Hunting for Hinzelmann, or: helping towns without magical thinking

[Spoiler alert: contains minor spoilers to Neil Gaiman’s “American Gods”; and major spoilers to bad regional policy.]

HINZELMANN: “Biggest problem we have in this part of the world is poverty. Not the sort of poverty we had in the Depression, but something more… insidious.”

SHADOW: “Lakeside seems kind of prosperous, though”

HINZELMANN: “Believe me, it takes a lot of work, hard work. But this is a good town, and all the work the people here put into it is worthwhile.”

Times are tough for towns. But Lakeside, Wisconsin is pulling through. In the words of one resident, “we’ve got a little of everything here — farming, light industry, tourism, craft. Good schools.” It isn’t prosperous, but it is, as they say, “just about managing”, buoyed up by a strong sense of community.

Unfortunately, Lakeside isn’t real. It’s the setting of Neil Gaiman’s apocalyptic fantasy novel American Gods. And it transpires that its prosperity is not due to public policy or economics, but to the magical powers of a man called Hinzelmann, an ancient spirit who protects the town from economic decline.

Hinzelmann is fictitious, but you can bet that if he showed up in Britain today, politicians would be beating a path to his door. A consequence of the Conservatives’ landslide election victory last week is that they have taken control of dozens of seats in towns* that have been held by Labour for decades — and now they need to explain how they will help them.

There’s been a lot of talk about how the new government will govern as “One Nation” Conservatives, rather than pursuing a “Singapore-on-Thames” model. One part of this is the idea that economic growth needs to be better “spread” across the country.

David Skelton, a Conservative who makes a passionate case for towns in his recent book Little Platoons, calls for “the creation of prosperity hubs to renew post-industrial towns as engines of innovation” and “the reindustrialization of forgotten towns”, calling for local tax breaks, investment in skills, relocating government departments, and local applied R&D funding. Will Tanner, leader of Mayite think-tank Onward, called for the government to use “science, research & development and skills spending to tempt world-class companies in emerging sectors such as renewable energy and advanced manufacturing to cluster in [the Conservatives’] new heartlands”. This involves “break[ing] free of the traditional conservative economic playbook of trickle-down growth and bring purpose back to towns”.

Sometimes this gets described as “post-liberal economic policy”, sometimes it goes under the vaguer name of “One Nation Conservatism”. But if we peel back the branding, the heart of the argument consists of three claims:

1. Firstly, in order to help towns, Government needs to make them centres of high-value production.

2. Secondly, we are told, Government should not be afraid of using industrial policy to make this happen**.

3. Thirdly, the rhetoric of “re” — “renew”, “reindustrialize”, “bring back” — the implication being that because towns were once industrial, industrial policy will be a process of restoring the proper state of things.

You don’t need to be a polling genius to see the political imperative here. If the Conservatives can bring prosperity to a swathe of newly-Blue left-behind towns, the next election is in the bag.

The problem is not the politics: it’s the economics. Many of the political pundits seeking to Make Towns Great Again have got themselves into a terrible confusion both about the economic problem they’re trying to solve, and about what policies will work to fix it. The result is a sort of magical thinking that would make Hinzelmann proud.

Let’s try a different approach.

What’s the problem we’re trying to solve? The first thing to recognize is that the decline of towns’ productive capacity has deep economic roots. Over the past few decades, the gap in productivity between bigger cities and smaller ones has been growing in most rich countries. What economists call “agglomeration effects”, the productivity benefits of bigger cities, are growing. (This is probably a result of the growing importance of intangible capital and knowledge, as Jonathan Haskel and I documented in chapter 5 of our book Capitalism Without Capital; the rise of two-earner households might also play a role.) Once upon a time, many small towns were supported by a single manufacturing employer; that’s less feasible in today’s economy, and becoming less so with time. That doesn’t mean you can’t do anything to help towns, as we will see — but it does mean that trying to do so specifically by “renewing post-industrial towns as engines of innovation” is swimming against the current.

The general productivity problem of small towns is an international phenomenon, which in itself should make us wary of easy solutions. But the UK does have some specific problems of economic geography that are relevant to policy on towns.

The most important problem is that, beyond London, England’s cities are broken. Placed like Birmingham, Sunderland, Sheffield and Manchester are much less productive than large cities in countries like France, Germany or the US. To put it another way, they don’t exhibit the agglomeration effects that you would expect them to. Tom Forth, who has thought more about economic geography than most, attributes this to sustained underinvestment in intra-city transport (which makes cities behave like smaller places than they are, because they take so long to get around) and the concentration of public R&D investment in the South-East. Underinvestment in skills (a general British problem) seems to weaken agglomeration effects too.

