Football stadiums and economics

With the start of the EPL this weekend I thought it appropriate to look at something related to football. Teams in the EPL and other domestic leagues often look for funding from the government to build stadiums with the rationale that the investment will attract consumers and businesses to the local area. This suggests that a multiplier effect would be at work and the benefits to the area go beyond that of the football field.

The size of the multiplier is influenced by how much of extra income is spent on domestically produced products. The more that is passed on in the circular flow, the larger will be the multiplier. This means that the size of the multiplier varies inversely with the tendency for extra income to be withdrawn from the circular flow – the marginal propensity to withdraw. It is calculated by 1/marginal propensity to withdraw. In the case of a two sector economy, this is I divided by the marginal propensity to save (mps). For example, if people save $20 out of an increase in income of $100, the mps will be 0.2 and the multiplier will be 1/0.2 = 5.

Cities with new stadiums initially create jobs and growth but in the long-term there is little economic benefit. Why?

  1. For all their cultural significance, sports tams are not very big businesses and so their overall impact is small in most cities of any size.
  2. If local residents spend more at the stadium they are likely to reduce spending elsewhere which will impact on local businesses.
  3. A stadium may attract more visitors from outside the area who inject money into the local economy, but the multiplier effect is likely to be small because many of the services they consume will actually come from outside the area – e.g. food and beverages may be shipped in from elsewhere.

If you look at previous World Cups or European Championships there tends to be the same issues as mentioned above

The 2010 World Cup in South Africa saw Soccer City, the largest sports venue in Africa, undergo a £300 million renovation which costs £250,000 a month to maintain. It is the stadium for the Kaizer Chiefs and Orlando Pirates but is rarely full and has struggles to make revenue from other sources. See below:

Brazil spent about $3 billion building 12 new or heavily refurbished stadiums for the 2014 World Cup. Officials justified the expense by saying that the stadiums would generate revenue for years to come with Brazilian football premier league games and rock concerts but most stadiums are failing to generate any revenue. The most expensive stadium in Brasilia – 72,000 seater and a $900 million venue – is used a bus parking lot. A big issue here was that there was no major professional football team in the city so therefore limited crowds would be present. Although the organisers rationale was to improve facilities around the country there are white elephants evident – in some locations teams cannot afford the rental so will play at much smaller venues. A $600m stadium in Manaus was used for 4 World Cup games but is now empty which is not surprising as the city itself has a lower division football team who don’t have the finances. What people forget is that, although the stadiums might look good and are used to host the biggest sporting event in the world, a large number of people are displaced and neighbourhoods disestablished. But organisers say that it will add to the well-being of the population especially if the host side wins – however this has not been the case for Brazil – in fact as we know it turned out to be a bit of a trashing in the semi-final against Germany. It will be interesting to see the use of stadiums in Russia after the World Cup just gone but one cannot doubt that the morale of the Russian people was significantly boosted by their teams performance.

Least educated workers a symbol of recovering US economy

During the GFC the American workers who suffered the most were those without a high school diploma – their unemployment rate was 15.6% in the summer of 2009 more than three times the peak unemployment rate for college graduates – refers to cyclical unemployment. Furthermore this particular group of unemployed were also those that found it hardest to get back into employment. However by July this year the Labour Department recorded that the unemployment rate for those without a high school diploma fell to 5.1 percent in July this year. This is surprising considering that low-skilled workers, who makeup 7.2% fo the labour force, were seen as the least likely to recover from a recession

Cyclical unemployment (or demand deficient) occurs when there is not enough demand to employ all those who want to work. It is a type that Keynesian economists focus on particularly, as they believe it happens when there is a disequilibrium in the economy. It is also often known as cyclical unemployment because it will vary with the trade cycle. When the economy is booming, there will be lots of demand and so firms will be employing large numbers of workers. Demand-deficient unemployment will at this stage of the cycle be fairly low. If the economy slows down, then demand will begin to fall. When this happens firms will begin to lay workers off as they do not need to produce so much. Demand-deficient unemployment rises. The behaviour of demand-deficient unemployment will exactly mirror the trade cycle.

The increasing trade war between the USA and China seems to have done little to put a damper on hiring. The manufacturing sector, which is particularly sensitive to exports, was robust, adding 37,000 jobs.

