The pandemic has wide-ranging implications for the future of cities. Lockdown measures have reduced the use of office space, halted the hospitality sector and changed how we use transport systems. But is city-flight a temporary phenomenon? Or are cities more resilient than we think?
Welcome to another week of Macro Matters. In this episode our host Paul Diggle discusses the post-pandemic future of cities with the esteemed British economist Bridget Rosewell. Once the Chief Economist for the Greater London Authority and now Non-Executive Director of Network Rail, Bridget shares her leading expertise on the economics of cities and transport.  

 

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Podcast

Macro Matters: the future of cities with Bridget Rosewell

Paul

Hello and welcome to Macro Matters the economics and politics podcast from Aberdeen Standard Investments. My name is Paul Diggle, Senior Economist at Aberdeen Standard and along with my co-host Stephanie Kelly, we're guiding you through the macro economic and political themes that are driving global markets. Today I'm joined by the economist Bridget Rosewell to talk about the post-pandemic future of cities. Bridget is a leading expert in the economics of cities, transport, economic infrastructure, and she was Chief Economist and Economic Adviser to the Greater London Authority for a decade in the 2000s. She's founded several successful consultancy businesses specialising in the economics of transport and property development. And she is a non-executive director of Network Rail and a commissioner of the National Infrastructure Commission. And all this is actually just one aspect of what Bridget is interested in within economics. She has great knowledge of financial markets, econometric methods, the economics of uncertainty, and she has both an OBE and a CBE recognising her contributions to economics. And I first met Bridget in 2008, when I started working for her at one of her businesses, Volterra Partners, where I got to think about the economics of cities enter developments, runway capacity, transport infrastructure. So I'm really looking forward to this conversation with Bridget on the future of cities. Bridget Rosewell, welcome to the podcast.

Bridget

Thank you for inviting me. And it's good to see you again, after all these years.

Paul

it's lovely to see you again. So why don't we start with a sort of an overview question, which is, why are economists interested in cities in the first place? Why are cities an issue for economics and not just something that geographers or urban planners care about?

Bridget

I think the really important thing about cities is the way that economic performance happens, and in particular changes and grows. Indeed, you can trace this interest right back to Alfred Marshall, one of the pioneers of economic analysis back in the 19th century, who looked at how Manchester had grown this cotton industry, and how that happened within a city context. And of course, it's particularly important as we've seen, economies change over the last 20, 30 years now, more than half of the population of the world lives in cities. So why is that? How does it happen? What are the implications? Where's the infrastructure for that? What happens in the rest of the country? All of these afterall are not just geographical issues, they're economic issues, they're what drive economic performance.

Paul

So cities are these engines of economic growth? But what's the actual mechanism by which people clumping together closely in cities actually generate economic growth and productivity growth? How does that actually work?

Bridget

Okay, so I think there are a number of dimensions to that. One is that by being close to other people, you can sell to them. Now, obviously, at the moment, everything's happening at a distance. But one of the ways in which people established markets, is by finding people who are interested in what they are doing. And that actually is much easier. In a highly dense setting, we'll come back obviously, to how that might change. The other thing about it is, so that's about how you produce something new, how you get a market for something new, how you develop your ideas, and how you generate those new ideas in the first place. So we did again, Manchester, actually, back in the day with with Volterra partners, we did some work for Manchester around innovation. And what that established is that the way it happens is not by being too close to people like you, it's being close to people who supply you or who are your customers and that is the way that you get the new stuff to happen. And if you can't create those linkages, and that's true back into the 19th century, and and the scientific societies which sprang up Noona society in Birmingham, for example, where those new ideas were discussed. So it's all about linkages. It's all about networks. It's all about how you make connections, and how you make those connections effectively, and generally speaking, that's cities. Another good example is the birth of the computing age back in the 1960s and 70s, all of those people worked in the centre of the city. It was only when it became kind of business as usual, that all the call centres went away. And all the programmers, you didn't need those sorts of idea generation any longer. And so it all dispersed, and the next load of new stuff came back into the city.

Paul

That sort of overarching term, and you've pioneered the use of this term, is a glomeration. The idea that density and the positive externalities of density, the spill over effect of being close to other people who are maybe complements to your business processes, that spark ideas, that generate productivity growth, the sort of term that we as economists have given to this is is a glomeration, right. That's the sort of overarching concept.

