Bluematter.

It happens all the time: a guy fails to stop at a red traffic light and crashes into another car, causing massive damage to the vehicle and serious injury to the driver.

Now, imagine a world where the offending driver had no responsibility to pay any form of compensation to the victim, and - no matter how substantial the damage - his only punishment was to have his driving license revoked for three weeks.

Crazy? Welcome to the world of professional sport.

Last weekend, Gunners watched in horror as Aaron Ramsey suffered a terrible injury at Stoke. As a direct result of this, he is likely to be unable to play for months, at immense financial cost to Arsenal and the player himself.

Arsenal is prohibited from filling the vacancy quickly by signing a player from another club, and this could well cost them titles and the financial benefits that come with them. Furthermore, players are a football club's most valuable assets*, and in a very direct sense: Ramsey is worth a lot of money to Arsenal, and the club could have even chosen to capitalize on that by selling him to another club. Ryan Shawcrass caused damage to Arsenal's assets much the same way as having taken a baseball bat and wrecked their offices.

Aaron Ramsey seems to have escaped relatively lightly this time, but of course there's always a chance he will never fully recover, losing out on millions of pounds he has been expected to make as a top-flight footballer. And of course there's the psychological trauma he has to go through.

The punishment for the offending player and team? A three week ban on the player participating in club games (ironically, Ryan Shawcross learned of his first England call-up on the very day of the incident)

In econ-speak, this is a classic case of an externality: players and clubs hardly have any incentive to play less agreesively, as they don't have to suffer the consequences of their playing style to the opposing team and its players. Since they don't face the cost, they end up playing more aggressively than is optimal, leading to an inefficiently high level of injuries.

Some people may protest that no player ever intentially injures another, and they would be right. But whether injury is caused intentionally or not is largely irrelevant: it is also the case that no driver ever intends to cause an accident. He merely chooses to take on additional risks by ignoring a stop sign or by driving above the speed limit. Similarly, clubs and players choose to play more aggressively, increasing the probability that any given tackle will cause injury.

FIFA, UEFA and the FA must take action now: any injury caused as a result of foul play should be costed, with the offending club having to pay appropriate compensation to the injured player and his club. This will bring injury rates down, and make the beautiful game better and safer. The current situation is madness.


* Professional sport is really the last example of a labour market where is it OK to buy and sell people; in other areas, such arrangements are strictly illegal: it's called slavery. Even though the status quo is beneficial to both clubs and players, I am deeply perplexed that this is a stable equilibrium, given that all it should take for it to unravel is a single player wanting to declare his contract null and void and bringing the case to a court of law. But this is the subject for a future post.

If present trends continue, the poverty Millennium Development Goal of halving the proportion of people with incomes less than one dollar a day will be achieved on time.

And there's more, from a new NBER paper by Sala-i-Martin and Pinkovskiy entitled AFRICAN POVERTY IS FALLING...MUCH FASTER THAN YOU THINK!(I covered their previous related paper here):

1) African poverty is falling and is falling rapidly; (2) if present trends continue, the poverty Millennium Development Goal of halving the proportion of people with incomes less than one dollar a day will be achieved on time; (3) the growth spurt that began in 1995 decreased African income inequality instead of increasing it; (4) African poverty reduction is remarkably general: it cannot be explained by a large country, or even by a single set of countries possessing some beneficial geographical or historical characteristic.

And there's some lovely graphs too - the style is unappealing, but the content is so sweet it's worth framing them and hanging them on every wall you can find:


And here's where I'll be going in a month's time:


Yes, there is such thing as an uplifting economic paper.

This has gotten a lot of airplay recently. The man behind this is Bluematter's favourite LSE professor Satoshi Kanazawa, so it all makes sense.

On the tight confidentiality of Apple products throughout the supply chain network

Paul Krugman has a number of posts on Spain, Greece, et al, and specifically how being part of EMU means they won't be able to depreciate to avoid crushing recessions. The point he is making is of course perfectly valid, and he is - as usual - ahead of the pack in correctly perceiving the real problem as being loss of competitiveness in the PIIGS and the need for substantial deflation, potentially crippling growth for years.

His conclusion is also the correct one:

Am I calling, then, for breakup of the euro. No: the costs of undoing the thing would be immense and hugely disruptive. I think Europe is now stuck with this creation, and needs to move as quickly as possible toward the kind of fiscal and labor market integration that would make it more workable.

First of all, I was, and still am, a strong supporter of the Euro. The common currency is more than anything else a step towards the dream of political integration, a sceptical Europe of nation states moving towards a post-nationalistic era of many cultures but common political goals and aspirations, based on respect for human rights and the rule of law, a belief in the power of free trade and the absurdity of borders, and a desire to for ever leave behind the madness of the past and other petty differences. No-one in their right mind can possibly argue that the demons haunting Spain and Greece today are scarier than the demons that political union can forever banish.