Source: New York Times – 2nd August 2018

New Zealand’s Neutral Rate of Interest

A speech delivered last July by John McDermott (Assistant Governor and Head of Economics at the RBNZ) talked about the neutral rate of interest. Central Banks have often used the term ‘the neutral rate’ which refers to a rate of interest that neither stimulates the economy nor restrains economic growth. This rate is often defined as the rate which is consistent with full employment, trend growth, and stable prices – an economy where neither expansionary nor contractionary measures need to be implemented.

The neutral interest rate is the rate of interest where desired savings equal desired investment, and can be thought of as the level of the OCR that is neither contractionary nor expansionary for the economy.

OCR > Neutral Rate = Contractionary and slowing down the economy
OCR < Neutral Rate = Expansionary and speeding up the economy

The RBNZ’s last published estimate of the neutral OCR was in June 2017 at 3.5%, with a range of estimates around that between 2.6% to 4.6%. Like many other countries, the neutral cash rate in NZ is estimated to have been declining over many years.

Since the GFC neutral rates around the world have been falling which reflects the following:

  1.  Lower expectations about growth in the economy = reduces the return to investment
  2.  Relative to pre-GFC, a wider spread between the central bank rate and the interest rates faced by households and businesses (i.e. mortgages and business lending rates).
  3. An increase in global desired savings. For instance, demographic trends offshore have led to an increase in saving among the cohort of the population going through prime earning years (as they save for retirement). Likewise, increased income inequality is thought to increase desired savings, as top income earners typically have a lower marginal propensity to consume – MPC.
  4. Higher debt ratios in some countries (including NZ) make the economy more sensitive to interest rate increases than before.

Central Banks don’t have the independence to set the neutral rate as it is very much influenced by global forces. However they do have independence as to where they set their policy rate relative to the neutral rate.

Source: BNZ – Interest Rate Research – 14th June 2018

Clean energy – winners and losers

The impact of energy flows on the power and influence of nations has mostly been about the need for oil. Securing oil supply by ensuring its shipment, protecting the countries that produce it to the extent of going to war in an oil producing country has been prevalent in the 20th century. Oil being inelastic in demand has meant that as it becomes more scarce the price increases will result in higher revenue for the oil producing oligopoly. Countries dependent on the importing of oil have been at the wrath of higher oil prices caused by embargoes, wars, a financial crisis to name but a few – see graph below.

In fact the USA has been the most aggressive in protecting its oil supply to the extent that it saw it as their right to use military force in the Middle East – 2003 – second Iraq War. The reason given was to remove Saddam Hussein but this just disguised their real motive was to protect the oil fields. If they were so concerned about Saddam Hussein’s regime why didn’t they do anything about Robert Mugabe in Zimbabwe? The answer is Zimbabwe doesn’t have oil. Remember the Gulf War in 1990 was a UN sanctioned operation involving many countries not just the USA and UK.

However the idea of scarcity is coming to an end thanks to 3 big developments.

  1. The shale revolution in the US has lead to them being the biggest combined producer of oil and gas – the US now pumps 10m barrels a day and it is making the country less reliant on imported oil. Also increases in US supply has added to the global market reducing the price.
  2. China is now moving to a more service based economy and in the process is moderating its demand for coal and oil, slowing the consumption of electricity. More importantly though it is deploying gas and renewable energies and stopping the growth of carbon-dioxide emissions. It’s dependence on imported fossils fuels has been the catalyst to develop more of its own wind and sunlight for energy sources as well as it planner more electric vehicles.
  3. Climate change requires low-carbon energy and the Paris accord of 2015 is a start to fight climate change. To achieve this goal trillions of dollars will have to be invested in wind and solar energy, batteries, electricity grids and a range of more experimental clean-energy sources. Ultimately this creates significant competition between countries in developing these technologies but also but at risk the access to rare earths and minerals to make the hardware. It seems that energy is now driven by the technology not the natural resource we are so used to.

Energy transitions since the Industrial Revolution has seen the following:

Coal ——> oil ——> technology and clean energy.

The obvious losers from this change will be those who have an endowment of fossil-fuel reserves and have relied for too long on oil without reforming their economies.

Traditional energy system (oil etc) is constrained by scarcity
The abundant renewable energy system is contained by variability

Ultimately the challenge for countries in future will be who can produce the most energy and who has the best technology. Those that don’t embrace clean-energy transition will be losers in the future.

Source: The Economist – Special Report ‘The Geopolitics of Energy’ 17th March 2018

Looks like inflation might hit 2% in New Zealand

The ASB Bank produce a very good Economic Report and below are some of the points they make with regard to inflationary pressures – useful for NCEA Level 2 and 3 as well as CIE AS and A2 level. The CPI will be on the rise with higher global commodity prices (see graph below) as well as the weakening NZ dollar which in turn makes imports more expensive.