Bridget

So the word actually was first used by Marshall back in the 19th century. And we all forgot about it again. And I think it's really interesting to talk about why we forgot about it. Which is that in the, particularly in the second half of the 20th century, I guess, economics became all about equilibrium. It became all about things don't change, you reach that sort of Nirvana, where you know exactly what is happening, it all just trundles along. You don't need to restructure your economy, you don't need new ideas, you're mature. And so we forgot about those externalities, the idea that something you do has impacts beyond you, and onto other things that aren't going to be fully recognised. We forgot about dynamism. We forgot about the need for change. We forgot about how, if you're going to continue to be successful, you need to be responding to new things that are happening. We thought that didn't matter any longer. And then I guess, you know, sort of later that in the 20th century, we discovered 'Oh no, that wasn't true'. Rise of China, in particular, but also new technologies that were coming along computers, and all of that actually change did continue to happen. And you did need to work out what to do about it.

Paul

So of course, we're especially interested in these questions at this juncture, because the cities have or city centres have seemingly emptied out during the pandemic we're all working removed from each other. We're not clumping together, close together in high density settings. And the questions we're of course asking ourselves is, is this a temporary or permanent phenomenon? How does it change the course of cities? How cities work, how economic growth progresses. So do you think it's a temporary or permanent phenomenon that cities have the centre of cities has emptied out, we're all working, separated from each other?

Bridget

I think aspects of it are permanent, but much of it is temporary. The reason I think that much of it is temporary, is it's very interesting. After all, at the beginning of the pandemic, everybody was thinking, "Oh, I can stay at home" "Oh isn't this nice" and "I don't have to commute" and so on. And as the whole thing has persisted. Increasingly, people are saying, "I don't like this very much", "I'm gonna have more time at home", yes, but not all the time. working from home as a permanent activity is, is socially very undesirable. We all need to get out and meet people. And although it's great to see on the screen, Paul, it isn't the same as sitting in a room, it's not the same as dealing with people face to face. I've managed to have 2 strategy meetings for my boards during the 2020. Fortunately, they both fell in September. And fortunately, we were able to have them in a face-to-face environment. And everybody was really keen to get into that face-to-face environment to have those discussion. On the grounds that you just couldn't do it effectively, if you're all trying to do it at a distance. So yes, some things can be more effective at a distance, but many things cannot. And I'm particularly worried about how people learn. You know, if you like the rules of the game, the things that are not written down, the things that you learn by working with more senior people, all of those engagements. I'm worried about people who live in small flats. I'm worried about people who can't move. You know, all of these things are really important. And the moment that everybody feels a bit safer. There will be an explosion of activity in my view, and the city will fill up again, particularly the bars and restaurants of course. If anybody's able to, to finance them, so that desire for social life. And therefore, being ready to think about how you invest in hospitality industry, I think is one of the things that is really interesting, people will want to get together. And we saw that after all, when restrictions were relaxed. And as the vaccine begins to be effective, and as you know, to some extent this thing becomes endemic, we just get used to it like a winter flu season, then I think that that will really begin to rebound. The occupation of offices is a more interesting phenomenon. And there, I think the use of space and the periods over which that space is going to be used, that becomes an interesting question. Because if you want to reduce the density, of which you're using your, your real estate, then there's some questions about rental values.

Paul

Yeah, I've often thought of City Living, city centre living as something of a trade-off. We accept noise or stress or pollution or lack of space. And in return, we find it worthwhile to get the amenities, the density of culture, the access to other people, the employment opportunities, and it's that that trade off, which half the world has found is more than worthwhile. It's why cities are such a sort of economic success. And for a while, at least, it seemed like working from home, we figured out maybe we don't have to make this trade off. Maybe we can live near a green spaces in less polluted places, and still have all the amenities of being able to network and link with other people. And I think what you highlight, Bridget is actually, it's clear that something is lost in that process. I mean, clearly, access to culture to bars, to communities is just completely lacking at the moment, for lockdown purposes. But also the quality of interaction, which matters precisely to say, especially for new starters, in businesses, people who are learning the ropes of how an environment functions, that quality of interaction is definitely lost in the process. So what does all that mean, then for hybrid working patterns? Which there's been much talk about. We'll spend some days in the office and some days at home, we won't travel, burn carbon, to go to a city centre, just to do emails that we could do at home. Is that a sort of the pattern of city centre occupation that you would be expecting to prevail post-pandemic?

