on-trend Venezuelan economist whose ideas about long term change are increasingly hot (as far as socio-econo-technological systems analysis can ever actually be hot).

At ippr this evening Perez laid out her ideas, which sum up pretty much like this. First, we’ve been here before. The crisis we’re in is internal to capitalism, and is one of many big waves of change.  Second, these ‘revolutions’ are trackable, arriving every 40-60 years. New technologies arrive in an ‘installation period’, accompanied by a financial bubble (in this case, the dotcom boom). Third, casino finance precipitates a crisis, after which more activist policies can lead us into a period of long term growth (the ‘deployment period’, or ‘golden age’).

Essentially, Perez thinks that the future is already here. It will be a remix of the present, with industries like nanotech, biotech, greentech and social media coming to the fore. Human capital and open innovation will become ever more important. Policymakers need to refloat the financial system, then regulate the casino and use activist sectoral policies and pro-skills programmes to push forward growth.

Impressive stuff which stood up to some difficult questions – including Samuel Brittan suggesting this was all *very* short term (‘What about the Dark Ages?’). It also looks like a thumbs up for Lord Mandelson’s industrial activism – which itself feels like a policy remix of New Labour’s late-90s encounter with endogenous growth theory.

So what kind of spatial remix is heading our way? There’s good news and bad news for cities. Perez suggested to me that we think about sectors and location decisions. If she’s right, finance is going to be less important. So places like London and Leeds may need to diversify. Perez also argues that  TNC location decisions matter a lot. Firms will look for places with good natural resources, connectivity and a strong skills base. As Richard Florida suggests elsewhere, that means today’s leaders will probably stay ahead – big cities and knowledge centres will be OK, smaller ex-industrial centres less so.

So far, so familiar. But there are big unresolved questions about clusters and investment: should city leaders still compete for hot firms? The most recent UK evidence suggests urban productivity is driven by critical mass, economic diversity and human capital more than specific key sectors. If Perez is right, those sectors are going to change anyway. That implies city bosses might be better off going back to basics – sorry – rather than all chasing after a nanotech future which could never arrive.

Unfortunately, there are no easy answers here. As my supervisor would probably say, more research is required …