Modern Monetary Theory (MMT) debunked

Modern Monetary Theory was mentioned in a recent CPD event, so some schools will be looking at it. It is extension material, rather than required reading, although the more basic points are elements you will recognise from our lessons on inflation and crowding out. There is a very nice, accessible explanation of the issues associated with using the printing press to fund government investment at the end, worth reading to help explain this particular issue. For those of you interested in how the future will develop you might like to remember (and keep an eye on) the term "AOC" - it is included in a lot of economic and political discussion taking place in America, and thus will affect developments elsewhere. You might want to look at Amazon's decision NOT to build a new HQ in NY as well. Slightly bigger issue than Honda leaving Swindon...

MMT Is Even More Dubious Than AOC's Green New Deal

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02/25/2019Robert P. Murphy

One of the most interesting aspects of the “Green New Deal” is that its progressive proponents hardly mention taxes at all—even as some Republican economists continue to champion a carbon tax. Faced with the political defeat of the Waxman-Markey “cap and trade” bill, as well as the failed carbon tax initiatives in Washington State, it seems that Rep. Alexandria Ocasio-Cortez and the other Green New Deal supporters are just going to accentuate the positive. In other words, they are going to focus on all the goodies contained in their proposals—such as a trillion dollars in spending projects—while downplaying taxes and regulations.

Indeed, some of the Green New Deal proponents have turned this liability into an apparent asset. When asked, “How are you going to pay for this?!” they flip the question around, by bringing up “Modern Monetary Theory,” or “MMT” for short. This is a relatively new economic school of thought that ostensibly overturns much of the conventional wisdom about government finance, in the age of fiat money. By directing the skeptics to MMT gurus like Prof. Stephanie Kelton—who served as Chief Economist for the Democratic Minority Staff of the Senate Budget Committee, before advising Bernie Sanders’ campaign—the Green New Dealers can dodge awkward questions and come out looking quite sophisticated.

In previous IER articles — one, two, and three — I have directly criticized the Green New Deal. In the present post, I will focus on its relationship to MMT, and then I will explain why MMT is even more dubious than the Green New Deal itself.

Using MMT to Defend the Green New Deal

There is a growing link between the Green New Deal and MMT on social media, but here let me link to an article from Forbes.com that spells out the connection. Author Robert Hockett explains how Ocasio-Cortez has deflected criticism by relying on the new financial framework:

Representative Alexandria Ocasio-Cortez’s announcement of an ambitious new Green New Deal Initiative in Congress has brought predictable – and predictably silly – callouts from conservative pundits and scared politicians. ‘How will we pay for it?,’ they ask with pretend-incredulity, and ‘what about debt?’ ‘Won’t we have to raise taxes, and will that not crowd-out the job creators?’

Representative Ocasio-Cortez already has given the best answer possible to such queries, most of which seem to be raised in bad faith. Why is it, she retorts, that these questions arise only in connection with useful ideas, not wasteful ideas? Where were the ‘pay-fors’ for Bush’s $5 trillion wars and tax cuts, or for last year’s $2 trillion tax giveaway to billionaires? Why wasn’t financing those massive throwaways as scary as financing the rescue of our planet and middle class now seems to be to these naysayers?

The short answer to ‘how we will pay for’ the Green New Deal is easy. We’ll pay for it just as we pay for all else: Congress will authorize necessary spending, and Treasury will spend. This is how we do it – always has been, always will be.

The money that’s spent, for its part, is never ‘raised’ first. To the contrary, federal spending is what brings that money into existence.

Although Hockett doesn’t use the term “MMT” directly in the article, he is clearly referring to the framework. (Ocasio-Cortez herself has explicitly endorsed MMT.) And so we see the clever rhetorical move: The critics of the Green New Deal who focus on its price tag are cast as Neanderthals—and hypocrites to boot—who don’t understand that Uncle Sam can “pay for” anything he wants.

Indeed, given the shot in the arm from Ocasio-Cortez, MMT is becoming such a hot topic that even Paul Krugman has been moved to gently critique it. (Incidentally, when Paul Krugman warns that your economic philosophy downplays the dangers of government spending, it’s time to reevaluate your life choices.) In the same spirit, then, in the rest of this post I’ll explain why the “insights” of MMT don’t mean what its proponents seem to think.