Bridget

Yes. But I think that there are some difficult consequences of all of that. So if we're right, that when people are in the office, they need to be with everybody else in the office, then you're looking at still a quite an intense occupation. But on a more restricted number of days. So maybe it's work at home Monday, Friday, and you're in the office Tuesday, Wednesday, Thursday. But if you want to be in the office, you want, you want to be able to meet people, I had a really interesting experience of my latter days at the Greater London Authority when I was Chief Economist. And there was the office was utterly overcrowded. So everybody started hot desking. And you could never be sure if you went in whether anybody else was going to be there or not. So effectively, I just stopped going in. Because what was the point? But there was a point to go and if I'd known that I could engage with people and sit down and have a chat and see what was going on and all of that stuff. And so I think that that combination is going to be very important. And of course, that has consequences for the cost of running your office, you still need the space, but it's not going to be occupied so intensely, you probably need to reconfigure how it's being used and the social space and the desk space. On the other hand, people won't be want to be sitting quite close together, I think for quite a while. So that sort of you know, squash them in 100 square feet per person, and it's 200 square feet per person was the standard 20 years ago and we squeezed it, squeeze it, squeezed it. I think we need to think about how you can spread that out again. Again, consequences potentially for rental levels, and also enormous consequences for the transport system. So if you're going to be needing to run the transport system, at it sort of previous levels three days a week, but a much lower levels five days a week, or indeed a more spread out because in fact before the pandemic, the level of utilisation of the system was evening. So there were already fewer people coming in on Mondays and Fridays anyway. So we were seeing that. So all of this is done is intensified that that pace of change, and much more use at weekends. But of course, the finances of the transport system and the commuting system, particularly in London, but public transport it not so clear outside London, incidentally, we might talk about that separately. But in London, the transport system is relied upon the underground, the finances of the underground, and if that's going to be used less intensively, then either the fares have to go up, or the taxpayer has to step into the breach. At the moment the taxpayer is stepping into the breach. But that cannot continue forever.

Paul

Well, let's talk about what it means then for other cities other than London. And it seems to me there's some intersection here with a broader policy aim of our current government levelling up of the regions and how activity might move out of one particular enormous city, London to elsewhere in the UK. How do other city regions embrace the sort of structural change that these post-pandemic patterns of commuting and using city centres? I mean, does that really hinder levelling up and the development of, of economic activity outside of London? Or is it helpful, because turns out, you don't always, seven days a week or five days a week have to be in London to do economic activity.

Bridget

I think that's going to be a very complicated set of dynamics. And it's not clear who the winners are going to be in that actually. So if you think about say in Manchester, where they've spent 30 years really turning around that economy. With very strong civic leadership in the past with Richard Leese and Howard Bernstein, and really made a difference to Manchester. They recognised that they had to go out and get the money themselves, they recognised they needed the investment, they rebuilt the centre of Manchester, and particularly after all of their very sad Well, some people say rather positive bombing of the onside centre, and the ability to redevelop that. What you've then got to do, of course, it's still a very small centre, if you compare it to London. So what you want to do is continue to increase that. And that means being able to bring in people on a public transport system, because that's the only way you can do that you cannot allow massive private transport via cars. You get the pollution problems, but it's a space problem, it's a congestion problem. So managing that public transport, the park and rides or whatever it is, that you will need to do to generate that is going to be the most important thing. And that's where they are now up in arms offshore, in Manchester in the north, generally about cutting the budgets for transport for the North, because that's the way that they could think about that. It's not just about the intercity stuff, the HS2s Northern Powerhouse Rail, it's about that intracity. And how you create that integrated system where you can think about where the development is going to go. And you can think about how the transport system is going to go. The national Infrastructure Commission, we've been very clear and we've fought hard to continue to make the point that devolution to cities is really important, because only they can see those linkages. You can't do it from Whitehall. Doesn't work. You need to give that power and the funding to cities like Manchester and Leeds and Birmingham to enable them to make those decisions. And I'm really worried that the government isn't allowing that to happen. They think that levelling up happens from Whitehall. I mean, sorry, no.

Paul

Yeah, there are interesting interactions here with English. This question of English devolution of the power that go to city mayors. Of course, there's been some, it's been an interesting political issue over the past year, in fact, the push and pull of the powers of City Mayors and central government. But clearly, those local powers will be required to pursue the levelling up agenda properly.

