Simon Jenkins has an interesting article linking smart growth to government spending.
I witnessed government growth policy at work last week on the road north out of Manchester towards Rochdale. The scene is one of utter devastation. Not just individual shops but entire parades have gone out of business and are boarded up. Mile upon mile of factories, garages, supermarkets and warehouses lie empty and for sale. Recession has delivered the coup de grace to a quarter century of manufacturing decline. Manchester is by no means the worst hit of English cities, but its northern suburbs are Detroit UK.
The British economy needs three things: demand, demand, demand. It needs cash in pockets and cash in tills. It does not need richer banks or easier credit lines or looser regulation. It needs that old Keynesian salve, money in circulation. If money can be showered short term on banks, it can be showered short term on consumers, whether through benefit handouts, vouchers, tax holidays or scrappage schemes. Osborne declares quantitative easing to be off his debit sheet. He can do the same for temporary boosts to the money supply.
The cabinet’s current response to the cry for growth is to dip into the old goody bag. Osborne is already spending or planning billions of pounds for new railways, tunnels under London, wind turbines and aircraft carriers. There are murmurs of power stations, toll roads and ecotowns. The portfolio of ideas flowing through Whitehall reflects the interests of those whom Whitehall meets – government contractors, land-owners, estate developers and the bankers who finance them. It comes from government departments lobbying for airports, colleges, roads and hospitals.
The reason why the Treasury likes such projects is that they make headlines for ministers and can be controlled from the centre. Also, few involve big spending now. They are slow growth, lobbyists’ growth, dumb growth. They can be farmed out to private finance and are more likely to fuel the next boom than ease the present slump.
It would be better by far to import the US concept of “smart growth”. This does not channel counter-recessionary spending through grand projects. It directs it to the renewal of existing communities and infrastructure, to where there are already roads, transport, schools and hospitals. It restores, infills and stimulates activity where the social and physical framework is in place. It is productive and “sustainable”.
Smart growth revives the private sector through blood transfusion to the high street, rather than through the colossal public contracts favoured by Osborne and the industry secretary, Vince Cable. It makes cities denser, rather than depopulating them. It lets the market rather than the state allocate the extra cash. All this may lack ministerial glamour and earn little for consultants, but if politicians are serious about growth, smart sure beats dumb.
I have been working with NT and others over Smart Growth principles so there is a limited amount I can say, though I would stress three new points.
Firstly smart growth is neutral regarding macro-economic policy, it is an argument about efficient spending by both public and private sectors on infrastructure – that if spent badly harms our wellbing, and if wisely spent can enhance it. I might argue that it is more coherent to combine smart growth with a smart approach to macroeconomics and regional development but smart growth can and should be adopted across the political spectrum by Keynesians and Austrians/Austerians alike, because it makes sense.
Secondly while of course the focus will be on existing cities their is a large mismatch between household growth and where there is brownfield capacity, most notably in the East of England and the South West, so towns in these areas need to growth both up and out and that will require new infrastructure or putting back long neglected or abandoned infrastructure – a good example being the Varsity Line linking Oxford to Cambridge which can promote smart growth, as opposed to car -orientated growth, at several point along its length, in particular at Milton Keynes. Growth which avoids excessive growth of pretty villages with poor public transport, which would otherwise have to occur.
Finally Keynes argued that it didn’t really matter where fiscal expansion occurred as long as it circulated through people’s pockets. But economists would today argued that this wasn’t consistent with another of his key arguments – the multiplier effect – that money spent goes on to be respent so the effect on aggregate demand of £1 of expenditure is more than one (though they will argue till the cows come home whether it is and a few arguing with little evidence it is less than one) – so it makes sense to invest, if you are investing, in the sectors which have the highest multiplier effects, such as new housing (multiplier of around 2.75) [interestingly the figures show the sector with the highest multiplier is nuclear power around 6, we dont yet have good data to assess the renewable s multiplier and opportunity costs – but of course you don’t set energy policy by multiplier effects alone]. So you can refocus a fixed sum (if it is fixed) of government expenditure if you spend it where it has the greater multiplier leverage, though net if you reducing government leverage then you may be undoing much of this good work as aggregate demand at any instant in time is equal to output +change in debt+net income from assets (after depreciation). If the government deleverages it must suck in demand from the private sector from taxes and then not spend it.
From this it makes sense to spend on infrastructure most needed to facilitate new housing (including council housing as it reduces the pressure on the deficit from housing benefit which is just a subsidy to rentiers, it is a public subsidy on the extractive sector of the economy), and which reduce car use (as it reduces imports of oil is a huge drag on the economy through harming our balance of payments) and that may well need new railways, roads, schools etc. if the existing ones are at capacity or if residents would drive to get to existing infrastructure otherwise. In the North of England projects such as the Northern Rail Hub, (huge benefits to costs in comparison with many other projects in the South of England) and which regenerate cities with real growth potential and housing pressures, i.e. Leeds – Bradford, should be the priority.
Jenkin’s piece seems to assume that infrastructure spending as opposed to revenue spending is the problem. however the data shows that government revenue spending has increased (to pay for increased unemployment, a new baby boom and an ageing /sick population even while there are cuts of 20% or so in other sectors such as local government, the police etc.) whilst capital spending has collapsed by 20-40% depending on sector. The problem is not too much infrastructure spending but too little and the overly centralised way in which infrastructure priorities are decided. We wont get smart growth without infrastructure spending it is essential to every significant smart growth project.
Jenkins has a point but it needs to be put in a different way. The greatest prior investment we have made as a society is in our cities, their existing infrastructure and our high streets. If these die and growth shifts elsewhere we will have to do this all again, a huge opportunity cost. But our poorer cities are dying, shedding population. So if you are undertaking fiscal expansion it makes sense to spend it not just on new infrastructure but on spending which maxes out existing infrastructure, and get the balance right between the two. It might make sense for example to reduce corporation tax to zero in these cities and allow 100% tax write offs to reclaim brownfield sites. Because if it doing so it attracts entrepreneurs and new population, which prevent for example schools closing, or shops going bankrupt, then it can net save public spending through the combination of not having to spend on new infrastructure and loss of tax revenue. In the past we have had regional policy in one silo looking only at firms, and regeneration silo in another, housing in another etc. A proper approach to city policy needs to tear down these silos and look at consumers, businesses and state expenditures and revenues in the round and by place comparing different investment scenarios by total costs and benefits.