  • Commodity-price related influences are expected to directly contribute around 1 percentage point to annual CPI inflation over 2018. The direct impact is expected to wane.
  • The period of retail deflation looks like it might be coming to an end. The lower NZD and pending increases in wage costs could see this component add to inflation. The extent to which prices will firm will depend on retail margins.
  • Administered price increases will add roughly half a percentage point to annual inflation despite the impact of the free tertiary fees policy. Higher prices for tobacco and local authority rates seem to be a fact of life: one driven by health objectives, the other by perennial infrastructure demand and a lack of competitive pressure.
  • The labour market is likely to become more of a source of price increases. We note that higher wages need not impact on consumer prices if they are offset by a corresponding increase in labour productivity/trimming in producer margins.
  • Price increases from the housing group are expected to subside. It is no longer a sellers’ market for existing dwellings. The balance of power for building work looks to be increasingly shifting towards the customer and away from the provider. Rental dwelling inflation is expected to remain moderate.

Breakdown of CPI Weighting

Source: ASB Bank – Economic Note – Inflation Watch 26 July 2018

Satisfaction-maximising gifts versus favour reaction-maximising gifts.

A recent research paper entitled “The Smile-Seeking Hypothesis: How Immediate Affective Reactions Motivate and Reward Gift Giving” by Adelle X. Yang, Oleg Urminsky discussed the fact that when we decide on gifts for others we often do not choose what the recipient really desires. It is assumed that the person giving the gift wants to be rewarded with a non-monetary currency called ‘gratitude’ – this can be in the form of hugs, kisses and smiles. It is the latter (smiles) that the research focuses on and asks the question is gratitude creating poor incentives. Prior research has generally explained such preference mismatches as decision makers mispredicting recipients’ satisfaction. They propose that “smile-seeking” motive is a distinct cause for these mismatches in the context of gift giving.

The gift giver has the choice of getting an affective reaction to the gift versus the gift’s long-term utility – satisfaction. Adelle X. Yang, Oleg Urminsky framed an experiment around Valentines Day. They picked 3 pairs of appropriate gifts – one of which would be more likely to induce an appreciative response versus a gift more likely to have more long-term satisfaction:

They recruited 295 volunteers online on 13th February, the day before Valentine’s Day, in order to standardise and have an appropriate mood. They were asked the following:

  • Men were asked which of each pair they would give as a gift
  • Women asked which they would prefer to receive
  • Men and women asked to predict how much affection would be displayed by the receiver for a particular gift and which would create the greater long-term utility.

Results

Men seemed to go for the gift that would induce hugs and smiles over the long-term satisfaction of the present. Women on the whole were the opposite except for the biscuits and the fruit – the majority of women preferred the sugar boost over the long-term benefit of healthy fruit. This is despite what they had said about the long-term value of fruit.

If the gratitude market was working correctly the long-term option would be more appropriate.

Cash as a gift – is it rational?

I have blogged on this topic before using an episode of Seinfeld. It seems rational that Jerry gives Elaine $182 for her birthday but it really is inappropriate. Cash replaces social norms by market norms and ruins the feelings usually evoked by a typical non-cash birthday gift. The deadweight loss of giving is the loss of efficiency that occurs when the value of the gift to the recipient is less than the cost of the gift to the giver. In this case, economists argue that cash would be a more efficient gift. See video below.

Source: The Economist ‘The Economics of Gifts’ –  June 30th 2018

10 years on and the financial system is still fragile

Nassim Taleb of “Black Swan” fame has a new book out entitled “Skin in the Game”. Below is an interview with John Solman of PBS ‘Making Sense’. In this he argues:

  • a financial system works only if the people who are running it have a stake in the outcome.
  • a society should be built around risk and reward – if you make good decisions you do well but if something goes wrong you are penalised.
  • Currently profit is privatised and loss is socialised, where the taxpayer only has a downside and will never have the benefit of what’s going on.
  • The financial system is at risk if people can make money transferring risk to others and aren’t penalised. Dangerous, unfair and immoral
  • The Federal Reserve tried to cure debt with debt, transferring debt from one to the other, from the private to the public.
  • The system loaded — laden with debt and with pseudo experts will collapse eventually.

