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The predictability of the Premier League

The Premier League kicks off again this weekend.  Given the abysmal showing of our boys in the World Cup, a falling off of interest might be expected.  But increasingly, the competition attracts many of the best players from all over the world.    A self-reinforcing process has been set up on a global scale.  The more popular both the League and its individual clubs become across the world, the more money is brought in through TV rights, merchandise sales and so forth.  Even better players can be employed, which increases its attractiveness even further.

Yet this very process makes the competition more boring in the sense that the outcomes at the end of the season become more predictable.  The places really worth playing for are the top five, which guarantee entry into European competitions.  If we step back in time, to the days of the old Football League Division One, which became the Premiership in the 1990s, there was frequent turnover in these elite positions.  Fifty years ago, in 1963/64, the names of the top five are very familiar: Liverpool, Manchester United, Everton, Spurs and Chelsea, in that order.  But both three years before and after, in 1960/61 and 1966/67, just two of these finished in the top five.  Spurs were in fact the only one of the 1963/64 teams to claim a top five slot in each of these three seasons.

In recent years, turnover in positions at the top has atrophied.  Over the past ten seasons of the Premiership, Arsenal have been in the top five in every single one, and both Chelsea and Manchester United have appeared on nine occasions.  Liverpool and Spurs feature in six.  Manchester City muscled their monied way to success in 2009/10 and have been in the top five ever since.  The only rank outsider to finish in the top five in the past decade was Newcastle, squeezing into fifth in 2011/12.  The top half dozen clubs now effectively form a league within a league.

The decline in turnover has accelerated during the lifetime of the Premiership.  The winners in the opening season were, predictably, Manchester United.  But, almost incredibly from the vantage point of 2014, the next five were Aston Villa, Norwich, Blackburn Rovers and QPR.  Even during the first decade, top five turnover fell.  Manchester United filled one of the slots in each of the ten seasons, with Arsenal and Liverpool on eight and seven respectively.  But Leeds, now vanished to the nether regions, was in the top five on seven occasions also.  Other clubs had a chance.

The situation is not so dire as it has been since time immemorial in Scotland.  No team apart from Celtic or Rangers has won the championship since 1985.  Until Rangers went into liquidation in 2012, there was only a single season in which these clubs did not fill the top two slots in the Scottish Premier League.

Perhaps the fans like it this way.  To paraphrase TS Eliot ‘human kind cannot bear too much excitement’.

As published in City AM on Tuesday 12th August

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Is Wayne Rooney an expert in rational economic theory?

So, farewell then England!  Yet another failure by our boys at the highest levels of the game. Despite their stupendous salaries, they seem once again to be unable to exhibit the necessary skills, a point which seems to exercise many fans of the game.  Tens of thousands, if not millions, of words have been written about the purely footballing aspect already.  But one topic which is hiding away under this torrent is the question of incentives.

The salaries in the Premier League and Spain’s La Liga have exploded in recent years.  The average annual first team salary at Manchester City, for example, is £5.3 million a year, just ahead of Real Madrid and Barcelona.  Even QPR pay an average of over £40,000 a week to their first teamers.

The world’s leading club trophy was recently contested not just by two Spanish teams, but by two from the same city, Madrid.  Of course, there is a large influx of foreign talent, especially in the Premier League.  But native English and Spanish players in their domestic competitions not only receive huge payments, they also have their skills sharpened by competing on a regular basis with many of the world’s best players.

It may be no accident that both England and Spain massively underperformed against expectations in the World Cup.  The incentives which players face are to perform for their clubs.  It is the clubs, after all, which pay their wages. Indeed, from a purely financial incentive point of view, playing for your country could have adverse consequences.  Why put that extra one per cent effort into a tackle which might save the game when you might get injured?  From the perspective of the purely rational economic man, this makes perfect sense.

But fans seem to think differently.  For them, non-material incentives really matter. The theme of pride, of the honour and privilege of playing for England are constant refrains in the criticisms of our national side.

Stellar rewards and a sharp focus on purely material incentives have had adverse consequences in other areas of our national life.  Bashing bankers has almost become a national sport in itself.  But, as Keynes remarked, financial markets do perform at least one function which promotes the common weal.  He argued that well adjusted people found activities such as trading intolerably boring.  Many of those successful in this area could only keep at it because of inherent psychopathic tendencies.  The City, he suggested, reduced the level of violent crime by providing them with a safe outlet for their urges.

Of course, as in so many instances, irony was part of Keynes’ repertoire, so we will never know how much he really meant it.  But his musings did contain a serious message, one which is just as relevant today.  There is a growing realisation that monetary incentives are not the only things which should drive the successful.  Most great innovators, for example, relish above all the intellectual thrill.  It is not just the England soccer squad which needs to reappraise its attitudes.