A common currency brings with it not only disadvantages but also advantages, but whichever way you cut it it was never meant to be a brilliant economic idea, even if reasonable people can claim it is a good one. It was meant to be a trojan horse leading us to closer and closer union: not a superstate, but an unbreakable union of culturally diverse nations living together in peace - and if this political experiment is to succeed in Europe, why not the world?

This crisis may yet bring people to their senses - what was everyone thinking when they picked Van Rompuy? - and remind them what the Euroland is all about; if this happens, the current mess may well lead to a better Europe and a better world.

So, the first thing bothering me about Krugman's analysis (and the debate more generally) is a lack of perspective. It is the same thing I talked about when I posted on the misguided economics of Scottish independence.

The second thing that bothers me is Krugman's style. Krugman is always right; and I really mean that. On top of that, he is incredibly good at homing in the most important aspects of every issue, as he did in this case by focusing on the prospect of deflation in the PIGGS rather than the state of public finances. But not being wrong is a good thing, right? It would be if he then didn't push his case to the extent that he paints a misleading picture. In the words of Vladimir Nabokov, Krugman deals in doughnut truths: only the truth, and the whole truth, with a hole in the truth.

First of all, he posts this graph to support his thesis:

What is the problem with this? Well, by picking Germany, he makes the degree of appreciation look much more extreme than is actually the case - here is what a more representative graph would look like:



The divergence in price appreciation between Greece and the EMU average is about 10%, which could go away with only moderately lower inflation in Greece compared to the rest of the Euroland over the next, say, 10 years. [Addendum: to his credit, Krugman also posted this after I'd written this post, which paints a more balanced picture, if only by including France. And yes, he is absolutely right again in calling for higher inflation for EMU as a whole.]

Even more importantly, by posting this graph he is strongly implying (although not quite saying- that same irritating 'he's never actually wrong' thing again) that these discrepancies need to go away. But it is not so: between 2000 and 2008 Germany's real GDP grew by about 13%, Spain's by 33% and Greece's by a whopping 40%. Yes, some of this is illusory, 'debt-driven bubble growth'; but the biggest part is probably pure Solow coupled with a speedier institutional reform in the poorer, more backward PIIGS compared to Germany. And guess what: even after this decade of strong gains, employment as a percentage of the working age population is 70% in Germany (from 65% in 1998), in Spain it is 65% (from 52%), and in Greece 62% (from 56%). Hourly wages in the latter two countries remain a fraction of German levels, and I'm sure there is a similar picture when it comes to unit labour costs (sorry, can't find the relevant data).

A large part of this capital inflow and price appreciation is here to stay: As Spain and Greece have become richer, with the potential to grow even more in the future, you would also expect the price level to go up. If country A has half the nominal GDP of country B, you would expect the price level in country A to also be lower; if country A grows to have the same level of GDP as country B, you would expect price levels to be the same. Things are expensive in France and cheap in Algeria.

So, would Spain and Greece benefit from being able to depreciate? Yes. Should EMU move towards more fiscal integration? Hell yes. Would EMU benefit from more inflation? Yes indeed.

Does the price level in Greece need to fall by 30% so that Greece can be competitive and grow again? Most definitely no. The imbalances are simply not as great as Krugman presents them to be, and he is being disingenuous, if not outright mistaken, by presenting growth in GDP deflators since the formation of EMU to support his (basically valid) main points. Growth in GDP deflators in itself is irrelevant to the point he is making.

Addendum: Why are poor countries cheaper than richer countries? The answer lies in the existence of non-tradable goods: things like haircuts and doctor visits. The price of tradeables (grain, plasma TVs, cars, etc) is common across the EU since there are no barriers to trade, but it costs much more to get a haircut in Germany than in does in Portugal. If Portugal becomes richer and Germany stays where it was, the price of TVs will still be the same in both countries, but the price of haircuts in Portugal will no longer be as low relative to Germany as it used to be. With Germany and Portugal sharing a common currency, higher real GDP growth in Portugal means the price level in Portugal will increase relatively to Germany - and there's nothing weird about that. Simply pointing to divergence in GDP deflators between countries with no reference to real GDP growth (or growth prospects for that matter, as this is also about current account deficits) is silly.

Across town at the nearby Pyongyang University for Foreign Studies, the staff were much more progressive. The students were sophisticated, knowledgeable and engaging.

"It helps us a lot learning English. I so much want my country to be one of those leading in the economy. We're already a leading nation in politics and other stuff. Well, it's no offence but I want to learn English so that the other people get to learn [about] Korea." 