Bridget

I think also, the other challenge about that, of course, is that to do the levelling up agenda, you need to be able to create effective relationships between cities and allow them and create a framework which will allow them to do the right investments. And, again, make the linkages to other investments and particularly other property investments when they're thinking about their transport systems. Even say between Oxford and Cambridge, which you think would be a no brainer as to the we need to invest in that, that they still haven't managed to create a proper framework to allow that investment to go ahead, and to allow there to be a proper integration between, say, the east west rail project, and where you're going to put new settlements and major development.

Paul

So we've talked a lot about what it might mean for offices, the layout of offices, the occupation density of offices, and what it means for economic and transport infrastructure. Are there implications for retail hospitality. And of course, that is a sector enormously hurt at the moment and suffering from lockdown measures. As you say, the easings of lockdown that have occurred have actually seen to me very surprising, rapid increases in the number of people who want to visit bars, hospitality settings telling you that that underlying desire to be together in those kinds of settings is absolutely there. But are those kinds of settings and investors in those real estate asset classes going to have to think differently, as well.

Bridget

On the retail side, definitely need to think differently. After all, one of the main things the pandemic has done is to accelerate changes which are happening anyway. So the change for a more limited number of days in the office was happening anyway. And a move to online retailers afterall has been happening for ages now. So what is the role of A. the high street, if indeed the high street exists, or indeed any form of retail? Do people actually want to go and look at the things they are going to buy? And in many areas, perhaps not. But it's but it is interesting, actually, that say we take books. So books after all, Amazon started off its life as a book, retailer and music. And that became the core of the first success. And bookshops closed. But book shops have started reopening, or at least they were reopening or still people were starting book shops, because actually, there is an interest in browsing. And there was an interest in particularly in local book shops in smaller places. So I think there's going to be a bit of a, a lot of people will lose money, because they will start things that don't quite work. But I think the desire to look at things won't have gone away. The moment I can think of things that I would much rather not be buying online, but equally things that I'm very happy just to buy online and get them delivered tomorrow by Amazon Prime and Yay, don't have to worry about that I know exactly what I want. I just want to get it. So then there's the things that I don't want to buy, I want to go and look at it, I want to go and think about do I want that or do I not want that? Is that going to work? All of those things. So I think that say shop fronts, display, maybe not. Do then go away and get it delivered. You don't have to carry it home with you all of those sorts of things that bricks and clicks mortar model. I think there's probably some legs in that one. But I think there's going to be some risks too and some of the established names will continue to disappear.

Paul

So I'm interested taking a step back, the death of geography is a much sort of talked about trend in global macroeconomics a thought for a long time was you need to be close to other countries to trade with them. And geography and proximity matters. And I think much of the art of the success of cities is the same concept that proximity matters. And we've argued that there still is an important element in which that is true. But do you think it exerts quite the same gravitational pull on our economic activity? As it once did? There must be a lot of opportunity for collaboration at great distances enabled by video conferencing like we're doing now. And then in turn, this has implications for the amount we travel internationally. It's difficult to imagine business travel budgets returning to what they are. So can we link this kind of the future of cities to this broader concept of the death of geography in economics, or is that as a sort of a concept actually much over heralded.

Bridget

And I think there's layers to that. So there's areas where, yes, actions at a distance, if you like, is going to become more prevalent. As you say, business travel is probably going, to be reduced, more things will happen on a video conference, but not everything will happen on a video conference. Establishing a relationship of trust, will still involve some travel, perhaps less than before. But some. Going to sign the contract, looking the guy in the eyes. And, you know, making sure that you really do think that this thing can happen, that's still going to be important. So all of that continues to be true. I think the other bit of this, but at another level, and how manufacturing works, may well be changing back to some increases in propinquity, if you like. So the pressure to reduce energy use, for example, means that shipping components and, well maybe shipping components more, but shipping finished goods less, that's one possibility. So that you bring more stuff home, as we brought call centres home, incidentally, in many, many senses. You know, you're in BT now you get somebody in this country, not somebody in India. So how is that different levels of integration and different levels of particularly the physical component tree, the services you're providing, the people with whom you need to engage, the services that you need to supply, and then the expert systems that you're going to use. So the other part of this, which we haven't kind of talked about really is, is the use of expert systems and AI and all of that. And the extent to which that means that you're using software to do something, rather than trying to find cheap labour to do it. So after a lot of that death of distance argument was all about cheap labour. In other countries, in China, and then in the Philippines, and then in Vietnam, Thailand, Malaysia. If you can use a software instead, then that actually will become less relevant. And in any case, hopefully, attenuate, the wage rates in these places will rise, because that is the way that they get better off. So some of that we've already seen that in the way that some of these activities like clothing, for example, have textile manufactured, moved from one country where they got established, then the wage rates went up similar to another country, and wage rates went up. And so it goes and that's, that's a good process, the wage rates going up. For people who are in poverty, that's a really great way in which markets, capitalist system actually improves people's lives, increases their health and all these sorts of things. So long as you're making sure you're not exploiting it, things bloating, child labour, and so on. So how that dynamic will continue to evolve, when the costs that the focus on carbon, so this is not so much the pandemic, but the other piece of this the climate change, urgency, how that's going to change the patterns of global trade, or needs to keep a close eye on and how individual companies are changing their supply chains to respond to that. So I think both climate change and the pandemic have made people think more about shortening their supply chains, and making them more flexible and responsive. And that brings propinquity. It needs to be near. You can't, you know, order massive set of containers. And they're going to arrive six months later, it's not going to work.

