Will Taylor

Banning relegation from the Premier League: More Investment certainty, less excitement?

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There has been a bit of talk recently about abolishing the promotion and relegation system in the English Premier League, mainly coming from the Foreign owners of Premier League clubs. A couple of quotes from this article sum up the argument, which is really about investor certainty:

a growing cartel of owners believe the Premier League should adopt the American franchise model to end financial fears linked to the massive cost of dropping out of the elite

…

Obviously, if I was an American owner and I owned a football club, or I was an Indian owner, I might be thinking I would like to see no promotion or relegation. My investment is going to be safer and my shares are going to go up in value

Relegation results in a massive drop in revenues so I can see an argument that owners will be more willing to invest in the clubs if they know that they will not be regulated. Basically, getting rid of relegation would give more certainty on the firms future cashflows. Interestingly, the Premier League already gives “parachute” payments to relegated clubs to help compensate for this.

The other side of this argument, voiced quite passionately by Sir Alex Ferguson, is that this would “kill English football”. For once, I’m inclined to agree with red nose. The Premier league would be so much more boring without relegation. Given the gulf between the top 6 or so teams and the rest of the 20 team league, the majority of the games would become relatively meaningless. Similarly, the Championship (England’s second division) would become pretty boring too. Given the big prize of promotion would disappear, who would actually care who wins the 2nd division??

Now you are probably wondering where the economics is, this is an economics blog after all. If the league is less exciting due to getting rid of the relegation system then fewer people will watch games on TV, go to games etc.. which means the league will suffer financially. My hypothesis is that supporters of the big teams would be still be just as interested, but supporters of the teams at the mid to bottom end would be less interested and that the Championship would die.

So there is a trade-off here. It’s possible that by giving owners more certainty through a “franchise model” the entire Premier League would become more even as owners would be willing to plow more money into their teams, this may make the league more exciting and make more people watch. But there would be a countervailing effect of potentially less revenue available to teams as fewer people bother tuning in (which is particular important with UEFA’s financial fair play rules coming).

 

Matt Nolan

A point on global income inequality

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From Ezra Klein we have the following:

Those at the 34th percentile of income in the United States are at the 90th percentile globally, and those at the 50th percentile in the United States are at the 93rd percentile globally. Even the very poorest Americans — those at the 2nd percentile of income in the United States — are at the 62nd percentile globally.

So a person who represents the poorest 2% in the US has more income than 62% of the worlds population – and don’t forget this excludes the implicit security net you gain by being in a developed economy (and excludes the fact that wealth disparities may be more significant at a global level). And the following graph:

Now I would note that the fact that there is global inequality does not imply that domestic inequality is “fair” – or that policy is appropriate.  But it does imply that there are other more important sources of income inequality in the world.

Another thing, the key issue isn’t inequality of income – it is inequality of opportunity.  The fact that people in the developed world restrict the movement of labour, and do not help improve institutions in poor countries, is doing more to reduce equality of opportunity than anything.

In NZ, I came from a poor family in a country town – thanks to the way the country is structured I have been able to borrow, invest in my human capital, and work my way up to be an economist and live comfortably.  That sort of mobility on the basis of effort is what we want in society.  And this is the thing that people born in poor countries do not have access to, which is why the real injustice is being perpetrated on these people.

Matt Nolan

The importance of incentives

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This story is a great example of how institutions can shape incentives, in order to change outcomes.

The women of Barbacoas, Colombia have ended a three-month, 19-day “crossed legs” strike of sexual abstinence aimed at getting a road to their isolated town paved, after officials pledged to invest in the project.

The money quote is:

“The men’s first reaction was laughter, because they found the way we were protesting very curious,” Silva said.

Then reality set in, and work on the road finally began last week as the government had promised.

Now, my question is – is this optimal or not?

On one side, the women were signaling the high value they place on the project through their actions – and are in one sense trading sex for a road.

On the other hand, the women are in a position of power – and are changing the bargaining position so that they can extract more surplus from this trade.

Truly, there is economics everywhere

Matt Nolan

Moral hazard: The case to increase regulation

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This piece from Vox Eu provides a good run down of one of the issues of that exists when we have a central bank as a lender of last resort – moral hazard.

The prospect of receiving liquidity support may distort banks’ risk-taking incentives to a much larger extent than has been acknowledged up to now. In particular, in addition to stimulating excessive maturity transformation, the prospect of receiving liquidity support provides banks with an incentive to increase their leverage, diversify their asset portfolio, lower their lending standards, and to do so in a procyclical manner.

As long as we need a lender of last resort to prevent against bank runs – we also need to lean against the moral hazard implicit in any of this sort of support.

The question I have is, how do we then try to make banks price in the full social risk of their actions, when they are protected in the “worst case scenario”.  In essence this suggests there is some “externality” and so we will want to have some type of “externality tax” for these banks.

However, this is an issue we need to look into, I see the argument as follows:

  1. We require a lender of last resort function for central banks, to prevent bank runs on solvent banks facing liquidity issues.
  2. However, this function creates a moral hazard problem – because some of the downside risk is socialised
  3. Given that, how can we solve the moral hazard issue?

This is one of those cases where the initial issue (bank runs) is serious enough that it seems worth dealing with the unintended consequences directly – instead of dumping the policy of a “lender of last resort” completely 😉

Matt Nolan

A message to tomorrow’s protesters

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Update:  The protest that I’m arguing against in the first half of the post isn’t till the 5th of November (thanks Seamus!).  However, my main critique in the second half applies to both protests insofar as the first protest is focused on inequality again.

Personally I AGREE with a some of the issues being put down for the first protest – and would potentially head along if it wasn’t that the bullshit inequality line is being sold so hard (including in the picture for the site).  Sigh

I see that a number of people have decided that, on Saturday, they are going to camp outside the Reserve Bank of New Zealand in Wellington to protest.  After seeing a similar protest on Wall Street these protesters have stated that they are the “99%” (a statement that implies that they aren’t part of the 1% that is assumed to own most of the capital) – and they are protesting for “change”.

I understand why people feel worn down, I understand the power and importance of non-violent protest, but I have to say something that will likely upset the protesters and many of my closest friends:

This protest and its message are wrong, and by doing it you both ignoring the real issues in the world and acting in a selfish way – and for that reason I think less of every single one of you.

That’s a pretty damned cutting statement – so let me discuss why I believe this.

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Matt Nolan

Protectionism: What the ….

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The US is pushing to start introducing duties on Chinese goods to make a “level playing field” given the currency “misalignment.

Hold up a second.  China maintains a “low” exchange rate by “saving” too much – and using that savings to do things like by US currency and bonds right.  Any subsidy on Chinese exports is “implicit”.

If  this is indeed the case, introducing duties is not the way to go about things – and by ignoring the central issue it will at best lead to an uncomfortable situation and poorer US consumers, and at worst will lead to a full scale trade war and a severe economic crisis.

If you think that having China save excessively creates risks to your own economy (as that sort of subsidy actually sounds pretty welfare enhancing in a direct sense – so we need to think about risks), then deal with it directly – eg by taxing capital flows from that specific country.  Don’t start rubbish protectionism.