The U.S. Government Never Needs to Default

Perhaps the single biggest “insight” of the MMT camp is that the United States government, as an issuer of an unbacked fiat currency and an entity that doesn’t carry significant foreign debts, can never become legally insolvent. In short, no matter how many Treasury securities outsiders hold, ultimately the Federal Reserve can simply create more dollars in order to pay them off. Under a gold standard this would not be true, but ever since 1971, the U.S. government has had no official constraints on its spending.

This is why MMTers think it so old-fashioned when the critics ask, “How will you pay for the Green New Deal?”—or Medicare For All, a Universal Basic Income, etc. To ask, “How will you pay for it?” implies that there is a budget, where the federal government must first raise revenue and then spend it. But as the MMT gurus like Warren Mosler explain, under a fiat currency a government first spends the money in order to bring it into existence, and only then is it even possible to tax it back from the citizens. (This MMT mindset is quite clear in Mosler’s interview with me on my podcast.)

I hate to break it to the MMTers, but fuddy-duddy economists already knew this. Indeed, among free-market economists it is a standard pedagogical device to tell the audience that the government has three ways of financing its spending, namely (1) taxes, (2) borrowing, or (3) inflation. So this notion that only the MMTers perceive the possibility of the printing press as a means of “paying for” government programs is silly.

For proof, consider the following excerpt from Austrian economist Murray Rothbard’s economics treatise, Man, Economy, and State, published in 1962:

Many “right-wing” opponents of public borrowing, on the other hand, have greatly exaggerated the dangers of the public debt and have raised persistent alarms about imminent “bankruptcy.” It is obvious that the government cannot become “insolvent” like private individuals—for it can always obtain money by coercion, while private citizens cannot. (Rothbard, p. 1028, bold added.)

Here is another example, this one from Ludwig von Mises, speaking in 1951 on wartime finance:

What is needed in wartime is to divert production and consumption from peacetime channels toward military goals. In order to achieve this, it is necessary for the government to tax the citizens…

…

Part of the funds may also be provided by borrowing from the public, the citizens. But if the Treasury increases the amount of money in circulation or borrows from the commercial banks, it inflates. Inflation can do the job for a limited time. But it is the most expensive method of financing a war; it is socially disruptive and should be avoided. 

There is no need to dwell upon the disastrous consequences of inflation. All people agree in this regard. But inflation is a very convenient makeshift for those in power. It is a handy means to divert the resentment of the people from the government. In the eyes of the masses, big business, the “profiteers,” the merchants, not the Administration, appear responsible for the rise in prices and the ensuing need to restrict consumption.

…

A truly democratic government would have to tell the voters openly that they must pay higher taxes because expenses have risen considerably. But it is much more agreeable for a government to present only a part of the bill to the people and to resort to inflation for the rest of its expenditures. What a triumph if they can say: Everybody’s income is rising, everybody has now more money in his pocket, business is booming. (Mises, bold added.)

For a third and final example, here is Henry Hazlitt, writing in his classic book Economics in One Lesson, which came out way back in 1946:

It is because inflation confuses everything that it is so consistently resorted to by our modern “planned economy” governments. We saw in chapter four, to take but one example, that the belief that public works necessarily create new jobs is false. If the money was raised by taxation, we saw, then for every dollar that the government spent on public works one less dollar was spent by the taxpayers to meet their own wants, and for every public job created one private job was destroyed.

But suppose the public works are not paid for from the proceeds of taxation? Suppose they are paid for by deficit financing—that is, from the proceeds of government borrowing or from resort to the printing press? Then the result just described does not seem to take place. The public works seem to be created out of “new” purchasing power. You cannot say that the purchasing power has been taken away from the taxpayers. For the moment the nation seems to have got something for nothing. (Hazlitt, bold added.)

As the above examples illustrate, there is nothing new under the sun. Free-market economists have long understood that modern governments have the legal ability to resort to the printing press to finance their expenditures. The problem is, creating green slips of paper—or electronic bank reserves—doesn’t generate more labor-hours or acres of farmland. The problem of scarcity isn’t banished simply because we’ve gotten rid of the pesky gold standard.

Moving the Discussion From Revenue to Inflation

Now to be fair, the more responsible MMT proponents do not say, “Deficits don’t matter.” (Though see these examples from Bill Mitchell where he does say just that, notwithstanding the other MMTers’ willful refusal to admit as such.) Rather, people like Warren Mosler and Stephanie Kelton merely point out that insolvency is never an issue. In other words, we don’t need to worry that Uncle Sam will “go broke” or be unable to pay the bills, but we might worry that too much spending will lead to undesirably high price inflation.

