Sam Bowman is an economist.
Ryan Bourne had a point in his column on this site last week: in the end, it’s people, not places, that matter. And acting as if it’s the towns themselves that matter, rather than the people who live in them, has led to wasteful spending – good money thrown after bad in the belief that the government can spend a town into prosperity – and misguided policy.
But we disagree that this means a Conservative Government has to shrug its shoulders when faced with the question of what to do about struggling towns.
In our recent paper, “Reviving Economic Thinking on the Right”, Stian Westlake and I arguee that the Conservative Party under Theresa May failed to tell an economic story that makes sense of Britain today. We propose an alternative focused on boosting productivity through smart tax cuts, innovation and investment.
We argue that we have been living through a period of unprecedentedly weak productivity growth. After nearly thirty years of growth averaging 2.3 per cent per annum, we have since the Great Recession had a decade of growth at 0.4 per cent per annum. To put that in perspective, if the UK had kept up with its pre-crisis trend growth, we would be 25 percent richer today.
This era of economic malaise has coincided with the rise of the ‘intangible’ economy, where things like software and R&D matter more than ever. One effect of this is that in every industry there is a greater tendency for the most successful companies to take a larger share of the pie than we are used to, historically.
This new economy has also strengthened the power of ‘agglomeration effects’ – the economic benefits we get when people are closer together. In general, people in cities are more productive than towns, and towns more than the countryside, because they can focus on more specialised tasks and cooperate with each other – it’s Adam Smith’s pin factory writ large.
All of this means that policies like the Stronger Towns Fund could be ten times bigger and still barely make a difference. Without a deeper understanding of why these towns have been ‘left behind’, more government spending won’t help them catch up.
There are things we can do, with a proper understanding of what’s gone wrong before. Business tax reform could be a huge benefit to struggling parts of the country. Quite apart from the largely unavoidable economic trends that we discuss above, decades of policy short-termism have left us with a tax system that is heavily biased against ‘tangible’ investment – the sort of investment in factories and machinery that might mean a return to growth in many parts of the country.
For example, at the moment, businesses can deduct the cost of operating expenses like pens and paper from their tax bill immediately, but have to write off the cost of heavy machinery over years, and cannot write off the full amount. That means that industrial businesses end up paying more tax for investments than if they’d spent that money on day to day expenses. Apart from discouraging investment, that creates a huge bias against businesses with significant physical investments.
Ending this bias by making the Annual Investment Allowance unlimited would be a huge boost to parts of the country where manufacturing is a major part of the economy, or where it could be. Similarly, exempting heavy machinery from business rates bills would end that tax on investment, and shifting business rates towards taxing land values, rather than the value of the property on top, would stop penalising businesses that invest.
But most of the big trends we identify are things we couldn’t change even if we wanted to. For towns, agglomeration is one of the most important. The gains from people being near each other mean that we can’t expect small towns to prosper in isolation.
But we can make it easier for the people who live there to access better opportunities. For one, we could liberalise housing supply to make it easier for people to move to where the best jobs are. In places like London and Cambridge we constrain the supply of housing so much that it has become an investment like fine art. Inflated land values mean the price is far above the cost of actually building new houses – in London, for example, houses cost about £600,000 to buy and £150,000 to build.
As John Myers argued on Monday, freeing up the supply of housing would make it easier for people to move to where the jobs are, as previous generations have done since the beginning of the Industrial Revolution.
But this is only part of the story. Not everyone wants to move or is able to, even if housing costs were not so high. A Conservative Government needs to have something to offer these voters too. If we can’t bring Muhammad to the mountain, sometimes we actually can bring the mountain to Muhammad.
Agglomeration benefits can be achieved by making it easier for people in struggling towns to commute to more prosperous cities near them. Margate, in Kent, has grown since better rail links with London have improved. Wigan is the same distance from central Manchester as Esher is from central London, but transport links are much worse, so its residents find it more difficult to take advantage of Manchester’s economic prosperity. This would bring benefits not just to people who choose to commute – it would also create jobs and wealth in the towns themselves by bringing more money in, revitalising high streets and creating opportunities.
Improving transport links between towns and cities should have a threefold benefit: giving people in these towns access to better jobs, encouraging richer and more skilled people to move to these towns to take advantage of lower property costs without sacrificing their jobs in cities, and boosting the economies of the cities by increasing the pool of talent available to them. Sometimes this means more investment in rail links, but in many parts of the country it means giving more prominence to buses – high frequency services along dedicated bus lanes so that buses are fast and reliable.
None of this means letting ‘left behind’ towns decay. But it does mean reckoning with the world as it is, not how we’d like it to be: accepting that innovation and growth will largely come from thriving cities, and working around that. Ultimately, Ryan is right: politics should work with market signals, not against them – but that doesn’t have to mean giving up on towns or the people who live in them.