The French Disconnection

15/12/2011 Leave a comment

Today, Christian Noyer, the chairman of the French Central Bank called for the credit rating agencies to focus on downgrading the UK before looking at France. His comments came in response to S&P placing France on “CreditWatch” – essentially monitoring it closely and considering an imminent downgrade.

The UK, Noyer argued, should be ahead of France in the queue for downgrades because it has:

  • a higher deficit
  • higher inflation
  • lower growth

Now, I have no love for rating agencies but he has missed the point a bit. If the factors he mentioned were the only factors then fine but he forgot to mention anything to do with the reasons S&P gave for putting France on CreditWatch, namely that the countries using the Euro are in a massive pickle and their politicians have proved unable to decide upon a way to depickle themselves.

I understand why he’s upset with the UK. David Cameron’s performance last week of refusing any attempt of negotiation in favour of showing his backbenchers that he is tough on Europe and tough on the causes of Europe was probably not our proudest moment.

Even so, Noyer should have a bit more compassion. He might have to deal with Cameron every now and then but in the UK we have to deal with the guy every day, and it’s hard enough without foreign central banks petitioning the rating agencies for a UK downgrade.

Yes, our finances are in bad shape but we are a long way from risking default. How he could compare the UK’s credit worthiness with France’s without mentioning the Euro-shaped elephant in the room shows he is either clouding his judgment because he is in a big huff with David Cameron or he is simply disconnected with reality.

We might have equally incompetent politicians running our country but while we are not using the same currency as Greece or Italy and while we have the ability to determine our own monetary policy, it should be no surprise to Noyer or anyone else that when it comes to worries about debt repayments, all eyes are on Europe.

RedEaredRabbit

Filed under Economics, Politics Tagged with , , , , ,

We need to talk about Europe

08/12/2011 Leave a comment

In the run-up to the last election, much was made of the UK’s poor financial situation. We were told repeatedly  by the Conservatives that after years of irresponsible borrowing, our finances were the worst in the developed world, that we were on the point of bankruptcy and that if we didn’t immediately reduce the deficit then no one would lend to us.

18 months on, we’ve achieved nigh on no economic growth and despite the government’s cuts have continued to increase our debt at more or less the same rate.

This leads me to wonder – if our finances were so bad then and have got worse since, why is it that we can continue to borrow money so cheaply when no one will lend two Drachmas to all of those struggling economies in the Eurozone? Something doesn’t add up.

First, let’s look at whether our finances were really the worst in the developed world. This is a graph of government debt as a percentage of GDP for each country in the G7. The data is taken from the IMF website.

Government Debt as a Percentage of GDP (source IMF)

Government Debt as a Percentage of GDP (source IMF)

You see that orange line at the bottom? That’s the UK. Were we really borrowing so irresponsibly for all of those years under Labour? That’s a matter of opinion but if we’re on the naughty step then it’s pretty crowded.

On a side-note, Japan’s is quite impressive, isn’t it? They seem to be in a Ponzi scheme with their own public but Japan could be a million blog posts on its own so I’m not going down that avenue.

Turning our attention to the Eurozone, you will have noticed in recent weeks that Angela Merkel has blamed the current crisis on the irresponsible fiscal policy of certain member nations – i.e. that they have screwed the Euro by living beyond their means.

Here’s some more data from the IMF website showing some Eurozone economies’ borrowing as a proportion of GDP from the adoption of the Euro up until 2007, the year before the financial crisis.

Government debt as a percentage of GDP (Source IMF)

Government debt as a percentage of GDP (Source IMF)

Ireland and Spain reduced their debt significantly in this period. Italy reduced theirs a bit and although it was pretty awful in 2007, it was even worse when they joined the Euro so I don’t understand the sudden surprise now.

Anyway, it’s fairly clear that while Italy and Greece maintained high levels of borrowing throughout this period, Ireland and Spain did not. Merkel’s claim that each of these nations brought it on themselves purely through their government borrowing is not backed up by the figures. Ireland arrived on the eve of the financial crisis with much lower borrowing rates than they’d had historically but their economy imploded spectacularly nonetheless. Saying that the problems are purely down to fiscal policy is quite bizarre.