But if this is the essential MMT insight, then it’s old news. Again, the three examples from the previous section show that classically liberal, free-market economists have known this all along. What those economists recognized, however, is that financing government spending through taxation (and to a lesser extent, borrowing) is more “honest” in the sense that the public can better understand the actual costs involved.

Consider a simple example: Suppose the Green New Deal contains a proposal to spend $24.8 billion on electric vehicle mass transit options in certain cities. If the proposal were financed by a flat $100 tax on every adult American (of which there are about 248 million), then it would be obvious what “the cost” of the proposal was. Every adult American would have $100 less to spend on private investment or consumption, and the government would devote the $24.8 billion in funds to the “green” infrastructure projects.

But what if, instead, the Treasury floated $24.8 billion in additional bonds—thus increasing the federal budget deficit—and the Federal Reserve kept interest rates from rising by creating $24.8 billion in new money with which it bought $24.8 billion in Treasuries from the bond market? This would be a convoluted way of having the Fed effectively “pay for” the projects using the (electronic) printing press.

The political benefit of this method of finance is that no American is apparently “down” any money, and yet the lucky cities get their infrastructure projects, with all of the spillover effects (in terms of construction jobs, etc.) they entail. It seems that inflationary finance is all gain, no pain.

But of course, in reality real resources are still being diverted from the private sector into the channels dictated by the political process. The construction workers who move to the cities in question are now no longer able to work on private buildings or houses. The rubber, cement, steel, glass, lumber, and other materials devoted to the new projects are not available for use in other possible projects elsewhere in the economy.

When all is said and done, the average American still “pays for” the new government spending, but via higher prices. In other words, rather than the average American’s income dropping by $100, instead the prices of other goods and services rise slightly, so that the original income no longer fetches as much stuff in the market.

However, the two methods are not equivalent. Most obvious, the source of the (real) income drain is harder to detect under inflation. If a family can’t make ends meet because of taxes, then it knows to blame the government. But if a family sees prices rising at the store faster than the paychecks from work, it might blame greedy capitalists or trade unions or OPEC; it might not realize the Federal Reserve is the true culprit.

Conclusion

The MMTers are “right” in the sense that yes, modern governments that issue fiat currency need never default on their bonds. But they are wrong if they think this observation absolves Alexandria Ocasio-Cortez from explaining how she will pay for the Green New Deal. The printing press doesn’t create real resources, it only obscures the method by which the government siphons them away from the private sector.

To be sure, MMTers would respond that the economy currently suffers from excess capacity, and then we could safely accommodate large deficit finance without pushing up the CPI. Yet we have now moved beyond accounting tautologies and into competing theories of how the economy works. I am happy to have that debate as well, but much of the existing discussion involves MMTers acting as if they alone understand that the government can buy stuff by printing money. Yes, free-market economists have understood that all along, and have explained in elementary detail why it is such a dangerous option.

Originally published at the Institute for Energy Research

Robert P. Murphy is a Senior Fellow with the Mises Institute and Research Assistant Professor with the Free Market Institute at Texas Tech University. He is the author of many books. His latest is Contra Krugman: Smashing the Errors of America's Most Famous Keynesian. His other words include Chaos Theory, Lessons for the Young Economist, and Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) which is a modern distillation of the essentials of Mises's thought for the layperson. Murphy is co-host, with Tom Woods, of the popular podcast Contra Krugman, which is a weekly refutation of Paul Krugman's New York Times column. He is also host of The Bob Murphy Show.

Tech Giants & Oilgopoly - Must Read for Y13

This is a fascinating insight into a big - and for me, a hitherto unseen - reason for regulating the tech giants from The Economist. If you get a question on this in Paper 1 there is a wealth of material in here you can bring to bear to really lift your answer:

American tech giants are making life tough for startups

Big, rich and paranoid, they have reams of data to help them spot and buy young firms that might challenge them

 Print edition | Business

Jun 2nd 2018| SAN FRANCISCO

IT IS a classic startup story, but with a twist. Three 20-somethings launched a firm out of a dorm room at the Massachusetts Institute of Technology in 2016, with the goal of using algorithms to predict the reply to an e-mail. In May they were fundraising for their startup, EasyEmail, when Google held its annual conference for software developers and announced a tool similar to EasyEmail’s. Filip Twarowski, its boss, sees Google’s incursion as “incredible confirmation” they are working on something worthwhile. But he also admits that it came as “a little bit of a shock”. The giant has scared off at least one prospective backer of EasyEmail, because venture capitalists try to dodge spaces where the tech giants might step.