As published in City AM on Tuesday 24th June

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Maybe We Need More Markets and Fewer Regulators

Economics provides us with a really big insight into how the world works. People respond to changes in incentives. A great deal of public policy is based on this principle. You want fewer people to drive into Central London? Introduce a congestion charge and make it more expensive. It works.

In practice, of course, estimating exactly how much any given change in a particular incentive alters behaviour can be a difficult problem. Indeed, changing incentives can sometimes have unforeseen consequences, which may appear perverse.

A couple of months ago, a school in Milton Keynes proposed to fine parents £60 if their child was late more than 10 times in a term. We do not know yet how this has worked out. But a similar scheme in a day care centre in Israel seemed to backfire. After the fine had been introduced, there was a rise, not a fall, in the number of parents delivering their children late. People now knew the price – the fine – for being late. They could then make judgements as to the value of the effort required to arrive on time compared to the cost of being late. Previously, they had only incurred the displeasure of the teacher. A recent book by the Harvard political philosopher Michael Sandel cites this as an example of the intrinsic limits to the use of markets. Social norms, not incentives, matter. His book has metropolitan liberals both here and in America gurgling with pleasure.

But the problem essentially arose not because of the limitations of markets, but because there were too few markets. Without a market, the disapproval could not be priced transparently. Parents just had to guess what this was worth, and they clearly placed on average a higher price on it than the level of the fine set by the school. The school was also at fault for not increasing the fine by trial and error steps until it started to do its intended job.

More challenging is the study carried out by the Frameworks Institute in America on public attitudes towards global warming. The document, ‘How to Talk About Global Warming’, reported that substantial numbers of people, when faced with how they respond to more extreme weather, choose to buy an SUV to help them cope, rather than to support increases in fuel-efficiency standards.

The instinctive response of a regulator to this finding would be to say that these individuals only had access to incomplete information. With more and better information, they would then respond to incentives so that they made the ‘correct’ choice. But more information does not necessarily help. Al Gore’s 2006 film about global warming, ‘An Inconvenient Truth’, received enormous publicity. But the number of Americans telling Gallup that the media was exaggerating global warming has grown from 34 per cent then to 42 percent today.

A popular policy for avoiding a financial crisis is to restrict bankers’ bonuses, giving them different incentives. It may work. But understanding exactly how incentives operate in practice does not always have a pat solution.

As published in City AM on Wednesday 16th April

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Trends in Inequality: Truth and Myth

Concern about inequalities of income and wealth is now a fashionable topic. It featured strongly in the gathering of the world’s top brass at Davos earlier this year. Much of the popular coverage of the topic gives the impression that not only is inequality at record highs, but that it is confined to the wicked Anglo-Saxon economies. A recent paper published by authors linked to the George Soros-funded Institute for New Economic Thinking shows very decisively that neither of these points is true.

Tony Atkinson, former Warden of Nuffield College Oxford, and Salvatore Morelli examine trends in both income and wealth inequalities in 25 countries since 1900. Their work is a very impressive piece of scholarship, requiring detailed examination of a wide range of data sources. Even so, there are often historical gaps where no information is available. Regrettably, too, the study includes neither Russia nor China, socialist societies characterised by massive inequalities. In the old Soviet Union, for example, in the early 1950s the diet on offer to the general population was no better than that in the labour camps, whilst the Party elite luxuriated.

It is certainly the case that inequalities have increased in the UK and the US in recent decades. A crude but widely used measure of inequalities in inco

me and wealth is the so-called Gini coefficient. Theoretically, this can range between 0 and 100. If it is zero, everyone has literally the same amount. If it is 100, one person has all the income or wealth and no-one else has anything. Obviously, these theoretical extremes can never be observed in practice. The key point is that the higher is the GIni, the greater is inequality. Looking at the distribution of income, in Britain in the 1950s and 1960s, the Gini was approximately 30.

Atkinson and Morelli estimate that in America the Gini coefficient was 7 percentage points higher in 2012 than it was in 1980. For the UK, the increase was even higher, at 10 percentage points, though they note that much of this increase took place during the 1980s. Contrary to popular perception, it has not risen sharply since then. The authors also have a measure of ‘relative poverty’, which is even more interesting. The relative poverty rate in 1990 was twice that of 1977, but “overall the poverty rate has been falling since the 1990s”. In America, it has been “constant since about 1970”, although with cyclical variations around this level.Economics_Gini_coefficient

Strikingly, in the Scandinavian countries, often held up as exemplars of ‘fair’ societies, inequality has risen. In Norway, the Gini coefficient for income is 4 percentage points higher than it was in 1986. In Finland, it is 6 percentage points up on its 1990 level. And in Sweden, since the early 1980s, the Gini has increased by no less than 10 percentage points, just the same as the UK.

Atkinson and Morelli do not offer explanations of movements in inequality, but they provide an excellent example of the value of meticulous empirical analysis in economics.