A second problem is that the UK has a history of underinvestment, both in physical capital like machines and factories, and in some types of intangible capital, like R&D and training. This seems to be a very long-term phenomenon (even in the late nineteenth century, British firms invested less than American or German ones — here’s a Victorian Royal Commission complaining about it), but it has been exacerbated by some recent policy choices, such as cuts to further education budgets and the downgrading of capital allowances, both of which happened in the last decade. Both of these could plausibly have accelerated deindustrialization, in towns and elsewhere.

The UK’s third idiosyncratic problem is that by a quirk of history, some of our most productive and innovative places (Oxford, Cambridge, much of the South East) are tightly constrained by planning rules. (I forget whether the Dreaming Spires of Oxford have 10 legally protected lines of sight or 12, but you get the picture.) This is bad for the country as a whole, because it means we get less economic benefit from the ideas coming out of Cambridge etc. It also has a less obvious effect on towns: if rents and houses in places like Cambridge are very high, there’s little incentive for anyone living elsewhere to move to take up jobs there. Over time, this reduces people’s mobility***, making people more tied to their own hometowns than they would otherwise be — turning “Anywheres” into “Somewheres”, to use David Goodhart’s characterization, and makes failures of regional policy more painful.

Pause for a moment to marvel at the beauty of this protected view of the Dreaming Spires of Oxford

So to recap, four things are happening: (i) towns everywhere, not just the UK, are becoming less productive relative to cities; (ii) UK cities outside London are poorer than we’d expect by global standards, probably because of poor infrastructure and investment; (iii) the UK invests less than other rich countries in a range of things, including skills and machinery, in part because of recent policy changes; (iv) our planning system makes it hard for people to move to prosperous bits of the UK, which makes the plight of left-behind places a more urgent problem.

Untested policies

The first thing to recognize is that the intention to help towns on its own isn’t sufficient.

One of the dangers of the narrative that the Tories won town seats that Labour had “taken for granted” is that it implies that the failure to do successful economic development is towns is mostly a failure of will. But as veterans of regional development policy from the Blair era will tell you, this isn’t true. As David Higham points out:

“I spent nearly 20 years working on economic development in the NW. New Labour didn’t neglect places like Blackpool, Burnley and Workington. It failed to come up with effective solutions. That is a very different issue and one which will come back to bite Johnson.”

When it comes to helping towns, it’s not just a matter of will: there’s the additional problem that no-one is sure what policies work, or even if such policies are possible.

The idea that to Make Towns Great Again you need to make them centres of production requires you (a) to fight against long-run economic forces that seem to be present in most rich countries (b) to devise entirely new policies that work. I’m not against government trying things out and being bold. But we need to be conscious of how difficult this is. A policy like Free Schools, which was seen by the Coalition Government as a major success, was certainly bold — but it was based on years of experiments on school autonomy in Sweden and the US, so it was known that it was possible; and it was not a total departure from the Academy Schools movement. Making towns flourish through industrial policy is much harder: no-one, to my knowledge, has made it work at scale, and when we have tried it in the UK we have failed****.

What can government do for towns then?

At this point, the more politically minded reader is preparing to give up reading in disgust. “How can these desiccated economists ignore the urgent political and human need here?!”

But I’m not preaching a counsel of despair. I think there is a policy programme that could help England’s towns, and that is realistic. Here is what I would do:

1. Invest in cities (by which I mean city-regions, bleugh, horrible term). Splurge on in intra-city transport and sensibly***** devolved R&D (as suggested by Richard Jones) so they become as productive as major cities in other rich countries. (Most of the R&D spending is likely to end up being spent in or near cities, not directly in towns, because that’s where most of the capacity is — but that’s not a bad thing: R&D benefits especially strongly from agglomeration effects.)

2. Invest to fix nationwide problems that have affected towns particularly badly: this means a decent funding settlement for skills, and tax breaks to encourage investment (full expensing of capital expenditure, as proposed by Sam Bowman and me, would be a good move).

3. While you’re investing in transport, improve the links to nearby towns from cities. (This is a topic where it’s right to talk about “restoring” — public transport in and between many towns was much better before the 1970s.) There’s some debate about how near towns need to be to benefit from these city effects. Centre for Cities research is optimistic that many towns can benefit from these effects; other economists are more skeptical and point out that some very poor towns are already quite well connected to cities, and that agglomeration effects are massively weakened at commuting times of more than half an hour. But at least some well known towns are within existing city regions (Wigan or Oldham in the Manchester City Region, for instance) and ought to benefit from better cities policy: we should make sure the transport links are in place to make this a reality.

(By the way, a government that can pull off 1, 2 and 3, can in good faith claim to be rebalancing the economy, helping the country outside London, and helping the North — all important things, and things which are often jumbled up with the issue of helping towns specifically.)

4. This will leave a number of towns that aren’t near enough to cities to benefit from their economic growth. I don’t think it’s practical to promise them a productivity miracle, since I’m not convinced we have the policies to make this happen. But there is an alternative.