The behemoths’ annual conferences, held to announce new tools, features, and acquisitions, always “send shock waves of fear through entrepreneurs”, says Mike Driscoll, a partner at Data Collective, an investment firm. “Venture capitalists attend to see which of their companies are going to get killed next.” But anxiety about the tech giants on the part of startups and their investors goes much deeper than such events. Venture capitalists, such as Albert Wenger of Union Square Ventures, who was an early investor in Twitter, now talk of a “kill-zone” around the giants. Once a young firm enters, it can be extremely difficult to survive. Tech giants try to squash startups by copying them, or they pay to scoop them up early to eliminate a threat.

The idea of a kill-zone may bring to mind Microsoft’s long reign in the 1990s, as it embraced a strategy of “embrace, extend and extinguish” and tried to intimidate startups from entering its domain. But entrepreneurs’ and venture capitalists’ concerns are striking because for a long while afterwards, startups had free rein. In 2014 The Economist likened the proliferation of startups to the Cambrian explosion: software made running a startup cheaper than ever and opportunities seemed abundant.

Today, less so. Anything having to do with the consumer internet is perceived as dangerous, because of the dominance of Amazon, Facebook and Google (owned by Alphabet). Venture capitalists are wary of backing startups in online search, social media, mobile and e-commerce. It has become harder for startups to secure a first financing round. According to Pitchbook, a research company, in 2017 the number of these rounds were down by around 22% from 2012 (see chart).

The wariness comes from seeing what happens to startups when they enter the kill-zone, either deliberately or accidentally. Snap is the most prominent example; after Snap rebuffed Facebook’s attempts to buy the firm in 2013, for $3bn, Facebook cloned many of its successful features and has put a damper on its growth. A less known example is Life on Air, which launched Meerkat, a live video-streaming app, in 2015. It was obliterated when Twitter acquired and promoted a competing app, Periscope. Life on Air shut Meerkat down and launched a different app, called Houseparty, which offered group video chats. This briefly gained prominence, but was then copied by Facebook, seizing users and attention away from the startup.

The kill-zone operates in business software (“enterprise” in the lingo) as well, with the shadows of Microsoft, Amazon and Alphabet looming large. Amazon’s cloud service, Amazon Web Services (AWS), has labelled many startups as “partners”, only to copy their functionality and offer them as a cheap or free service. A giant pushing into a startup’s territory, while controlling the platform that startup depends on for distribution, makes life tricky. For example, Elastic, a data-management firm, lost sales after AWS launched a competitor, Elasticsearch, in 2015.

Even if giants do not copy startups outright, they can dent their prospects. Last year Amazon bought Whole Foods Market, a grocer, for $13.7bn. Blue Apron, a meal-delivery startup that was preparing to go public, was suddenly perceived as unappetising, as expectations mounted that Amazon would push into the space. This phenomenon is not limited to young firms: recently Facebook announced it was moving into online dating, causing the share price of Match Group, which went public in 2015, to plummet by 22% that day.

It has never been easy to make it as a startup. Now the army of fearsome technology giants is larger, and operates in a wider range of areas, including online search, social media, digital advertising, virtual reality, messaging and communications, smartphones and home speakers, cloud computing, smart software, e-commerce and more. This makes it challenging for startups to find space to break through and avoid being stamped on. Today’s giants are “much more ruthless and introspective. They will eat their own children to live another day,” according to Matt Ocko, a venture capitalist with Data Collective. And they are constantly scanning the horizon for incipient threats. Startups used to be able to have several years’ head start working on something novel without the giants noticing, says Aaron Levie of Box, a cloud and file-sharing service that has avoided the kill-zone (it has a market value of around $3.8bn). But today startups can only get a six- to 12-month lead before incumbents quickly catch up, he says.

