Another argument for Open Borders: It is good for the quality for football!

There is no doubt that I strongly favour a policy of removing restrictions on immigrations. Nathan Smith in his recent guest post on my blog showed that a policy of global Open Borders would significantly boost global GDP. However, there might be even better arguments for Open Borders.

My friend Ben Southwood, Head of Policy at the Adam Smith Institute, in a new paper argues that the “crackdown on foreign players hurts English football”. You might not buy Nathan’s arguments, but you should certainly buy Ben’s arguments for Open Borders in international football (to my American readers: Soccer).

This is the abstract from Ben’s paper:

It is a very common view that “importing” foreign football players into the UK to play in the Premier League leads to less opportunity for English players to play for these teams. This means that English players get less high-level experience, and consequently aren’t as good as the players of Spain, France, Italy or Ger- man, who make up a larger fraction of the players playing in their home leagues. This, the argument runs, is an important factor in explaining the English national team’s perceived underperformance in international competitions. I review the literature and present novel data establishing a negative relationship between current performance (as measured by FIFA ranking) and the current amount of football played in a league by native players (across Spain, England, Germany and Italy). Further, I find no relationship between minutes played by English players in the Premier League five or ten years ago and current performance. Finally, I find strong evidence that a league’s overall strength (as measured by its UEFA coefficient) is predicted by the current amount of foreigners playing in it. To restrict foreign players would not directly benefit the English national team, but it would risk substantially curtailing the overall quality of the world’s most popular football league.

PS in my favourite team FC Copenhagen there are very few Danish players and the best “Danish” players have immigrant background. Thank god for immigration and free trade in footballers!

PPS this is my son’s favourite (now former) FC Copenhagen player Igor Vetokele.



Gary Becker has died. Long live economic imperialism!

As geopolitical tensions in Ukraine have been rising I have found myself thinking about the impact of such events on markets and economies. One thing is to understand what is actually going on and another thing is to understand the economics of such events. How are geopolitical tension or terror impacting investment and consumption decision?

Most people would tend to give ad hoc explanations for the economic and financial impact of such events. However, that would not be the way I would look at it. I would always start out by trying to understand such events and the impact of such events from a rational choice perspective. The tools economists use to understand the pricing of beer or the demand for football tickets can also – and should – be used to understand for example suicide bombings or how markets react to geopolitical tensions.

This was the key message from Nobel laureate Gary Becker who passed away on Sunday at an age of 83.

Becker was awarded the Nobel Prize in economics in 1992 “for having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including nonmarket behaviour”.

Airport security and the Economics of discrimination

Gary Becker is one of the economists who has had the biggest influence on my thinking about the world in general – also the “nonmarket world” – so his ideas often come up when I encounter different decision making problems.

Recently I was going through security control in Copenhagen airport. In Copenhagen airport there is a special security control called something like the “Express” track. It is basically a quasi-fast track. I fundamentally think it is used to get people who are late for the their flight fast through security and for example for people in wheelchair. However, I have noticed that I often will be called over to this Express track. Last time that happened a couple of weeks ago I came to think about the concept of “statistical discrimination”.

The idea with statistical discrimination is that it can be rational for example for employers to discriminate against certain ethic groups if there is a cost of gathering information of about individuals’ skills. While Gary Becker did not come up with the theory of statistical discrimination he nonetheless was the economist to pioneer the economics of discrimination. His work on discrimination was published in his great book The Economics of Discrimination from 1971.

Becker books

So why am I so often called to the “Express” security control in Copenhagen airport? The answer is statistical discrimination. When I travel I am mostly wearing a suit and look like a seasoned business traveler. The security staff will based on my looks fast conclude that I am a seasoned traveler and know the security routine well and I therefore would not slowdown the process if they got me through there. This obviously was completely rational because I am in fact well accustomed with the security process.

As I was going through the express security control I was thinking about Gary Becker and what he taught us about using standard economic thinking (rational choice theory) to understand non-market phenomena.

Fear and the Response to Terrorism   

I consume a fair amount of working papers every month. As it happens the last working paper I read (or actually re-read) was a paper by Gary Becker (and Yona Rubinstein). The paper – “Fear and the Response to Terrorism: An Economic Analysis” (2011) – “offers a rational approach to the economics and psychology of fear”.

The reason I re-read the paper was that wanted to better understand how the increased geopolitical tensions in Ukraine might impact particularly the Central and Eastern European markets and economies.

