The Billion Pound Drop: Did the Blitz enhance London’s Economy?

The Blitz lasted from September 1940 to May 1941, during which the Luftwaffe dropped 18,291 tons of high explosives and countless incendiaries across Greater London. Although these attacks have now largely faded from living memory, our recent paper ”The Billion Pound Drop” shows that the impact of the Blitz remains evident to this day in London in both its physical landscape and economy.

Using recently digitised National Archive records on the locations of all bombs dropped during the Blitz (see Figure 1 below), we compare the locations of Blitz bomb strikes with local differences in London’s modern-day building heights, employment levels and office rental prices. After controlling for the central concentration of bombs, we find that local areas which were more heavily bombed during the Blitz have more permissive development restrictions, more office space, and consequently higher worker densities today. For example, as Figure 2 (see below) illustrates, the eastern core of the City of London, which was heavily bombed, is today an area in the City of London where tall buildings are permitted. Figure 2 also illustrates that at a local level bomb strikes are pretty much random.

Consistent with considerable empirical evidence from other cities, the consequence of this higher worker density in London has been greater worker productivity (which we proxy with office rents). What is new about this research, however, is the magnitude of measured effects. Whereas previous research has primarily sampled secondary cities and has generally found that a doubling in worker density raises productivity by only about 5% (as measured by wages), even after extensive sensitivity tests our paper shows an increase in rents in London of 25%. We argue that this difference is largely due to London’s unique position as perhaps the world’s foremost financial and commercial centre, and that the benefits of greater worker density here are likely to be exceptionally large.

City planners are tasked with controlling development in order to separate incompatible land uses and to mitigate the costs of congestion, such as traffic. However, these restrictions (especially building height limits) entail various costs— for example, higher property prices and greater price volatility. Equally significant is the fact that constraining worker density damages the productivity of the economy. For many historical reasons London has one of the most restrictive planning regimes in the developed world. Based on back-of-the-envelope calculations, we estimate that the value of the Blitz to London, in terms of its having reduced the restrictiveness of its planning regime, is £4.5bn annually, equivalent to 1.2% of London’s GDP — or 39% of its average annual growth rate.

Ideally, planners would calibrate the stringency of development controls to ensure that society makes the best trade-off between the costs and benefits of greater worker densities. However, in order to make this judgement, planners require accurate information on both these costs and benefits. What our research now shows is that for the case of London, and perhaps other global cities such as New York and Tokyo, the benefits of greater worker density appear to be much larger than anyone had previously surmised. Consequently, if welfare maximization is indeed the primary goal of city-planners, then, at least in those cities, planners should now be reviewing the stringency of their height restrictions and new development controls more generally.

The Blitz was a tragic episode in London’s history, the likes of which one only hopes will never be repeated. Despite the enormous human cost, however, the Blitz has subsequently had an extremely positive effect on London’s present day economy— chiefly through the local relaxation of the restrictive planning regime put in place after the war. Furthermore, this lasting influence has now provided us with unique insights into our understanding of urban economics, and spotlights the exceptional dynamism of this enduring city.

Reference

Gerard Dericks and Hans Koster, “The Billion Pound Drop: The Blitz and Agglomeration Economics in London“, Discussion Paper No 1542 of London School of Economic’s Centre for Economic Performance.