Another factor, which Merkel hasn’t wanted to mention, is monetary policy. In the UK when our economy got into difficulty the Bank of England cut interest rates and they have been sitting at a tiny 0.5% for the last two and a half years. Conversely, in April, egged on by Germany, the European Central Bank started to increase interest rates in the Eurozone and perhaps it should not come as a surprise that this coincided with the start of the current crisis.

The fragile Eurozone economies didn’t want higher interest rates but they could do nothing about it. Germany wanted higher interest rates because they were worried about inflation and so the weaker economies had to pay for this through lower growth and higher unemployment.

When the fragile Eurozone economies want to borrow money, lenders look at them and see that they are powerless to control this basic facet of monetary policy and therefore have lower confidence in their ability to respond to changes in their economies. If I want to invest some money shall I do it with a country who can respond to economic problems or one who can’t? Not a difficult decision.

There is though, another branch of monetary policy that is perhaps even more concerning. There is a reason that no one in the market really worries about the UK or the US being able to repay its debt but do worry about the economies in the Eurozone.

If the UK ever gets into a real pickle and needs some more Pounds to repay a loan they always have the option of going to the printer and just printing it. The UK controls its own currency. Ireland doesn’t. Italy doesn’t. Spain doesn’t. If they run out of money they go bust.

In the first recession they have faced, the Eurozone members’ lack of control over their own monetary policy has been a key factor in the crippling of several economies. Angela Merkel now wants to take things further and take away their control over their fiscal policy. Forcing the weak economies into crazy austerity measures will simply lead to many more years of high unemployment and no economic growth.

If it’s that simple though, why would Merkel be advocating a clearly bad policy? The problem Merkel has is that if she did the sensible thing and told the ECB to cut interest rates and buy up lots of government bonds from the weak economies, the German people would get cross and she would not be re-elected. Sadly, these are the things that matter most to politicians.

So what will actually happen? This is my prediction:

  • Germany will implement some rules to restrict fiscal policy of the Euro member states which will keep German voters happy but screw up the weak economies for years to come
  • Having done this Germany will then, finally, allow the ECB to buy up some government bonds, allowing the fragile economies breathing space to avoid short term default
  • The underlying problems will remain

Do you remember when William Hague fought his 2001 election campaign with pretty much one policy? “Keep the Pound,” he bleated incessantly for several months before losing in a landslide against a government who, err, kept the Pound.

He was right to want to keep the Pound though. Ok, he was right for the wrong reasons – nationalism and xenophobia have little place in macroeconomics but in hindsight, I shudder at the thought of where we would be now if we’d adopted the Euro too.

There is a certain romance in the single currency. It feels like it brings us all closer together, working with our neighbours in one financial union and it’s a marvellous two-fingered salute to the sickening xenophobia peddled by Nigel Farage and The Daily Mail.

Sadly, romance and economics don’t mix either and whatever transpires, one thing is abundantly clear – in an era of many bad ideas, the worst one of all was the Euro itself.

RedEaredRabbit

Filed under Economics, Politics Tagged with , , , , ,

Banks, Bishops and Robin Hood

03/11/2011 2 Comments

Suppose you have £100 in your pocket. You know at some stage you are probably going to need to use it to pay for something but not today. Maybe tomorrow but not today, so you lend it to a bank for a day and they pay you some interest and tomorrow you get back £100.02.

The next day again you don’t need your money so you lend your £100.02 back to the bank and the day after you get £100.04. You continue doing this every day making a daily 2p profit until a month later the day comes when something crops up and you need to use your £100. In that period, because you invested you have made a 60p profit compared with having just kept the £100 in your pocket.

That’s all nice and easy. Now suppose that the taxwoman comes along and every time you transact with your bank she charges you 1p.

(Why do people always assume that a person working for the IRS is a taxman? This time it is a taxwoman – I am fighting for equal opportunities.)

With this tax in place it is still profitable to do the investment but your profit is reduced to 30p, having reinvested your money every day for 30 days and having been charged 1p each time.

If you are feeling a bit miffed at losing half of your profit there is an alternative. Rather than invest your money for one day 30 times in a row, you could invest it once for 30 days. Since you are now doing just one transaction instead of 30 you will pay just 1p to the taxwoman and walk off with a healthy 59p profit. Hoorah! Take that you thieving taxwoman!