Towns are not cities. But not everyone wants to live in a city. Instead, we should promise to make towns really great places to live and to raise a family, where they know their neighbours. This might sound a bit flaky and Big Society-ish, but there’s actually a lot government can do to help make this a reality.

A very smart correspondent who lives in a town described his ideal town to me thus:

“It needs to have very low crime levels, so that people feel it is a safe area to bring up children: the sort of place where neighbours get to know each other, knowing that the investment in meeting people is worthwhile. That points to high levels of owner occupation, and social housing. It also points to the disproportionate provision of family housing, rather than flats. (Flats for the elderly should be encouraged: we want grandma to be able to move to somewhere near her children and grandchildren.)

It also points to the massive provision of family friendly facilities. This means both free provision (parks), and paid for provision (bowling alleys, indoor climbing, et cetera). It also means a lot of provision for voluntary groups: mother and toddler groups, youth groups such as the Scouts, etc. It means being able to get to see your GP immediately, or very good walk-in centres for when your child is ill. It means having a hospital in which you can give birth. It does not have to be a super high-tech hospital, just one for regular routine births.

Above all, the town should try and be a nice places to live. There should be good street trees, and well tended parks. There should be civic pride, and places that enter the Britain in Bloom competition. They should spend a lot of money picking up litter. Getting rid of crime should be a big priority. Lots of police, and particularly lots of PCSOs. Council tax will cover this, but we should not be over-subsidising the big cities just because they have more crime. If people want to live in big cities, let them, but they should pay the costs of these things locally. Smaller towns like this should have relatively low costs, as they will not have many expensive social services (high crime rates, expensive public transport). So they ought to be able to afford to keep the town really nice, as well as keeping crime low.

Finally, where will the people work? Some will commute (by train or car — most places are near a big place). Some will downsize their jobs. The cost of living will be lower, so one salary should be sufficient. Some will work in good local jobs — teachers, doctors, etc. And the hope is that the place will, by virtue of being a nice place, create a buzz that will attract and create jobs — people dislike commuting quite intensely, after all (we know this from house prices). There are also some jobs that can be in places like this — conveyancing, para-legal.”

There’s a crucial human element to all of this, so let me put on my wamb hat for a moment. (If you don’t know what a wamb is, drop everything and read this enlightening blog-post.) Whatever policy Number 10 decides on needs to promote autonomy and dignity in the towns it hopes to help. This is partly a matter of hearts and minds, the spirit of “vote leave, take control” in a world where towns have been massively disempowered. But it’s also <hurriedly removes wamb hat> a sensible pragmatic decision — investment is a necessary condition for making a town a great places to live, but not a sufficient one. It also requires the energy and passion of the people who live there, and that is going to work much better if the project is led by the town and its people, rather than by central government.

I’m not going to pretend this vision of how to help towns is a new one. It reflects lots of lessons learnt through years of work by communities and regeneration experts. (There is a nice up-to-date summary here by Metro Dynamics.) It resonates with the things that people say they value most in their community. It aligns with the Government’s election promises to invest in the NHS, in schools and in policing. And above all, it involves doing things governments broadly know how to do, and working together with people and their communities, not on finding out how to do things that no government has done before at scale and bucking global economic trends.

The reason this is important is that this isn’t just a wonkish question of good or bad policy: it’s also a matter of politics and political communications. If the Government makes ambitious claims that it will help newly-Blue towns by reindustrialising them and turning them into innovation hubs, it is creating an unnecessarily hard set of “victory conditions” — conditions that will be remembered when people return to the ballot box in less than five years’ time. Why promise something that may well be impossible to deliver, when you can offer something that people want that you probably can deliver?

* Note to non-UK readers: you might think you know what a “town” means: a place where lots of people live, probably with tall buildings. But like so many things in Britain, it has an arcane and specific meaning to UK political pundits: it means a smallish city, population roughly less that 300,000, that’s fallen on hard economic times and isn’t populated by metropolitan elite types. Big cities like London and Manchester aren’t towns, and neither are prosperous places like Milton Keynes or York. Clear?

** (A similar argument is emerging on the Right in the US — a central claim of The Once and Future Worker by former Romney aide Oren Cass is that economists should value production more than consumption because production is ennobling; Cass is founding a new think-tank to promote this agenda.)

*** The US has this problem too, as can be seen from the ferocity of the wars between the NIMBYs and the YIMBYs in Northern California.

**** I’d argue that the most developed town-based development models are cooperative structures like the Basque Country’s Mondragon structure or the Preston Model that is widely admired on the radical left, but (a) as far as I know, no-one in Government is proposing following these models and (b) while I’m not an expert, I’m not sure either of them is easily replicable. Here’s an interesting recent Twitter debate on the Preston Model, and here is a readable 100-page summary of the principles behind it.

***** I accept that “sensibly” is doing a lot of work here — but the question of how to devolve R&D spending is too long an issue to cover in this already-too-long piece!