The BBC visits Pyongyang.

Burma VJ: Reporting from a Closed Country - Watch the full movie here

A brief story of pretty much everything

Looking to puzzle in your 5 minute coffee break?

Russell Brown (@publicaddress)
07/02/2010 00:45
Herald asks readers why autism diagnoses are rising. "Why ask us, you clowns?" say readers.
http://bit.ly/bUL46c

[Embedded music video]

'You don't need to be born Greek to be Greek' - Έλληνας και γεννιέσαι και γίνεσαι.

These are the words of Greek Prime Minister George Papandreou in Parliament yesterday. They make me proud to be Greek.

If we really love our country, we have to help make their (immigrants') dreams the dreams of our country. Why raise the ghost of 'dilluting the purity of the nation'? After all, what does it mean to be Greek? Democracy, equality, humanism. Is our faith in Greece and our ideals across the centuries so weak and shallow?

We can't be fooling ourselves; we can't keep denying them a voice.

There are no perfect solutions, but there are better solutions. (This law) gives us new opportunities: to see Greeks of Indian ancestry, of Albanian ancestry, proud of our common Greek nationality.

And all this while the main opposition party is promising to repeal the law if elected (their plan is to only award Greek citizenship to children born in Greece when they reach adulthood and provided they have a full Greek education and they relinquish their parents' nationality) and with large segments of the Greek public - perhaps a majority - being sceptical or outright hostile.

This is a true moment of greatness, all so rare in politics.

In Greece, there is history in the making. Εύγε!

Just needed to say this.

Scott Stulberg's Photography

Priest checks fingerprints for mass attendance

In January 1943, Churchill and Roosevelt agreed that after the successful North Africa campaign, the next target would be Sicily. The island was the logical place from which to deliver the gut punch into what Churchill famously called the soft “underbelly of the Axis”. But if the strategic importance of Sicily was clear to the Allies, it was surely equally obvious to Italy and Germany. Churchill was blunt about the choice of target: “Everyone but a bloody fool would know it was Sicily.” This presented the intelligence chiefs with a conundrum: how to convince the enemy that the Allies were not going to do what anyone with an atlas could see they ought to do.

The result was “Operation Barclay”, a complex, many-layered deception plan to convince the Axis powers that instead of attacking Sicily, the Allies intended to invade Greece in the east, and the island of Sardinia, followed by southern France, in the west. The deception swung into action on a range of fronts, and Montagu and Cholmondeley went looking for a corpse.

The Second World War may have been responsible for the deaths of more people than any conflict in history, yet dead bodies of the right sort were surprisingly hard to find. What was needed was a discreet and helpful individual with legal access to plenty of fresh corpses.

Montagu knew just such a person: the coroner of St Pancras, who went by the delightfully Dickensian name of Bentley Purchase. For a man who spent his life with the dead, Purchase was the life and soul of every occasion. He found death not only fascinating, but extremely funny. When Montagu dropped him a note asking if they might meet to discuss a confidential matter, Purchase replied with directions, and a typically jovial postscript: “An alternative means of getting here is, of course, to get run over.”

Operation Mincemeatis a new book on a little known (i.e. I didn't know about it!) WWII incident, featuring a dead body with an assumed identity, deception, and even Ian Fleming himself as the inspiration behind it all (007 would be jealous). The extracts are from the Guardian (part 1, part 2).

Fascinating stuff.

Let's say you own a bond you are not allowed to sell that pays you £100 a month. Even though you can't sell the bond, it is silly to say that you have zero savings; your savings are given by the value of the bond even though you can't just sell it now and collect the money. A guy that has a bond with the same characteristics which pays £1 a month has much, much lower savings than you do, even though none of you has any money in the bank right now.

Now we got this out of the way, think of these two scenarios:

Scenario 1: You have £50,000 in the bank and use them to pay for a university education that will help you make much more in the future. Your measured savings have gone down by £50,000; your effective savings - your wealth - has gone up. Saving rate statistics will look at the fact your bank balance is down but will ignore the fact you will be earning much more in the years to come.

Scenario 2: There are two men, same age, each with zero money in the bank and no assets to their names. One has a university education, earns £30,000 a year and has experience managing a company. The other has only finished primary school, earns £3,000 a year and has experience assembling parts in a factory. Who has more savings?

Now let's say that the latter man starts saving 20% of his salary and lends the money to the first guy. Who has more savings (wealth) now? If the second guy uses the money to get an MBA that will bring him even more money in the future, has his saving rate gone up or down? How meaningful is it to say that the first guy saves 30% of his income and the second guy -3%?

And does this story change if the first guy is Chinese and the second guy American?