There is a downside though. The nice thing about the first option was that each day you got your money back. If you needed it to pay an unexpected bill you could do so and if nothing unexpected came up you could just reinvest and have the same choice again tomorrow. By moving to the single 30 day investment you have in fact made a bet. You have bet that at no time in the next 30 days will you need to access that cash.* If after 20 days you do have an unexpected bill to pay then you’re in trouble.

In effect, what the taxwoman has done, in trying to raise revenue, is unwittingly made you take a risk. Having easy access to your money was very expensive compared with not having any access to it for a month. You thought it was worth the gamble.

Of course, the profit of 30p or 59p is unlikely to make anyone bother to invest at all but scale this up to the amount of excess cash a bank might have on a particular day, which could be tens of millions of pounds and suddenly the difference between the two options becomes something to think about. Should they invest it daily knowing that they’ll get it back the next day should they need it but making a small profit or should they invest it longer term knowing they’ll make a bigger profit but might be in a pickle if they need it unexpectedly?

Irrespective of what they decide, the taxwoman has given them a new incentive to take a risk.

This week the Archbishop of Canterbury came out firmly in favour of such a tax. He is backing a tax on financial transactions known as the Tobin Tax (after American economist James Tobin who first proposed the idea back in 1972).

While I think taking economic advice from a clergyman almost as absurd as taking it from a politician, I do see why the Tobin Tax, (recently rebranded in the UK as the Robin Hood Tax) has gained popularity. These are some of the things I have heard about it:

  • The tax is a good idea because it would stop banks taking risks
  • The tax is a good idea because it is only tiny in the grand scheme of things and it would still raise lots of money
  • The tax is a good idea because the banks caused the mess so they should pay to clean it up

I’ll take each of these in turn.

It would stop banks taking risks

As I showed in my simple example of investing spare cash (traditionally a low risk activity) this tax gives an incentive to move from a safer strategy to a more risky one. It is simple enough to see in this example but apply it to the complex things traded between banks (which 2008 showed us even they don’t understand) and we really don’t know what effect it would have on the market in terms of risk. It would most likely lead to fewer, bigger, longer term transactions and those are simply more risky not less.

The tax is tiny and will raise lots of money

That doesn’t make sense – they can’t both be true. Rowan Williams thinks the tax could raise $400bn each year. According to this McKinsey report, global banking profits last year were $712bn. Are we honestly saying this is a small tax that the banks won’t notice? That’s over half their profit!

Will it raise lots of money? Probably but remember, banks are experts in passing on the costs of something on to their customers. If you want to borrow some money when such a tax is in place, what is to stop the bank just giving you a worse rate to compensate? In doing so it isn’t the bank paying the tax, it’s you.

Banks caused the mess so they should pay to clean it up

The banks did cause the mess and they should pay towards the clean up. If you think that such a tax is going to recoup what they cost us though, think again. I would broadly estimate that the total cost of the problems caused by the banks will have a negative effect on the UK economy alone to the tune of several trillion pounds. Sorry, that’s never coming back.

Also, just because the banks should pay towards the clean-up doesn’t make the Tobin Tax a good way of doing it. If we decide to go after the banks a simpler way of doing it would just be to tax their profits. If we did that at least we wouldn’t push them towards risky trading strategies even if they would still probably try to pass the extra costs on to us.

You can therefore summarise from this that I don’t think it’s a particularly good idea. Please don’t misunderstand me – I would love to get some money back off the banks. I just can’t see this is a good way of doing it. Branding it The Robin Hood tax was a stroke of genius – take from the rich and give to the poor etc. It gives the tax a certain romantic quality and I think that’s where a lot of its political support comes from.

Sadly though, a tax is a tax and romance can play no part in differentiating a sensible one from a bad one.

RedEaredRabbit

*Additionally, putting money on deposit for a longer term opens the lender up to increased credit risk as if the borrower gets into difficulty during the period the lender can’t just decide to get their money back and reinvest elsewhere.

P.S. As with all of my posts this is purely my opinion and I’m not saying that my opinion is definitely correct or any better than anyone else’s. As always, whether you agree or disagree with me, I am happy to hear your thoughts.