There are some exceptions. Airbnb, Uber, Slack and other “unicorns” have faced down competition from incumbents. But they are few in number and many startups have learned to set their sights on more achievable aims. Entrepreneurs are “thinking much earlier about which consolidator is going to buy them”, says Larry Chu of Goodwin Procter, a law firm. The tech giants have been avid acquirers: Alphabet, Amazon, Apple, Facebook and Microsoft spent a combined $31.6bn on acquisitions in 2017. This has led some startups to be less ambitious. “Ninety per cent of the startups I see are built for sale, not for scale,” says Ajay Royan of Mithril Capital, which invests in tech.

This can be enriching to founders, who can go on to start another firm or provide financing to peers with smart ideas. To the extent that such exits provide more capital to spur innovation, this is no bad thing. The tech giants can help the firms they acquire grow more than they might have been able to do on their own. For example, Facebook’s acquisition of Instagram took out a would-be competitor, but it has thrived under the social-networking giant’s sway by adopting the technical infrastructure, staff and know-how that Facebook had in place.

Friend or foe?

But plenty of people in the Valley reckon the bad outweighs the good and that early, “shoot-out” acquisitions have sapped innovation. “The dominance of the big platforms has had a meaningful effect on the entrepreneurial culture of Silicon Valley,” says Roger McNamee of Elevation Partners, a private-equity firm, who was an early investor in Facebook. “It’s shifted the incentives from trying to create a large platform to creating a small morsel that’s tasty to be acquired by one of the giants.”

And when startups are bullied into selling, as some are, it is even more worrying. Big tech firms have been known to intimidate startups into agreeing to a sale, saying that they will launch a competing service and put the startup out of business unless they agree to a deal, says one person who was in charge of these negotiations at a big software firm (which uses such tactics).

There are three reasons to think that the kill-zone is likely to stay. First, the giants have tons of data to identify emerging rivals faster than ever before. Google collects signals about how internet users are spending time and money through its Chrome browser, e-mail service, Android operating system, app store, cloud service and more. Facebook can see which apps people use and where they travel online. It acquired the app Onavo, which helped it recognise that Instagram was gaining steam. It bought the young firm for $1bn before it could mature into a real threat, and last year it purchased a nascent social-polling firm, tbh, in a similar manner. Amazon can glean reams of data from its e-commerce platform and cloud business.

Another source of market information comes from investing in startups, which helps tech firms gain insights into new markets and possible disrupters. Of all American tech firms, Alphabet has been the most active. Since 2013 it has spent $12.6bn investing in 308 startups. Startups generally feel excited about gaining expertise from such a successful firm, but some may rue the day they accepted funding, because of conflicts. Uber, for example, took money from one of Alphabet’s venture-capital funds, but soon found itself competing against the giant’s self-driving car unit, Waymo. Thumbtack, a marketplace for skilled workers, also accepted money from Alphabet, but then watched as the parent company rolled out a competing service, Google Home Services. Amazon and Apple invest less in startups, but they too have clashed with them. Amazon invested in a home intercom system, called Nucleus, and then rolled out a very similar product of its own last year.

Recruiting is a second tool the giants will use to enforce their kill zones. Big tech firms are able to shell out huge sums to keep top performers and even average employees in their fold and make it uneconomical for their workers to consider joining startups. In 2017 Alphabet, Amazon, Apple, Facebook and Microsoft allocated a whopping $23.7bn combined to stock-based compensation. Big companies’ hoarding of talent stops startups scaling quickly. According to Mike Volpi of Index Ventures, a venture-capital firm, startups in the firm’s portfolio are currently 10-20% behind in their hiring goals for the year.

A third reason that startups may struggle to break through is that there is no sign of a new platform emerging which could disrupt the incumbents, even more than a decade after the rise of mobile. For example, the rise of mobile wounded Microsoft, which was dominant on personal computers, and gave power to both Facebook and Google, enabling them to capture more online ad dollars and attention. But there is no big new platform today. And the giants make it extremely expensive to get attention: Facebook, Google and Amazon all charge a hefty toll for new apps and services to get in front of consumers.

Seeing little opportunity to compete with the tech giants on their own turf, investors and startups are going where they can spot an opening. The lack of an incumbent giant is one reason why there is so much investor enthusiasm for crypto-currencies and for synthetic biology today. But the giants are starting to pay more attention. There are rumours Facebook wants to buy Coinbase, a cryptocurrency firm.