Paul

Why don't we close then with some of these questions of technological change? We did a recent podcast episode, in fact, on the innovation consequences of the crisis as a potential silver lining of the COVID crisis. So one aspect of this is that cities themselves are being an enormous engine of productivity growth, because of the mechanisms we've been talking about, to the extent that some of that agglomeration doesn't return fully that is that a potential threat to the path of productivity. But more broadly, I mean productivity, and the slow decline in the growth rate of productivity has been an overarching macroeconomic policy concern for decades now. Do you see the Coronavirus crisis as having this potential silver lining? Or perhaps the, the need to deal with the climate change crisis is having the silver lining of spurring productivity enhancing technological change, and ended up being a sort of a silver lining of this whole experience.

Bridget

And this is the view that economists would generally take, and I share it. I recall, ages ago, a meeting with some climate scientists before business became, 20 years or so ago I guess, and the economists, they were talking about innovation would solve some of these problems, and the climate guys would go, "Why? No, doesn't happen". But actually, it does. And we've seen that, and we just need, we need to continue to push for people to be able to come together to come up with those ideas. And that actually is when periods of uncertainty will generate the need for those for cities. And for people to be able to get together in them. They may then go back and do some more work in their labs, or whatever. But it's that mix that really drives human ingenuity. So I think that any kind of uncertainty, bit like the dawn of the computer age, brings people together in cities, then those will that will continue really, really, really importantly to matter. And we need to make sure that companies recognise that actually, and help them to recognise that and that closing down their city central offices isn't necessarily the most sensible thing to do. So that spur to innovation is definitely there. We've seen that with the vaccine. 10 years to a year, who knew who knew, so that when something really has to be done, then people get together and they are enabled, and they know they want to do it. So the spurt of innovation, yes. The other part of that, however, is getting the innovation to be effective. Right? It's not just coming up with a vaccine, it's actually getting regulatory approvals, manufacturing it, making sure you've got the right quality of manufacture, and then of course, the distribution system, to deliver it. All of these things are going to be equally important. And all of them have to come together to make anything, whether it's a vaccine or anything else, really, really work. I'm not sure about the productivity. Incidentally, I'm not even sure of that. I believe that productivity statistics, are we really able to measure productivity? And what's your productivity? How do you know? What's mine? How do I how does anybody know what the productivity is of a board member or an analyst for Aberdeen Standard Investments, these things are incredibly difficult. And I think, you know, when it was PYGAR, and that was kind of easy. Well, I'm not sure that I want to drive too much policy on the basis of those kinds of statistics, because I'm not sure I believe them.

Paul

Yeah, absolutely. The mis measurement of productivity, it's an enormous debate, perhaps a future podcast episode.

Bridget

Indeed, Yes.

Paul

Well Bridget Rosewell thank you very much. That was a very interesting wide ranging conversation. We greatly appreciate your time.

Bridget

It's been lovely to speak to you.

Paul

Thank you for listening to Macro Matters. We have a mailbox now, macromatters@aberdeenstandard.com. We'd love to hear from you. If you want to email us please bear in mind that email is not a secure form of communication to send us anything personal on there. But if you would like to suggest topics to see covered feedback, you want to talk to myself and Steph about the podcast please do drop us an email macromatters@aberdeenstandard.com. Don't forget to like or subscribe on your favourite podcast platform. And next week, Steph is back talking about the first 100 days of the Biden administration. What are the President's priorities? What can he get done? What does it mean for the economy and investors? But until then, Goodbye and good luck out there.

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