Try to think about the geopolitical tensions while reading this part from the abstract from the paper:

“We explicitly consider both the impact of danger on emotions and the distortive effect of fear on subjective beliefs and individual choices. Yet, we also acknowledge individuals’ capacity to manage their emotions. Though costly, people can learn to control their fear and economic incentives affect the degree to which they do so. Since it does not pay back the same returns to everyone, people will differ in their reaction to impending danger … Education and the exposure to media coverage also matters. We find a large impact of suicide attacks during regular media coverage days, and almost no impact of suicide attacks when they are followed by either a holiday or a weekend, especially among the less educated families and among occasional users.”

This might help us understand why the increase in geopolitical tensions in Ukraine and Russia has had so relatively limited impact on global financial markets. Obviously there has been a marked impact on the Russian and Ukrainian markets, but while we initially saw a “fear factor” in the global stock markets this “shock” fast ebbed.

In reality there is a similarly to Becker’s original theory of discrimination, where economic agents could have a “taste” for discrimination. Hence, an employer might have a dislike for jews or blacks, but this “fear” is not for free. If the employer refuses to hire a certain individual because of his or her race or religion despite that individual is as productive as a more open-minded competitor might hire other candidates for the job then that individual. Therefore racist employers will have to pay for their racism by having to accept a lower profit.

Similar it is costly to maintain an irrational fear of geopolitical risks. This I think is pretty important in terms of understanding the impact of the Ukrainian crisis on the global markets.

Long live economic imperialism!

This is just a few examples of how Beckerian thinking is influencing my own thinking at the moment. Gary Becker made a huge impact of me when I really got into studying his research in the second half of the 1990s when I was doing research on the economics of immigration at the Danish Ministry of Economic Affairs and at the same time was teaching a course in the Economics of Immigration at the University of Copenhagen.

I will gladly admit that I am a strong proponent of economic imperialism. I strongly believe – and learned that from studying Gary Becker – that economic method (rational choice theory) can be used to understand most societal issues whether it is stock market pricing, suicide bombings, why politicians are asshats or sports. In fact the latest book to arrive in my mail from Amazon I got to today is a book – “The Numbers Game” – on how to apply economic methods to understanding football (for my American readers – that is what we call soccer in Europe).

I am sure Gary Becker would have agreed that if you want to understand for example the impact on team success by firing a coach you need to apply rational choice theory. It is not about “psychology” – it is all about rational choices.

Thank you Gary Becker for making me understand this.

Numbers game

Update – See also these links on Gary Becker:

Greg Mankiw: Very Sad News

Peter Lewin: Gary Becker: A Personal Appreciation

David Henderson: Gary Becker, RIP

Bloomberg: Gary Becker, Who Applied Economics to Social Study, Dies at 83

Reuters: Nobel-Winning Economist Gary Becker Dies at 83

Chicago Tribune: Nobel-prize winning economist Gary Becker dead at 83

Fox News: Gary Becker, University of Chicago Economics Nobel Laurete, Dies at Age 83

Peter Boettke: Gary Becker (1930-2014) — An Economist for the Ages

Mario Rizzo: Gary Becker (1930 – 2014): Through My Austrian Window

Russ Robert/Café Hayek: Gary Becker, RIP




What are Crashes in Cycling’s Grand Tours telling us about banking crisis?

The concept of moral hazard can often be hard to explain to non-economists – or at least non-economists are often skeptical when economists try to explain excessive risk taking in banking with moral hazard problems. Non-economists often prefer a simpler explanation to banking crisis – bankers are simply evil and greedy bastards.

But maybe if we – as economists – use something that most people would understand – sports – to explain moral hazard we might be more successful when we want to explain moral hazard in banking.

Just take a look at the abstract from a recent paper – Does the Red Flag Rule Induce Risk Taking in Sprint Finishes? Moral Hazard Crashes in Cycling’s Grand Tours – from the Journal of Sports Economics:

Sprint finishes in professional cycling are fast, furious, and dangerous. A ‘‘red flag rule’’ (RFR) seeks to moderate the chaos of these finishes, but may induce moral hazard by removing the time penalty associated with crashing. To test for moral hazard, the authors use a 2005 rule change that moved the red flag from 1 km to 3 km from the finish. Data from Europe’s Grand Tours indicate that, after the rule change, both the incidence and the size of crashes nearly doubled in the 1–3 km from the finish zone. There was no such increase in crashing rates in the 3–5 km zone.

I love Sportometrics or the Economics of Sports not only because it tells us about sports, but also because sports is a good way of testing economic theories such as moral hazard. It is real-life experimental economics.

Therefore, I think that if we can show that if you reduce the “cost” of crashing in a bike race with a rule like the “red flag rule” then you will increase “risk taking” then it is only natural also to expect bankers to take excessive risks if there is a similar “red flag rule” in banking – such as deposit insurance.