Regulators will be watching what the giants try next. Criticism that they have been too lax in approving deals where tech firms buy tiny competitors that could one day challenge them has been mounting. Facebook’s acquisition of Instagram and Google’s purchase of YouTube, before it was obvious how the pair might have taken on the giants, might well have been blocked today. To fight back against the kill-zone, regulators must closely consider what weapons to wield themselves.

This article appeared in the Business section of the print edition under the headline "Into the danger zone"

The importance of good public transport

This ties in beautifully with a great article on the radio yesterday about Pacer trains in the North - stopgap trains introduced as an emergency measure in the 1980s, basically buses bolted onto a train chassis, with many, many drawbacks, and intended to be used for a few years only, but still in use after more than 30 years - in the words of an interviewee, "They are not good enough for use in the South - another example of discrimination..."

This looks at the impact of public transport on mobility of labour - a really good point you can bring to bear in micro and macro:

Birmingham is a small city during peak hours

For a year now, the Open Data Institute Leeds has been tracking most of the buses and trams in the West Midlands, the UK city region centred on Birmingham. We do it by polling the live departure screens that you see at bus stops, even at stops where they aren’t installed.

So far we’ve recorded 40m bus departures, a total of 16GB of data. And we’ve written tools to explore it in seconds.

You can try for yourself here. You can see how long every bus took to connect any two bus stops anywhere in The West Midlands, and calculate averages over tens of thousands of bus journeys at specific times, to see how bus journey times change over the course of a typical day.

But why?

The agglomeration effect

We’ve mostly done this work because of the following graph.

Click to expand.

Many economists argue that larger cities are more productive than smaller cities, and become ever more productive as they grow due to something called “agglomeration benefits”.

There are many other factors that contribute to productivity, but this simple law seems to hold well in economies like the USA, Germany, France, and the Netherlands. For example, Lyon, the second largest city in France, is more productive than Marseille, the third largest city, which is in turn more productive than Lille.

Almost uniquely among large developed countries, this pattern does not hold in the UK. The UK’s large cities see no significant benefit to productivity from size, especially when we exclude the capital.

The result is that our biggest non-capital cities, Manchester and Birmingham, are significantly less productive than almost all similar-sized cities in Europe, and less productive than much smaller cities such as Edinburgh, Oxford, and Bristol.

Public transport and city size

One notable difference between the UK’s large cities and those in similar countries is how little public transport infrastructure they have.

While France’s second, third, and fourth cities have eight Metro lines between them (four in Lyon, two each in Marseille and Lille), the UK’s equivalents have none.

Manchester and Lyon have similar-sized tramway systems, with about 100 stations each; but Marseille (3 lines) and Lille (2 lines) have substantially more than Birmingham (1 line) and Leeds (0 lines).

Is it possible that poor public transport in the UK’s large cities makes their effective size smaller, and thus sacrifices the agglomeration benefits we would expect from their population?

Our Real Journey Time data lets us ask this question.

Real journey time, and journey time variability

There is an important difference between bus public transport and fixed infrastructure public transport: reliability. I have used our Real Journey Time tool to calculate the worst-case (95th percentile) journey time on public transport on two routes into Birmingham. This is the time that a public transport user must leave for their journey to ensure that they are only late for work or a meeting once a month.

The first journey is a bus from the south of the city, Stirchley to, Birmingham. This 3.5 mile journey takes about 20 minutes between 6am and 7am, and about 40 minutes between 8am and 9am.

The second journey is a tram from West Bromwich to Birmingham. This 8.5 mile journey takes 30 minutes regardless of when it is taken, as the tram route is almost completely segregated from traffic.

Click to expand.

While the tram is substantially quicker at all times than the bus, the reliability of its timing, even during the most congested periods, provides an additional large benefit to users.

We think that people generate the most agglomeration benefits for a city when they travel at peak times, to get to and from work, meetings, and social events. Our tool shows us that, at the times when people need to travel in order to generate these benefits, buses are extremely slow. And since buses are by far the largest mode of public transport in Birmingham, this is likely to have significantly higher impact there than in Lyon; in the latter, the largest mode of public transport is the metro, which delivers reliable journey times no matter the time of day.

Our hypothesis is that Birmingham’s reliance on buses makes its effective population much smaller than its real population. This reduces its productivity by sacrificing agglomeration benefits. For the past six months, using our Real Journey Time tool, we’ve worked with The Productivity Insights Network to quantify that.