As published in City AM on Wednesday 19th March 2014

Image Source: Volterra 2014

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Frangleterre… Labour Mobility undermines Tax and Spend regimes

Pimlico Plumbers will be a familiar brand to many readers – it has a prominent advert on the approach into Waterloo station. But the company is now calling for plumbers who are fluent in both English and French, and says applicants will be interviewed by a native French speaker. This is just the tip of the iceberg. The original French school in London, the Lycée Français Charles de Gaulle in South Kensington, has been around for many years. Recently, however, it has opened new outposts to meet rapidly rising demand. Entirely new French schools are springing up across the capital.

London is now on the verge of becoming the fifth largest French city, measured in terms of the number of native speakers of the language. To all intents and purposes, London elects a member of the French National Assembly. The constituency covers the whole of the UK, Ireland, and parts of Scandinavia, but the bulk of its electorate lives in London.

Intriguingly, the French MP is a member of the Socialist Party, although she admittedly won by a fairly narrow margin. Cynics may say that it is easy to vote for a tax and spend policy when you do not have to pay. Large parts of the UK have conformed to this model for many years. But the election result suggests that London attracts two distinct groups from France. The sudden surge of French interest in London is undoubtedly in part due to President Hollande’s punitive tax regime on those who are already successful. Equally, however, there has been an influx of young people, who still retain what some would call political idealism and others naivety. Yet the fact that they are here, improving their English, making themselves marketable on an international scale, means that they are the tax base of the future, a dynamic element of society.

The key point is that talent, whether realised or still just potential, is now mobile on a scale unimaginable to previous generations. Combine this with another fact. HMRC now estimates that 30 per cent of all income tax is paid by just 300,000 people, less than 1 per cent of all taxpayers. The premium now placed on skill, and the resulting widening of the income distribution, is a key driver of this outcome. Rising income inequality is not just a feature of Anglo-Saxon economies, but a worldwide phenomenon.

These two developments call into question the long-term viability of the post-Second World War social and political model in Western Europe, based as it is on a state which actively redistributes resources on a large scale.

There is a tremendous ongoing furore about multinational firms avoiding tax, even though for the most part this is perfectly legal. But if governments are sufficiently resolute and willing to act in concert – a big “if” – something could be done about it. Short of building barbed wire fences on borders and bringing in the old Soviet system of internal passports, however, people can always move. And it is the taxpaying base, the dynamic and the successful, that has the greatest ability to do so.

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Have Bankers Been Practising Socialism? The Debate About the Top 1 Per Cent

Boris Johnson has got into trouble for his statement that it is “surely relevant to a conversation about equality” that just 2 per cent of “our species” has an IQ over 130. Over the past couple of years, the Occupy movement has made headlines by attacking the top 1 per cent.

The summer 2013 edition of the top American Journal of Economic Perspectives focuses specifically on the “Top 1 Per Cent”. This is written almost exclusively in English rather than maths, and top economists debate a range of intriguing questions.

Gregory Mankiw of Harvard has a piece entitled simply “Defending the One Per Cent”. Mankiw points out that IQ is “about as heritable as many medical conditions”, as are factors such as self-control and interpersonal skills. Taking this into account, America is truly an equal opportunity society. The specific family environment itself counts for very little. Further, the tax system in the US is very progressive. The poorest fifth pays 1 per cent of its income in federal taxes, the middle fifth 11.1 per cent, and the richest 1 per cent pay 28.9 per cent.

That said, Britain’s Tony Atkinson, with his colleagues, point out that changes in the share of income going to the top 1 per cent have been very different in the Anglo-Saxon economies than in those of Continental Europe. Over the past century, in the US, UK, Canada and Australia the share has followed a U-shape. It was high, fell, and is now back where it was early in the 20th century. In Europe, it looks much more like an L-shape. There has been some increase in recent decades, but the rise is small. They conclude that specific institutional factors must be responsible, since all the developed countries have all faced the same global economic environment.

The Labour Party’s old Clause Four promised to “secure for the workers by hand or by brain the full fruits of their industry”.  It seems to me that in the Anglo-Saxon economies, many “brain workers” have been practising socialism in the most unlikely settings. In Silicon Valley, for example, almost all the value of high-tech start-ups is embodied in their key personnel, who have not been shy of taking large equity stakes. The successful companies generate enormous wealth for a small group. In hedge funds and banking, the “workers” have certainly seized the full fruits. It is precisely in these sectors of the economy where the Anglo-Saxon countries are strong. Hence we see a sharp increase in the share going to the top 1 per cent.

One of the papers raises the question: why has democracy not slowed rising inequality?  People like Steve Jobs are seen as deserving their success because it is based on merit, whereas bankers are vilified. But it is fiendishly difficult to legislate between the two. For centuries, England has wrestled with the problem of the deserving and undeserving poor, the “sturdy beggars” of Elizabeth I’s Poor Laws. The same now applies in reverse to the super-rich.

As published in City AM on Wednesday 11th December 2013

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