Fiscal and Monetary Policy Next...

I'm almost thinking of renaming the course, for the next couple of parts, Future Issues in the UK Economy Based on Contemporary Issues in the Japanese Economy.

You'll perhaps be aware that the reason you've had a little break from me in econ217b is that I'm in Japan currently, and Japan just happens to, right now, be experimenting with both expansionary monetary and fiscal policy.

For a bit of context, Japan has been generally in the economic doldrums since 1990:

That picture shows that since 1990, real GDP growth has tended to hover around zero, whereas before then Japan was known for its stellar economic growth - in the 1960s averaging nearer 10%, and even in the late 1980s nearer 5%.

However, in early 1990 the Japanese stock market suffered a dramatic crash, which can be seen by looking at the following graph:

In the 1960s, 70s and 80s, the Nikkei (the Japanese stock market) rose dramatically (the late 1990s growth makes the earlier growth look quite miniscule, but plotting this in logarithms shows that actually growth was stronger in the 1950s and 60s than in the 1990s).

However, in 1990 the stock market stopped rising and started falling dramatically - by February 1990 5% had been lost, by the start of April more than 20% and by November about 40% (see here for the data, downloaded from http://stooq.de/q/d/?s=^nkx). By the start of 1993 the market had lost more than half its value - half of the wealth in the Japanese economy had been wiped out.

Since then, as the first graph above shows, GDP growth has barely recovered. Moreover, other economic statistics have taken very distinct patterns since then too. For example, pretty much since 1990, the price level stopped rising:

In this graph, Japan's price level is the red line, the UK's is blue. The UK's shows a fairly standard pattern - persistent inflation over many years (particularly the 1970s) means that the price level keeps on rising. In Japan, however, this stopped in the aftermath of the stock market crash in the 1990s.

Japanese government debt has also grown dramatically over this time (get gross data since 1980 from here and net data from here):

Gross debt is the number usually heard about in reference to Japan, as that has topped 200% recently (in the UK we haven't reached 100% yet), although many argue net debt (which takes into account assets) is a better measure of indebtedness anyhow. The interesting thing in the FT article linked is that it notes Japan's finance minister (equivalent of Chancellor) saying in 1995 he felt debt was already nearing its sustainable limit.

The point often made in the light of the global financial crisis is that the UK (and US and Europe) is following Japan into a long period of economic stagnation (a Google search for "Japan 2.0" should give some flavour to these fears).

So given the UK's experiment with austerity since 2010, which is an attempt to reduce government spending to reduce the deficit and debt, it is interesting that in 2013 Japan's government is experimenting again with fiscal stimulus. This has not been lost on a number of interested observers, most notably Paul Krugman and Adam Posen (worth reading both).

We'll be visiting many of the kinds of arguments made by both of these commentators when thinking about fiscal policy and monetary policy in the next few weeks for the UK.

New paper on Financial Fair Play

You'll recall from last term we look at the economics of sport, and touched upon reforms aimed at the financial side of the game, and the potential for them to backfire. Stefan Szymanski, one of the big names in the economics of sport, has just written a paper with Thomas Peeters on precisely this, arguing that actually, Financial Fair Play in football will reduce competition. It's a fascinating read and will certainly help you as you think about this crucial aspect of regulation in sport.

Sack the Manager Part II

I wrote on here recently about sacking managers, specifically with regard Queens Park Rangers in the Premier League, but it turns out my own team, Oldham Athletic, is also struggling, and as a result naturally has fans calling for their manager, ex-Man City Paul Dickov, to be sacked.

I linked to a paper by three sports economists that looked at data between 1972 and 1997 on managerial tenure and changes, which showed that over that time, any managerial change was associated with a 3-month dip in performance - not necessarily the thing to do mid-season if you're already bottom with only 4 points.

I then had a few Twitter exchanges with both QPR and Oldham fans regarding managerial changes, and both said essentially one thing - their team is different, and/or 2012 is different to 1997.

The great thing about these statements is they are testable. The data exists out there in oodles. We can get information on all managerial tenures from Soccerbase, squads from Soccerbase, and results from Soccerbase (back to the 1800s!) or ESPN.

Data collected, merged and in an Excel spreadsheet, you can get going investigating.

There's huge amounts that could be done with this data that interests economists as well as sports fans, but probably of most interest here is what's the impact of managerial change? There's a variable in the dataset called manager_change, which is 1 if in that match, the manager of the team is different from in the previous match. We'd anticipate that the upheaval from a managerial change would play out over a longer period of time than just one match, so manager_change_1month and manager_change_3month are 1 if the team's manager has changed in the last one or three months.

What we're essentially talking about here is tenure - length of time in a job. The longer, the better? Or, is the relationship quadratic (improving to a point then deteriorating)? There are two variables in the dataset, tenure and tenure2, which allow you to look into that.

I ran a regression, using outcome as the dependent variable (which is 0.5 for a draw, 1 for a win, 0 for a loss), and regressed on tenure, tenure2, and the three managerial change variables above. The output is:

outcome = -.0000828** tenure + 0.0000000589*** tenure^2 - 0.025 manager_change + 0.001 manager_change_1month - 0.089*** manager_change_3month + error

The stars denote how significant the coefficients are (email me if you want the actual output), and they show that there's a U-shaped quadratic effect of tenure:

So it takes a while for a new manager to bed in! These results should be treated with a lot of caution (only since 2001, no other controls for team performance, type of manager separation, etc), but they strike some chord of common sense. It takes at least a full season, maybe two, for a manager to have any effect - in fact the effect plotted above says that for the first four years in the job, the new manager is simply playing catch-up to the point at which he arrived - but after that, the only way is up.