This also shows that if we try to make the “game” more safe then the end result might very well be the opposite.  Regulators and bankers alike should realise this.

New Orleans will gain nothing (economically) from hosting Super Bowl XLVII

Today is Super Bowl Sunday – even in Europe we know that. So even though I strongly believe football is a sport where the player kick the ball rather than using the hands all the time I have to do a post on the topic.

New Orleans will be hosting the match between San Francisco 49’ers and Baltimore Ravens.

Non-economists (mostly politicians and reporters) always get wildly excited about the possible positive economic consequences of hosting such sporting events. Just take this story from Fox Business with the quasi-keynesian title “Super Bowl XLVII Spending Spree”:

“New Orleans is gearing up to host its first Super Bowl since Hurricane Katrina devastated the city 7 ½ years ago. The showdown between the San Francisco 49ers and the Baltimore Ravens is expected to attract more than 150,000 visitors over the weekend — and the big game will give “The Big Easy” a significant financial boost.”

This is basically a version of the broken window fallacy and in the same way it is hard to argue that the hurricane Sandy was good news for the US economy in the same way it is hard to get very excited about the economic impact of Super Bowl XLVII.

However, there is more to it. Lets take a look at the Public Choice perspective. Getting to host the Super Bowl is certainly not for free – it takes a lot of lobbying and probably also a lot of taxpayer money. I think we can learn a bit from what Public Choice theory has to say about the funding of Sports Stadiums. He is from a classic article on the topic – “A PUBLIC CHOICE PERSPECTIVE ON THE SUBSIDIZATION OF PRIVATE INDUSTRY: A Case Study of Three Cities and Three Stadiums”:

This article employs the public choice perspective to explain and evaluate the outcomes of publicly subsidized economic development projects. Despite the questionable impacts of economic development projects that have been assisted with the use of public subsidies (including tax remission, tax credits, and nontax incentives), such subsidies have increasingly become the tools with which states compete for various industries and, more recently, for stadiums. Invoking the public choice framework provides some insights into the interrelationship of the various actors involved in these projects — the investors, the public officials, and the taxpayers. A behavioral model is developed based on assumptions derived from basic economic principles and applied to the political marketplace. The model is then tested using case studies of public subsidization that involved three football stadiums.

But so what? Isn’t the Super Bowl not good for the economy anyway? Not if you believe a 2009 study – “The Economics of Super Bowl” – by Victor A. Matheson. Here is the abstract:

The Super Bowl is America‟s premier sporting event. This paper details basic economic facts about the game as examines the controversy surrounding the purported economic impact of the game on host communities. While the league and sports boosters claim that the game brings up to a $500 million economic impact to host cities, a review of the literature suggests that the true economic impact is a fraction of this amount.

Anyway, that is my two cents on the Super Bowl. Enjoy the game – I will probably not stay up to watch it and I will certainly not think too much more about the economic impact of the game.

To my American readers. This guy is a football player (and he was even playing in the US at the time when the picture was taken).

New York Cosmos   Pele

Finally some proper research from a central bank

I spend a lot of time complaining about the work central banks do these days. However, we should not forget (and that goes for you my dear US readers as well) that the European football championship (Euro 2012) kicks off today (the opening match is between host nation Poland and serial defaulter Greece). What do these two things have in common? Well, have a look at this (relatively) new Working Paper from the Dutch central bank. Here is the abstract:

At the 2010 FIFA World Cup in South Africa, many soccer matches were played during stock market trading hours, providing us with a natural experiment to analyze fluctuations in investor attention. Using minute‐by‐minute trading data for fifteen international stock exchanges, we present three key findings. First, when the national team was playing, the number of trades dropped by 45%, while volumes were 55% lower. Second, market activity was influenced by match events. For instance, a goal caused an additional drop in trading activity by 5%. The magnitude of this reduction resembles what is observed during lunchtime, and as such might not be indicative for shifts in attention. However, our third finding is that the comovement between national and global stock market returns decreased by over 20% during World Cup matches, whereas no comparable decoupling can be found during lunchtime. We conclude that stock markets were following developments on the soccer pitch rather than in the trading pit, leading to a changed price formation process.

Meanwhile at Dublin Airport this greeting for the Calvinists.

PS I co-authored this paper about the World Cup in 2010. You should note my prediction was wrong.

PPS it is no secret that other than my native Denmark I am cheering for Poland at euro 2012. I spend a lot of time in Poland over the past decade. It is a truly wonderful nation. I hope that they poles will have a lot of success at this championship.