Global Debt – 225% of GDP

The New Zealand Parliamentary Library publish a very good monthly economic review and in the July edition the topic of the month was The International Monetary Fund’s Global Debt Database.

The IMF publish their Global Debt Database which provides the gross debt levels since 1950 for 190 advanced economies, emerging market economies and low-income countries. It covers 99% of global GDP in 2016. Currently, total debt levels have reached a new high, standing at around US$164 trillion, or 225% of global GDP with USA, China and Japan accounting for more than half this figure – $92trn out of $164trn – see table.

The big change is China with debt having gone from $5trn to $26trn in the space of 10 years – this equates to 3% of global debt in 2007 to 15% in 2016. Private debt has nearly tripled since 1950.

Government vs Private Debt in New Zealand

New Zealand government debt has been on its way down which is in contrast to its private debt – see figures and graph below. Not surprisingly the IMF is concerned about private debt and the effects of the country’s inflated housing market despite the strong economic outlook. They said “Household debt remains high under the baseline outlook and would amplify the impact of large downside shocks, notwithstanding recent improvements in its risk structure after macroprudential policy intervention. Such shocks could also trigger a disruptive housing market correction,” The main risks to New Zealand are an economic slowdown amongst developed countries and China, the fallout from increasing protectionism and the Mycoplasma bovis cow disease.

Source: New Zealand Parliamentary Library – Monthly Economic Review – July 2018

World Cup – the economics of faking an injury.

As the World Cup enters the quarter final stage we have seen the same old tricks played by players to try and influence the decision of the referee.

  • France’s Lucas Hernandez admitted to flopping in France’s 2-1 win against Australia in an attempt to get Australian midfielder Mathew Leckie sent off.
  • Spanish defender Gerard Piqué accused Portugal’s captain Cristiano Ronaldo of exaggerating a fall to secure a penalty kick in their 3-3 nail-biter. Piqué said Ronaldo has a habit of “throwing himself to the ground.”
  • Neymar rolling around in what seemed to be excruciating pain when there was contact on his ankle and that was on the sideline. What would he have done if it was in the penalty area and Brazil were 0-1 down?

That being said it was hoped that the VAR system would start to see this sort of tactic removed from the ‘beautiful game’. Some of the techniques of faking an injury are below – HT to Kanchan Bandyopadhyay.

The Economist has looked at this area and I thought that I would delve a little deeper. There is no doubt that if you study the costs and benefits of faking an injury there are certain sports where it is perceived as quite worthwhile – i.e. the benefits outweigh the costs. Cost benefit analysis is part of Unit 3 of the AS Level course. What is cost-benefit analysis (CBA)?

Cost Benefit Analysis (CBA) refers to estimating the private and external benefits of an investment project – airport, rail link, road etc against the private and external costs. Once these costs/benefits are established a decision is made as to whether the project should go ahead.

CBA can be applied to any decision you make and below is a table outlining the cost and benefit of faking a peanalty or injury in particular sports. I see the benefit in soccer of diving in the box and being awarded a penalty outweigh the costs by a significant amount. Firstly, if the appeal for a penalty is turned down it is very unlikely that the referee will administer any punishment to the player faking a foul. In too many cases they are happy to let the game play on as they feel under so much pressure anyway for not awarding it. Whilst in ice-hockey a suspension of either 2 or 4 minutes has acted as a deterrent to those caught “embellishing” . I have put some values in the end column which will no doubt encourage a lot of discussion – remember Warren Gatland, the Welsh coach in the Rugby World Cup 2011, considered informing a player to fake an injury so there would be no pushing in the scrums. This was after their captain, Sam Warburton, was sent off early in semi-final against France.

However, with the perceived benefits of diving in soccer it does encourage players to even practice this activity. This reminded me of a great advertisement run by the Guardian Newspaper for the Euro 2004 Soccer Cup – see below

 

 

US and China trade war and what it means.

Doing trade barriers with my NCEA Level 2 class and below is a good clip from Al Jazeera about the issues that are arising from it and who will lose the least from a trade war. The last ten years saw a marked improvement in trade between the United States and China. But Trump’s battle of the tariffs is threatening that. And there are fears of an all-out trade war. The U.S. is putting tariffs on 50 billion dollars worth of Chinese imports. The president says he wants a fairer trade with China. But Beijing’s fired back with a tit-for-tat response. It’s published a list of more than 600 American products it plans to hit with its own taxes. Is it a case of who blinks first in this economic brinkmanship? And what will it mean for global trade? The comments by Philippe LeGrain are particularly good.