Furthermore, the results above show that in the first three months after a change, there's a further negative impact on top of what's plotted here - a drop of about 9% in the win probability of the team.

Now, the big question we can answer here now is: Are QPR and Oldham different? The way we do this is to add in dummy variables for those clubs. We can interact those dummies with the managerial change variables too, in order to be very careful about whether these clubs are different. And then we can test the significance of these dummies. The results: Oldham are certainly not different - the joint F-test of the two dummies (intercept and slope) is insignificant, with a p-value of 49%, but QPR stake a slightly better claim to "differentness" - the p-value on their joint F-test is 7.7%, close to the 5% conventional significance level we take, but not breaching it.

Is this over-sciencing things? No, it's not - we have terminally short memories, and forget things. Regression techniques like this can take into account every match, every managerial change not just since 2001 but if extended, back to the late 1800s. Every contention you throw at me (things have changed with squad sizes, for example), can be factored in - as mentioned, from Soccerbase we can learn how many players a team fields each season, giving a good idea of how high squad turnover is now, and whether that makes any difference.

The moral of the story is - get out there and play, use the data, and learn what it is telling us. It appears to tell us that the chairmen of QPR and Oldham should hold fire before getting rid of their managers...

Sack the manager!

Having just completed the lectures on the economics of sport, one thing we didn't have time to cover was managerial issues. A hugely common reaction of football supporters (and I don't doubt it's restricted to football) is when a team starts to struggle to call for the manager to be sacked (and failing that, the board too).

Clearly in the workplace if an employee isn't particularly good, it's best if they can be removed and someone more effective put in place. However, it is guaranteed that someone better can be found? Will the disruption be sufficiently small to make it worthwhile?

Does it work though?  The evidence suggests now; this paper by a couple of prominent sports economists, suggests not - in fact in the subsequent three months the team then underperforms. They look at about 25 years of data and find that there's no obvious improvement in the team's performance after a manager is replaced.

The biggest problem, of course, is that we never observe what economists call the "counter factual" - what would have happened had things been different. Hence, QPR fans can complain endlessly about how Mark Hughes has "taken them backwards", yet the fact is we don't know where QPR would be now if they had a different manager in charge since Mark Hughes was appointed.

Into that absence we can inject either some economic theory, or we can try and use data, which is what the paper linked above does. If we can look at enough episodes of teams doing badly getting rid of their manager (and not doing so), then we can see what happens, on average.

It tells us that, on average, it's not effective getting rid of a manager, yet teams persist in doing so...

Interesting post with important lesson

I just came across this blog post on an apparent relationship between obesity in the UK and Premiership revenues.

As the post shows using a scatter plot, the two look impressively highly correlated, and the author points out that the R^2 is 0.93.  It looks like either the Premiership's success causes more obesity, or the more obese people are, the more successful the Premiership is - not exactly the positive impact on health outcomes we might hope for!

However, further down the post, the author plots both series against time and you can clearly see that they are highly non-stationary - i.e. they trend upwards. The technical lesson to be learnt here is that these are two non-stationary series, and hence any strong correlation between the two will almost be erroneous, or "spurious" - i.e. not really there. That's because the regression model doesn't include a time trend and hence as the other variable closely resembles a time trend, it takes that place.

The less technical but equally important lesson is what the blog author emphasises - correlation does not imply causality.  That's a fundamental lesson to always be aware of. Alone, economic data can tell us nothing other than correlation. Only combined with some economic theory can we start to get any sense of causality.

Crazy Stuff

After yesterday's lecture, yours truly hopped on a train (which ended up delayed) to Reading, and just happened to stumble upon one of the most remarkable examples of joint production imaginable - a 12-goal football match between Reading and Arsenal.  It was live on TV, and the 25,000 supporters likely send hundreds of thousands of messages, Facebook updates and Tweets as the hard to believe action unfolded - all testament to the uncertainty of outcome hypothesis that we talked about yesterday!

Today, whilst reliving in my mind the events of last night (even happened to have seats very near to the divide between home and away fans), I came across this article on the NFL in London. You may be aware that each year an NFL match gets played in London - perhaps the starkest example of the difference between sport in North America and sport here in Europe, since the mere suggestion a Premier League match might be played outside England was shot down in flames just a few years ago.

Yet, playing at least one match over here in the UK must be profitable for the NFL, else it simply wouldn't happen.  Not only that, but London's Mayor, Boris Johnson, is engaging in suitably blue sky thinking, and talking about the idea of eventually having a franchise (i.e. a team) here in the UK.  More than likely this is just an attempt to sound really keen, in order to attract more business and attention to London (Boris, as Mayor, doesn't really have very much power at all so has to flex his muscles in other ways).

I suspect you will all be a little too young to recall a similar attempt to get American Football going here in Europe - London Monarchs (see Wikipedia if you're interested).  There may be a residual passion for something a bit different - the real thing, the actual New England Patriots packed with American superstars, but an NFL reserve league, which is what the European variant of NFL essentially became, is unlikely to generate a particularly high level of interest, particularly once novelty wears off.  However, maybe I'm just one big cynic...

Intro to Today's Lecture...

There's a very interesting blog I highly recommend you read, called The Sports Economist, and today they added a post on organisational structures in sport.

It leads us nicely into today's lecture, which will spend some time talking about the 'peculiar economics of sport', as Walter Neale described them and many economists since have commented upon.

Enjoy!