At peak times, Birmingham is a small city

The technique is quite simple. We pick 30 minutes as the travel time by bus that marks the boundary of the Birmingham agglomeration. This doesn’t include walking at either end of a journey, or waiting time, so this figure may well mean a 50 minute total journey.

We then use our real journey time to examine how far from central Birmingham that allowed journey time would let a person live.

For example, by examining six months of journeys on the buses, we calculate that, at off-peak times a person five miles from Birmingham in West Bromwich is part of the Birmingham agglomeration. At peak times, this is no longer the case and the outer boundary of the Birmingham agglomeration is reduced in size to just 3.5 miles away in Smethwick.

Making use of our data on trams, we can also imagine a Birmingham where major bus routes are replaced by trams and enjoy fast and reliable journey durations, even at peak times. The agglomeration then includes people as far away as Bilston, 9 miles away.

By repeating this process for bus route into Birmingham from every direction, we create a boundary of the effective size of Birmingham at different times of the day. By summing the population living within each boundary, we calculate the real size of Birmingham under three conditions: by bus at peak time, by bus at off-peak time, and in an imaginary future where all buses travelled as quickly and reliably as trams (simulated tram).

At this point you might see why we picked 30 minutes as our travel time. Allowing 30 minutes of travel time using fixed infrastructure such as a tram gives Birmingham a population of about 1.7 million people, which is very close to its population as defined by the OECD of about 1.9 million.

But at peak time Birmingham’s effective population is just 0.9m – less than half the population that the OECD use.

Birmingham’s effective size might explain most of its productivity gap

This is where things get very interesting. If we consider that Birmingham has a population of 1.9m, and we assume that agglomeration benefits should work in the UK to the same extent that they work in France, Birmingham has a 33 per cent productivity shortfall. This underperformance of the UK’s large cities is part of the productivity puzzle that UK economists have been desperately trying to solve.

But once you understand that Birmingham’s real size is much smaller, below 1m people, the productivity shortfall reduces to just 9 per cent and is no longer significant.

Click to expand.

Our hypothesis is that, by relying on buses that get caught in congestion at peak times for public transport, Birmingham sacrifices significant size and thus agglomeration benefits to cities like Lyon, which rely on trams and metros. This is based on our calculations that a whole-city tramway system for Birmingham would deliver an effective size roughly equal to the OECD-defined population.

This difference seems to explain a significant proportion of the productivity gap between UK large cities and their European equivalents.

So what should we do?

The good news is that Birmingham’s current plans for transport investment are aimed at increasing its effective size at peak times.

• Using our Real Journey Time tool, TfWM are targeting investment in bus lanes and bus priority measures to improve journey speed and journey reliability on existing bus routes.
• Seven sprint bus routes are being planned, with bus priority measures hopefully delivering journey time reliability similar to a tram.
• Two tram extensions (to Wolverhampton Train station and Edgbaston) are under construction, with two more (to Dudley and Birmingham Airport) under study.
• Station re-openings at places like Moseley and Kings Heath will offer reliable journeys by rail to new areas of the city.

The prize for achieving this is large. If bus journey times became as reliable at peak time as they are off peak, the effective population of Birmingham would increase from 0.9m to 1.3m. If we assume that agglomeration benefits in the UK are as significant as in France, this would lead to an increase in GDP/capita of 7 per cent.

Tom Forth is head of data at the Open Data Institute Leeds. This work was undertaken with Daniel Billingsley and Neil McClure.

A Roadmap for Regional Re-balancing

Discovered a new source of material for you - https://www.citymetric.com

This is really useful for regional issues, and I am looking for an article that looks at cities and productivity, which has a really simple thesis at its core for you:

A Roadmap For The North of England

The north of England has always been associated with industry, innovation, and pride in both. You can still see that pioneering spirit all over the North, whether it’s Teesside’s growing renewable energy sector, or Greater Manchester’s reputation for excellence in e-commerce and fashion.

However, that success is not as widespread as it should be. It’s been five years since then-Chancellor George Osborne called for a “Northern Powerhouse” to rival London and the South-East, yet analysis from the Office for National Statistics (ONS) suggests that gross value-added (GVA) – the value of goods produced – per head in the North still lags behind that in the South. This isn’t how you build a healthy, balanced UK-wide economy.

