Sunday, June 29, 2014

The World Cup is a waste of money

One of the greatest specialists in the economics of big sports events, Victor Matheson, writes in Five Thirty Eight that public money spent in these events are typically a bad investment, and Brazil is no exception to the trend. He says that with a price tag estimated at $11.3 billion in public works spending alone, it will take more than just a trouble-free four-week tournament to justify Brazil’s heavy investment in hosting the World Cup. In terms of long-run development potential, of most concern to economists is the $3.6 billion in total spending on the 12 new and refurbished stadiums that are being used for the event. The overwhelming conclusion of scholarly research on the subject of stadiums and arenas is that they provide little to no long-term economic benefits. It’s for this reason that Brazil originally emphasized that the great majority of the infrastructure spending for the World Cup would come in the areas of general transportation, security and communications, with less than 25 percent of total spending going towards stadiums.
Unfortunately, cost overruns at the sports venues increased stadium costs by at least 75 over the original estimates. Because of these increases and project delays, Brazil was forced to divert its resources away from general infrastructure projects that may have had greater long-run growth potential in order to focus on a mad scramble to finish the stadiums in time for the first whistle.
Matheson concludes that "The Brazilian national team may do great on the field, but the country’s stadium economics look like a bust. The only thing really going for Brazil is the fact that it may not hold the dubious distinction of building the least economically sensible World Cup facilities for very long. Russia, the 2018 host, is looking to spend nearly $7 billion on stadiums, nearly twice the amount spent in Brazil. And the event moves to Qatar in 2022, where stadium expenditures could be … well, even FiveThirtyEight may not have enough computing power to make those estimates."

Thursday, June 26, 2014

Homage from Catalonia (to Jeremy Paxman)

One of the great things from having spent time in the UK is to know who Jeremy Paxman is. He is probably the best TV presenter anywhere in the world. I always tried to do whatever I could to receive BBC2 at home anywhere so that I could watch Newsnight. It is hard to think how other countries could have a more independent TV journalist in a public television. Paxman presented his last program in the BBC last week, and in this piece you can watch a selection of his 10 best interviews. Some people believe that he is so aggressive that he represents both the best and the worst in TV journalism. But he was aggressive not in the shouting style that we are familiar with in Spanish talk shows, but in an ironic way that systematically made only the most intelligent people survive his interviews. The BBC will still have many good journalists and very few public broadcasting organizations will match their degree of independence. But Jeremy Paxman will be very hard to replace. Other public TV stations (like the Spanish or the Catalan) will only dream of having the institutional and political contexts where a Paxman can make interviews without interference for 20 years.

Friday, June 20, 2014

Progressive leaders want Scotland in a European Britain

Prestigious leaders such as Menzies Campbell and Barack Obama have been very clear in the recent past in their support to Scotland remaining in the United Kingdom, and the UK remaining in the EU. Now the "No to independence" campaign in Scotland is receiving the support of another very prestigious progressive leader, the former Labour minister and veteran Scottish politician John Reid. Reid says that while the no campaign was not complacent, he believed that once voters focused on arguments around the advantages of being a member of the UK, such as financial stability, economic strength and social justice, in addition to the risks of separation over the currency, Europe, and the funding of pensions, "we will sensibly take a no vote on 18 September".
Reid said that “The crucial decision will be made by the ordinary men and women of this country. These are people who don’t stand on platforms, wave banners or make speeches."
"They go about their daily business, unheralded and unsung. They love their country as much as any Scot."
“The measure of your commitment to Scotland isn’t about flag waving or how many tweets you send. It’s about acting in the best interests of your country. And I believe that a No vote is in the best interests of Scotland."
Lord Reid spent time as Health Secretary, Defence Secretary, Home Secretary and Secretary of State for both Scotland and Northern Ireland under Tony Blair. He has also been chairman of the Labour Party and Celtic FC.

Tuesday, June 17, 2014

Social and cultural distance is endogenous

In this paper presented last week in Bristol, it is shown that agents in charge of promoting developing programs can overcome social distance if they receive incentives to do so. That is, poor citizens who distrust government agents because they may be from different social groups (such as castes in India, or different language or religious groups) may overcome this lack of confidence if there is some action that reduces the cultural distance. This is very important, because there is a whole branch of research in development economics that takes cultural heterogeneity as exogenous, and then makes explicit or implicit policy recommendations based on these exogenous distances. For example, some take language differences as a proxy for cultural distance between homogeneous groups. Although the mother tongue of someone is of course exogenous to the individual, the impact of this initial language trait on cultural distance is largely endogenous. That is, there is no necessity in language initial distances implying cultural distances. People can learn other languages, the language of the neighbours for example, or they can all learn some lingua franca that helps reduce cultural distance. Or translators can be used and do business based on the fact that language diversity has never been an impediment to trade and collective action. Of course, there will always be entrepreneurs of hate that benefit form exacerbating cultural conflicts and divisions. These cleavages are instrumental in preventing majorities from aggregating in social or economic dimensions such as income and wealth. The nationalistic right has always known this very well, and the internationalist left has since Jean Jaurès struggled to fight them successfully.