Filed under Economics Tagged with , , ,

Rod Construction for Backs

25/10/2011 Leave a comment

When I was 17, one of my friend’s parents bought a video camera and we immediately decided to make a horror film. It was called “Day of the Leprechaun.” I’ve no idea why we called it that but the “Leprechaun” was a genetic experiment gone wrong. In the film’s first scene the “Leprechaun” was created in a lab and immediately killed the scientist who had created it. That scene was brilliant – we’d got some off-cuts from the butcher that he couldn’t use and was going to bin anyway and while the scientist was being killed we filmed a white wall and took it in turns to hurl bits of offal at the wall as hard as we could.

I actually played the “Leprechaun” in the film and recall killing someone by throwing a corn-on-the-cob through their head. Somewhere there is a VHS of that sitting in someone’s attic.

Anyway. It seems the big news story of the day is the Tory Rebellion – 81 Conservative MPs defying the whips and voting in favour of a referendum on whether the UK should stay as part of the EU.

Having this referendum would be fairly pointless. Do you remember the waste of time and money we had on the AV referendum? Multiply it by 10. If we did this, all the political parties would forget the economy, health care, education etc. and all focus on their bad marketing campaigns for the next however many months.

If ever there were the perfect opportunity for a bad marketing campaign it would be this. We would soon be bombarded with the usual nonsense, “Our bananas have to be a certain shape according to EU law!”, “90% of our laws are made in the EU!” etc. It would make the “illegal immigrant who couldn’t be deported because of his cat,” seem like a plausible story.

Although I don’t want to have a referendum on EU membership, there is something about this whole thing that I have found spectacularly funny.

This vote came about because someone made an ePetition on the government’s website and it got 100,000 signatures. Regular readers will know my view on ePetitions. I think they are an example of ill thought through, Big Society nonsense. In that post I talked about how easy it would be for any well organised campaign to get 100,000 votes on their ePetition and that getting 100,000 votes told us nothing useful at all about the will of the people. Giving a green light for a debate in the House of Commons in such circumstances is a bit daft.

Of course, David Cameron and I disagree on a lot of things but I think after the past couple of days he might be starting to wonder if he got this one right. In the same week that he is sitting around with other European leaders trying to work out an exit from the latest financial cow-pat, his party is in the news for trying to work out an exit form Europe.

“It’s the wrong question at the wrong time,” said William Hague.

Perhaps it is but surely he must appreciate the irony of the situation. You concoct a daft idea in a desperate attempt at trying to promote your Big Society thing and the first thing it delivers to you is a severe kicking.

When I look at the ePetitions thing it seems blindingly obvious that it has big, underlying problems. I therefore cannot, for the life of me, understand why William Hague or David Cameron thought such a policy would consistently deliver them the “right question at the right time”.

The ePetitions are nothing more than a marketing campaign by the government to make the people think that they are the ones with the power. If the government were really backing this scheme they wouldn’t have spent the last week bullying their own MPs into voting in a certain way. By the government’s definition, Big Society wants a vote on EU membership. Why therefore impose a three-line whip on your MPs telling them they have to reject the will of Big Society?

Of course, ePetitions are daft and Big Society is daft but if “Day of the Leprechaun” taught me one thing, it’s that if you create a dumb monster, its first action will probably be to bite you on the arse.

RedEaredRabbit

Filed under Politics

Creationist Economics

13/10/2011 13 Comments

Evolution is truly amazing.

The are two reasons I think this. Firstly, just look at the wonderfully diverse range of organisms to which it has lead. Elephants, dolphins, giant redwoods, kangaroos, scorpions, sharks, squid, salmonella, venus fly traps, honeybees and naked mole-rats. They are all stunning examples of what evolution has caused.

The second reason I find it amazing is that it is so simple:

  • An individual’s offspring will share similar traits with that individual
  • An individual with beneficial traits is more likely to have offspring
  • Therefore more beneficial traits are more likely to be passed on from one generation to the next than less beneficial ones

That is pretty much it and all you need to add is a bit of time.

A friend of mine disputed evolution recently, on the basis that the species we see today are just too complex to have come out about through such a process. This is how I thought about it. (This is probably why I don’t have many friends.)

Suppose that a particular species has a one year lifecycle and on average each new generation is about 0.001% better than the previous generation. It’s a very small amount – one one-thousandth of one percent better.