If we’re serious about changing this, then it’s time to talk about what simple things could set the foundations for a prosperous North. You don’t need an economics degree to understand that you’ll struggle to encourage talented employers and workers to an area if you can’t offer them the basics – things like decent homes, proper transport, and attractive areas in which to live.

That’s why Homes for the North will be joined by Kevin Hollinrake MP, Housing Secretary James Brokenshire, and Shadow Housing Secretary John Healey as we launch our new charter, Rebalancing the Economy: Building the Northern Homes We Need in Parliament this week.

We’ll be talking about the importance of devolution, transport, and the right homes in the right places for northern growth. In today’s politically turbulent times it can be hard to find something Labour and Conservatives can agree on, but we’re delighted that colleagues from both sides of the House will be coming together to celebrate something that unites them: the importance of a prosperous North.

With the right tools and right approach, the North could thrive. That’s why we’ll also be announcing an upcoming piece of research we’re working on with Transport for the North that explores how a new approach to homes and infrastructure could support the delivery of a massive £97 billion in additional GVA by 2050.

This new research, Housing Requirements to meet North of England Economic Growth Potential, builds on the findings of 2016’s Northern Powerhouse Independent Economic Review – a piece of analysis that set out how pursuing the “Northern Powerhouse Vision” could deliver a “transformational” change to the economy by 2050. This includes the creation of 1.5 million new jobs, and delivering an additional £97 billion in GVA – a massive boost that would benefit all of the UK, not just the North.

In response to this review, Transport for the North has set out how strategic transport investments in key areas could help to deliver this vision of prosperity by opening up new areas in which to live and work. Now, Homes for the North is working with Transport for the North, the Centre for Economics and Business Research and other partners to deliver the final piece of the puzzle: how building the right homes in the right places could put the North on track to achieve that “transformational” economic growth scenario.

This research will set out what, to many, just makes intuitive sense: that if you’re opening up new infrastructure links, and an area needs new homes, planning the two in tandem will result in a well-connected community where people want to live. This isn’t about ripping up the rulebook on planning – it’s about doing things smarter, and getting better results.

However, we can’t realise this vision of a rebalanced economy without a serious conversation about investment and ambition. At present, the Treasury assesses how and where to allocate investment using a methodology that relies heavily on a cost-benefit-analysis that looks at short-term economic value (ie, return on investment) rather than longer-term economic potential. This means that Treasury investment in vital infrastructure ends up disproportionately funnelled into areas like the South-East – areas that are already productive and economically strong.

This is a short-term approach that reinforces the productivity gap between the North and South. Unfortunately, we see this approach echoed in the government’s new means of assessing housing need. Objectively Assessed Need (OAN) has local authorities assess how many homes they need using data based on projections reflecting a period of sluggish economic growth – rather than accounting for future need and local ambition.

Homes for the North analysis found that this has resulted in the government underestimating how many homes are needed as a baseline in the North to the tune of 13,000 homes – which could mean a £2.37 billion loss in economic output. This is particularly troubling in light of Homes for the North research which revealed that the North needs at least 50,000 new homes a year just to keep pace with current demand.

Clearly, it’s time for the Government to take a more long-term approach to how it allocates funding for vital infrastructure such as homes and transport – looking at local economic ambition and plans, not just past trends and performance. The North certainly isn’t short on ambition and potential – last year saw Centre for Cities rank Manchester and Leeds the top two cities in the country for city centre jobs and growth.

If the Government wants to aid and assist this growth, and ensure that it is spread across the North, it’s high time that the Treasury started considering future demand and opportunity when allocating investment. We need targets, we need investment, we need the powers to deliver them in a way that works in a specifically northern context.

Our research and charter is focussed on how the North could achieve that “transformational” change to the northern economy – but it’s important that we never lose sight of the country-wide context. The lopsided nature of the economy means that many are effectively trapped in the London commuter belt, wrestling with high costs of living, housing, and commuting. A rebalanced economy would mean that people have greater choice over where in the UK they build their careers, homes, and families.

What’s more, in the first six months of 2018, the UK was one of the slowest growing economies in the G7. If the Government is to reverse this trend, it needs to start taking the North’s potential seriously. It’s time for real investment in this potential, and recognition of the fundamental importance of ‘basic’ infrastructure like homes and transport in transforming an area’s fortunes. For the sake of all of the UK, it’s high time we properly invest in the North.

Carol Matthews is chief executive of housing association Riverside and chair of Homes for the North.