Our pronounced regional inequality is a symptom of an economy that is broken in many important areas. Fixing those would go a long way to make the Government’s much-vaunted ‘levelling up’ a reality.
Four of the most broken areas are higher education, banking, transport and housing. There are radical but realistic ways to improve each of these, and spread prosperity more widely in the process. Some of that would be controversial, but it would not need much more in the way of government spending.
Open up Oxbridge
One of the big challenges facing parts of some regions is a lack of skills. But higher education still bundles teaching, assessment and diplomas the way it did in 1650. With modern technology it could be vastly better, and cost students much less.
We should make sure a motivated kid with nothing but grit can sit Cambridge finals if she wants to, without ever leaving Hartlepool.
My best ever lecturers taught me for a legal qualification. The provider scoured the country for the best on each subject, then recorded their lectures. Each lecture could then reach many thousands of students, at a tiny cost per student.
Not everything can be taught that way, of course. But innovations like Lambda School and online courses across the world show that surprising amounts can be taught better with technology and competition.
And yet Oxford and Cambridge have so little competition that they don’t even compete with each other for students. You can only apply to one, unless you are a skilled organist, who are so rare that they have more market power than Oxbridge.
There is evidence that a fraction of higher education is socially wasteful signalling. It could be so much better. Great teachers are stuck with low pay and small numbers of unmotivated students. Great students are stuck paying a fortune for mediocre teaching.
We can easily separate teaching and degrees by requiring Oxford and Cambridge, if they want continued state funding, to open up their finals exams to external candidates for a reasonable fee. Oxford has made steps in that direction before: Ruskin College was set up to give the working classes the chance to earn a university qualification.
They could require preliminary qualifying exams to keep numbers manageable, so long as their internal candidates have to sit them too.
Anyone who wants an Oxbridge degree could choose another school to teach them, and sit the exams when they feel ready. Then the institutions that are best at teaching can grow, online and offline, with innovative success-based funding models like Lambda School, requiring no cash payment up front.
The idea has been floated on the left and the right. It is not partisan, just radical. It will start to dislodge the entrenched grip of the current Oxbridge-educated establishment. That is no bad thing.
Stop subsidising banks
As we leave the EU, we have a chance to look at the hundreds of billions of pounds of subsidies – implicit and explicit – that the government showers on bankers in London.
Most of those subsidies, of course, benefit the already overheated south-east, not the regions we want to help. In the next credit crunch, the Bank of England won’t be giving Lender of Last Resort (LOLR) loans to manufacturers in the North. But is new factory machinery, or a building in the centre of Manchester, really worse collateral than a bond from a corporation or foreign government of dubious solvency? And of course the Bank of England has been happy to accept mortgages of property as collateral – so long as they are offered by a bank.
The Bank of England has never assessed the opportunity costs of the LOLR facility offered to banks but not other companies in a crisis. No-one has ever measured the value of banks’ exclusive access to reserve accounts at the Bank of England. No-one has ever assessed how much the banks benefit from being allowed eye-watering maturity mismatches between deposits and assets that would be illegal in any other retail financial service; from their implicit government guarantee; or from capital rules making fully reserved banks uneconomic. The tax incentives for companies to fund with debt rather than equity capital also help banks, although those are probably harder to fix.
No-one would engineer bridges or computer systems the way we allow banks to be structured. We literally expect the banks to blow up once every economic cycle unless the government steps in to save them, as it promises to do. And then we wonder why we have too many people doing negative-sum jobs in finance and not enough doing productive things elsewhere.
Fixing centuries of privileges that bankers have gathered for themselves would have been hard under existing EU regulations. But we now have the freedom to write our own rules.
In the 19th century many mortgages were funded by peer-to-peer lending, and banks lent money to companies for equipment to create jobs. We could become a world leader in high-tech peer-to-peer lending. Those new high-tech businesses will be more free to be based away from London. We should end unnecessary banking subsidies, and enable a new wave of innovation.
How can we start to fix this? First, open up reserve accounts at the Bank of England to everyone. Second, fix EU-driven capital regulations that currently make it uneconomic to run a ‘fully-reserved’ bank that has no maturity mismatches. Third, ensure that any future lender of last resort loans will be available to anyone with good collateral. The banks can pay the market rate for it, the same as everyone else.
Fix the roads
Congestion is universally hated. But drivers in the crowded city-state of Singapore enjoy speeds of 20 miles per hour at rush hour. How? Because the roads are properly priced.
At the moment we overcharge drivers for using quiet roads, but don’t charge a market rate for congested roads at peak time. No-one has an incentive to ride a bike, share a car or take public transport, and the result is endless congestion and more pollution – carbon and otherwise.
Congestion pricing is the only way to fix congestion and let drivers and buses move at decent speeds. That would also raise wages in places where transport has been too bad to allow the benefits from the ‘agglomeration’ effects of larger populations.
What’s more, it would avert the impending funding crisis for road repairs as the market switches to electric vehicles, which pay no fuel tax.
Congestion pricing instead of taxes on petrol would make driving cheaper for the vast majority of drivers. It would also speed up the buses and other app-based pooling options, making them fast enough to be a practical, affordable and low-carbon alternative to driving. Again, that will help those on low incomes most of all.
Fix housing
We cannot just abolish the planning system, any more than we could or should abolish the law of trespass or nuisance because they prevent useful economic activity. After all, you wouldn’t want strangers entering your property completely unhindered, and if there were no rules against nuisances, you might be choking in a smog of chemicals from the factory next door.
Likewise, the parts of planning that protect amenity have a purpose. Few want to live in a street of ugly concrete blocks with no nearby greenery. Even the US city of Houston, well known for its liberal planning regime, has rules.
Abolish planning completely and you will get a rush of concrete boxes until prices die down. Abolish it only outside conservation areas and you will see new conservation areas galore as people seek to avoid a wave of construction in their area, or howls of outrage as lower income areas are razed while the middle classes shelter in their current conservation areas.
The question is how to get from where we are to a great system that protects the good bits and works like the rest of property law to let people negotiate improvements. There are ways to do that, but you have to start with a win-win mindset that understands markets. China chose to enable markets for a good reason – you simply can’t centrally plan the whole economy.
We need to find a way forward that works like the other rules on land use. Few get upset that the law of trespass stops people living in homes that already exist, because people negotiate to find efficient solutions. No-one is calling to abolish the law of trespass. Other parts of the law let people or groups negotiate to find win-win outcomes. The current planning system makes that almost impossible.
I have written at length about how to fix this, and trials of our main suggestion were endorsed by the Government’s Building Better Building Beautiful Commission, as policy proposal 14. The Secretary of State, Robert Jenrick, has promised to implement as much of the report as he can. Let’s hope he does so urgently.
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