Why did the A’s stop winning? Scott has the answer

I have been watching Moneyball. It is a great movie, but unlike Scott Sumner and my wife I have actually no clue about movies. However, economics play a huge role in this movie. So that surely made me interested. It is of course very different from Michael Lewis’ excellent book Moneyball, but it is close enough to be an interesting movie even to nerdy economists like myself.

If I was not blogging about monetary policy and theory then there is a good chance I would be blogging about what Bob Tollison called Sportometrics – the economics of sports. It combines two things I love – sports and economics. But why bring Moneyball into a discussion about money and markets? Well, because the story of the Oakland A’s is a pretty good illustration that Scott Sumner is right about the Efficient Market Hypothesis (EMH) – even when it comes to the market of baseball players. So bare with me…

Any American male knows the story about the Oakland A’s but for the rest of you let me just re-tell the story Michael Lewis tells in Moneyball.

The story about the Oakland A’s is the story about the A’s’ general manager Billy Beane who had the view that the market was under-pricing certain skills among baseball players. By investing in players with these under-priced skills he could get a team, which would be more “productivity” than if he had not acknowledged this under-pricing. Furthermore as other teams did not acknowledge this he would increase his chances of winning even against teams with more resources. It’s a beautiful story – especially because theory worked. At least that is how it looked. In the early 2000s the Oakland A’s had much better results than should have been expected given the fact that the A’s was one the teams in the with the lowest budgets in the league. The thesis in Moneyball is that that was possible exactly because Billy Beane consistently used of Sabermetrics – the economics of Baseball.

Whether Lewis’ thesis correct or not is of course debatable, but it is a fact that the Oakland A’s clearly outperformed in this period. However, after Moneyball was published in 2003 the fortune of the Oakland A’s has changed. The A’s has not since then been a consistent “outperformer”. So what happened? Well, Billy Beane was been beaten by his own success and EMH!

Basically Billy Beane was a speculator. He saw a mis-pricing in the market and he speculated by selling overvalued players and buying undervalued players. However, as his success became known – among other things through Lewis’ book – other teams realised that they also could increase their winning chances by applying similar methods. That pushed up the price of undervalued players and the price of overvalued player was pushed down. The market for baseball players simply became (more?) efficient. At least that is the empirical result demonstrated in a 2005-paper An Economic Evaluation of the Moneyball Hypothesisby Jahn K. Hakes and Raymond D. Sauer. Here is the abstract:

Michael Lewis’s book, Moneyball, is the story of an innovative manager who exploits an inefficiency in baseball’s labor market over a prolonged period of time. We evaluate this claim by applying standard econometric procedures to data on player productivity and compensation from 1999 to 2004. These methods support Lewis’s argument that the valuation of different skills was inefficient in the early part of this period, and that this was profitably exploited by managers with the ability to generate and interpret statistical knowledge. This knowledge became increasingly dispersed across baseball teams during this period. Consistent with Lewis’s story and economic reasoning, the spread of this knowledge is associated with the market correcting the original mis-pricing.”

Isn’t it beautiful? The market is not efficient to beginning with, but a speculator comes in and via the price system ensures that the market becomes efficient. This is EMH applied to the baseball market. Hence, if a market like the baseball market, which surely is about a lot more than making money can be described just remotely as efficient why should we not think that the financial markets are efficient? In the financial markets there is not one Billy Beane, but millions of Billy Beanes.

Every bank, every hedgefund and every pension fund in the world employ Billy Beane-types – I am one of them myself – to try to find mis-pricing in the financial markets. We (all the Billy Beanes in the financial markets) are using all kind of different methods – some of them very colourful like technical analysis – but the aggregated result is that the markets are becoming more efficient.

Like Billy Bean the speculators in the financial markets are constantly scanning the markets for mis-priced assets and they are constantly looking for new methods to forecast the market prices. So why should the financial markets be less efficient than the baseball market? I think Scott is right – EMH is a pretty good description of the financial markets or rather I haven’t seen any other general theory that works better across asset classes.


PS there is of course also the possibility that Billy Beane was just lucky“The sample is simply not big enough” (“Peter Brand” in the movie about why his theory initially did not work).

PPS  In Moneyball the movie the term “Winning streak” is used. That is a bit of a turn off for anybody who has studied a bit of sportometrics. There is not such a thing as a winning streak or a “hot hand” – at least that can not be proved empirically.

PPPS Moneyball is not really about Billy Beane, but rather about Paul DePodesta. In the Moneyball Paul DePodesta is renamed Peter Brand.

PPPPS I have no clue about baseball and find it rather boring…that must be the ultimate disclaimer.

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