In the UK, they have these green belts. Green belts are a perimeter around the cities, a couple of dozen miles wide. In green belts, it’s illegal to build new housing. They act like a corset.

The high-minded justification for green belts is that they stop the cities from gobbling up the green and pleasant land of England. They are also said to provide green space for the enjoyment of city dwellers. They are also said to prevent sprawl and protect the distinct identity of cities.

Be that as it may, in practice, the big effect of green belts is to take money from workers and give it to landlords.

Agglomeration

Over time, the UK economy has got richer and more productive, as is the normal way of things. Economic growth has been concentrated in the south-east of England.

London has gotten more and more productive, but it hasn’t been able to grow. The green belt corset is a big reason for this.

The result is that all of London’s additional wealth has gone, not to workers, but to landlords. London salaries have gone up a lot, but the number of homes within commuting distance of those salaries has stayed more or less fixed. So workers have ended up handing their pay rises over to landlords. Living standards haven’t budged.

The following has not happened: employers, seeing that London is full, have not decided to set up shop somewhere with cheaper housing. For example, housing in the UK midlands and north has been cheap for the last 40 years, while London has boomed. Employers have not seized the opportunity to set up in Birmingham and Hull.

The following has happened: as London has become less and less affordable, its economy has pulled further away from the rest of the UK. More and more companies have chosen London as their base.

Why is that? Why have UK companies chosen overwhelmingly to set up in the most congested and unaffordable corner of the country?

Pernicious

Cities are labour markets. They’re places where workers find their perfect employer and employers their perfect worker. The bigger the city, the deeper the market for jobs and workers. Employers choose big cities because that’s where they have the best choice of workers.

By this logic, shouldn’t everyone live in one big city? There is indeed a limit to the “city as labour market” idea. At a certain point, a city gets too congested, and the benefits of a deeper labour market are outweighed by congestion. It’s hard to get around in Dublin, harder in London, and harder again in Mexico City. Cities don’t come bigger than Mexico City.

Despite its pain-in-the-neck qualities, London has boomed. Other rich cities, including Dublin, have boomed too. Why? It’s about the knowledge economy. Whereas previously the economy grew by putting things into a more useful order (factories), now the economy grows by putting information into a more useful order (software, marketing, law, finance). The crucible of economic growth these days is big cities, where knowledge workers do their stuff.

This is why policies like the green belt are so pernicious. They stop the booming parts of the nation — the big cities — from adding housing. The result, as we’ve seen, is continually rising housing costs.

The HNDA

Ireland doesn’t have a green belt but it has a soft green belt. I wrote about it last week. Through an obscure bureaucratic process called the housing need demand assessment, the planning system intentionally suppresses the amount of housing that can be built in the east of the country. The mechanism isn’t the same as the UK’s green belts, but the effect is the same. Dublin is booming, it’s creating lots of jobs, and salaries are going up, but housing isn’t being allowed to be built at the same rate. Savills estimated that, in the latest local authority plans, there is capacity for 100,000 fewer new homes in the greater Dublin area than in the previous plans. 

Our planning system suppresses growth in and around Dublin because it would prefer growth was spread more evenly around the country. The idea is that the planning system will suppress growth in Dublin, permit more growth in the west, and the country will reach a more even population density across the board.

This would be nice if it were possible. It would be easier to build homes and transport and services where there’s lots of space and cheap land.

The problem with this idea is that employers don’t play ball. You can’t start a knowledge-intensive business just anywhere. You need specific people with specific skills. Specialised skills are mainly found in big cities.

In places where planners try to balance regional growth, what you see is that they are very successful at suppressing growth in successful regions but terrible at encouraging growth in unsuccessful ones. They end up harming or killing regional economies with no commensurate upside.

For example, in 1956, UK planners decided that the Birmingham region was too dominant and needed to be constrained in the interest of balanced regional development. West midland household incomes at the time were the highest in the UK.

The planners set a target population lower than Birmingham’s then population. Factory construction was severely limited by the requirement for special Industrial Development Certificates. When services continued to grow, the UK government banned office construction in 1964.

The policies succeeded in strangling Birmingham’s economy, but they didn’t encourage growth elsewhere. A study of the Industrial Development Certificates found that only 18 per cent of projects went ahead in the areas directed by the government.

Ireland’s planning system isn’t as vulgar as that of Britain in the 1950s and 1960s. It’s also less transparent — how many understand the significance of the housing need demand assessment process? But the Irish system is animated by the same bad ideas that crushed the Birmingham economy.

Suppressing the housing supply in Dublin does not lead to balanced regional development. Companies that are viable in Dublin are not viable in Athlone or Limerick. Limiting Dublin’s growth does nothing but squeeze workers and line landlords’ pockets.