Saturday, June 14, 2014

Separability arguments

Great conference yesterday and today at the CMPO in Bristol, about  (broadly) "The Impact of Institutions and Regulation on Public Services." I presented a preliminary paper on "Behavioural Economics and Institutional Architecture". But the best has been, in my view, the keynote lecture by Maitreesh Ghatak from the London School of Economics. Ghatak has given an overview about the economic role of intrinsically motivated agents and organizations. He has done that in the context of the history of economic thought since Adam Smith. Smith is famous for his invisible hand statement, which is associated to the idea that economists and policy makers should let individuals pursue their individualistic material interest in most cases. Smith also acknowledged that real individuals have other motivations, but for most of the history of economic ideas since then, agents motivated by things other than material self-interest have been basically neglected. But this has been changing in the recent past. The idea that economists should focus on the pursuit of material self-interest is a consequence of a number of separation arguments that were made. Markets should allocate private goods and, separately, governments should allocate public goods and deal with redistribution. Firms should maximize profits independently (separately) from the consumption preferences of their shareholders, managers and workers. And extrinsic monetary incentives could be safely separated from intrinsic incentives that come from social norms, because they just reinforce them. But that is changing: more and more, it is recognized that governments are crucial to create and support markets, and that private organizations can also provide public goods. In some organizations, the preferences of owners cannot be separated from the objective of the firm (like in football clubs), and sometimes extrinsic incentives conflict with intrinsic ones. The relaxation of these separability arguments calls for much more interaction between public economics and organizational economics (a point I emphasize when I propose merging graduate programs in my university, but that no-one else seems to understand). In the tradition of Coase, the problems are similar. Contractibility problems in organizations and lack of property rights are related phenomena. And then the division between business economics and general economics, as many similar divisions, is artificial.

Tuesday, June 10, 2014

Nate Silver about the World Cup and Piketty

The star statistician Nate Silver predicts that Brazil will win the World Cup. He does not say that this is a certainty, but that the odds of Brazil winning, after applying a forecasting model of his invention, are higher than the odds that professional bettors are using in the market. The forecasting model will be updated as the World Cup progresses. We'll be able to test whether Nate Silver is as good forecasting soccer as he has been forecasting elections. He also has a recent post on the controversy between Piketty and the Financial Times. Although he does not go into the details of the controversy, he has interesting thoughts on the relationship between data and economic research. He argues that economic data is inherently difficult to compile, and that you do not need to wait until you have perfect data to report about some sort of research conclusions. He also says that peer review should not finish with publication, but should be a sort of indefinite process. He reveals that he is not a leftist, which perhaps prevents him from reaching the conclusion that you don't need a perfect dataset or a perfect theory to make bold and necessary policy proposals, like those made by Piketty.

Friday, June 6, 2014

The World Cup, the last refuge of the patriot (and the economist)

In less than a week we will be immersed in a new soccer world cup. Great excitement is coming. According to Branko Milanovic, the world cup is one of the big winners from globalization. Because now the best players in all countries play in the best leagues (but they return to play for their countries in the world cup), all national teams benefit from increased player mobility: the best players from any country compete at the highest level all year long and learn from the best directly. The result is more uncertainty in competitions between national teams, as opposed to much more concentration of talent in team competitions. If you look at the most recent editions of the world cup, it is true that from the round of sixteen to the final, most games finish with a very narrow score, in many cases ending with extra time or with a penalty shoot-out. The last final was decided at the extra time in 2010 and in the 2006 edition Italy won in a penalty shoot-out. That is why it is very difficult to predict who will be the winner. Brazil has the home field advantage, and Spain has enormous talent. True, they are older now, but there are more players now that play in non-Spanish leagues; that is, Spanish players are more open than ever to the forces of globalization: economists should like this. And there are many other teams that can be a surprise winner. Besides sports, at the world cup we will see flags and painted faces, people feeling identified with national symbols that have increasingly little meaning outside the football pitch. Someone said that patriotism is the last refuge of the scoundrel, and the world cup is one of the last refuges of the patriot’s gregariousness. It is also one of the last refuges of the economists, who find their theories of increasingly little application out of the pitch, but who spend an increasing amount of time and resources (myself included) thinking about the beatiful game. Look at today’s front page in The Economist or at the recent report by Goldman Sachs. Our excuse is that many important issues, such as corruption, rationality, team incentives and many others, have a very transparent laboratory in the soccer industry (in and out of the pitch).

Monday, June 2, 2014

Progressive economists strongly defend Piketty from criticism

A few days ago the Financial Times devoted most of its front page to criticizing a few empirical aspects of chapter 10 of Piketty’s book, “Capital in the XXI century”. This in itself is a sign of the importance of the book. Although the criticisms were in perspective minor and did not question the core of Piketty’s argument, they were sold as questioning the general message of increasing inequalities. Piketty himself has provided a timely and convincing response, and Paul Krugman among others have supported the French author’s claims here and here. A good thing from this empirical debate is that Piketty is absolutely transparent and allows everybody to share his data.
Others have more interestingly pointed out some weaknesses at Piketty’s theoretical arguments. For example, Debraj Ray has argued if I understand well that the inequalty r>g (the rate of capital gains being larger than the rate of economic growth) does not necessarily imply increasing wealth inequality. Milanovic has replied to Raj that it certainly does in a world (the world we’re in) where capitalists are the rich. In the same article Raj makes interesting points about economic growth and structural change creating non-linearities in the evolution of inequality, which Milanovic accepts, and which give a richer perspective on the issue.
Nobody seriously disputes that global wealth inequality is very high and is in an increasing trajectory. This phenomenon coexists with globalization and democracy, and it is the combination of the three (high wealth inequality, globalization and democracy) that must be dealt with. The empirical and theoretical criticisms of Piketty that we have seen so far do nothing to contradict the argument that these levels of inequality in a globalized world are incompatible with a well functioning democracy. And do nothing to contradict the argument that policy prescripctions must go beyond the nation-state, in the form of international  (initially European, ideally global) progressive capital taxation. These policies will only prevail if accompanied by institutional changes in a federalist direction. Although the defence of progressive economists such as Krugman or Milanovic has been very convincing, they do not put enough emphasis on the transnational, post-sovereignist dimension of the policy response to inequalities. The debate should go on.