Over a period of 1000 years you would notice little difference – the current generation would be about 1% better than they were 1000 years ago. It’s very similar to compound interest – invest £1 for 1000 years at a rate of 0.001% and you will get £1.01 back at the end. Look at this though:

After 10,000 years it will be worth about £1.11
After 100,000 years it will be worth about £2.70
After 1,000,000 years it will be worth about £22,000
After 2,000,000 years it will be worth about £485 million
After 3,000,000 years it will be worth about £10.7 trillion
After 4,000,000 years it will be worth about £235 quadrillion

Back in terms of our evolutionary example, our species that improved at a thousandth of a percent per generation is 235 quadrillion times better than its ancestor of 4 million years ago whilst being virtually indistinguishable from its ancestor of a few thousand years ago. Pretty cool.

Of course, like my friend, not everyone believes in evolution. Some favour Creationism. In Creationism you assume that there is a supremely intelligent being who made a supremely brilliant strategy for the development of species at the start of things and everything worked out from that brilliant strategy.

Now, I can hear you all saying, “That rabbit has really lost it this time, what the hell is he talking about now? I was expecting some sexy economics shit not a biology lesson.”

I am coming to that. I am a big fan of something that has come to be known as evolutionary economics. It works like this:

Suppose you want to achieve a certain outcome over a period of time in an environment with many unknowns. One way of doing it would be to work out the perfect strategy at the start and then run with it. Evolutionary economics would suggest that a better way of doing it would be to continually monitor and adapt your strategy, keeping the things that are working well, and replacing the things that are working badly with new things. Some of the new things will work and they’ll be kept. Some of the new things won’t work and they’ll be binned and replaced. Perhaps some of the things that worked well a while ago will stop being beneficial later. That’s fine, they’ll be adapted too. By doing this, the strategy continually evolves, adapting to the successes and failures along the way in order to ultimately succeed.

I strongly believe that in a complex environment the very best way to achieve success is by continually reviewing and adapting strategy. I do not believe that the very best way to achieve success is to come up with a strategy at the start and never adapt it in spite of how well it does.

Some people do though and they’re called politicians. When the Conservatives won the last election they did so partly based on the promise that they could cut spending and also achieve economic growth. The economic growth though, for one reason or another, has not materialised.

Some people will say, “You big muppet, George Osborne! You said we’d have economic growth and we didn’t! Your strategy was all wrong!”

I don’t agree with this way of looking at things. Sure, he’s a muppet but we are talking about the deployment of a strategy in a complex environment. The behaviour of the UK economy is not easily predictable – a huge number of unpredictable factors influence it. It is complex. His failure is not in his initial strategy, it is in being unable to adapt his strategy based on how well it is actually doing.

Imagine you are watching a horse race and horse number 3 is in the lead. You might say, “I think horse number 3 will win this race.” It would be a fair prediction. Horse number 3 might then take a fence badly and be overtaken by horse number 5. You might then say, “I think horse number 5 will win this race.”

You give your best judgment at a particular point in time and if the situation changes, you adapt your judgment. A politician does not do that though. When horse number 3 was overtaken, a politician would still back horse number 3 because that was what they said first. Horse racing is a brutal industry – when horse number 3 fell at the next fence, broke its foot and was shot by a vet, the politician would still back it to win.

In contrast to evolutionary economics, I have developed my own term for this kind of thinking – Creationist Economics. It’s impossible to get everything perfect first time around but politicians it seems, believe their strategies represent some kind of intelligent design.

At last week’s Conservative Party conference the general economic theme seemed to be, “We must keep doing what we’re doing because you can’t borrow your way out of recession.” (That’s actually not really true. You can borrow your way out of recession you are just left with more debt afterwards. What you can’t do is cut your way out of recession.) Either way, I am moving away from my point. George Osborne, favouring Creationist Economics, refuses to accept that his strategy has not realised the growth that he forecasted and instead stands by his policies through what I can only interpet as a matter of faith.

Of course, George isn’t the only disciple of the church of Creationist Economics. The Health Secretary, Andrew Lansley has an idea to reform the Health Service. Because the communicated benefits of his policy turned out to lack any basis in fact he had to work hard on a campaign of misinformation. (This is always preferred by creationist economists over accepting their strategy was wrong which is considered blasphemy.) Lansley found a couple of facts that if taken out of context he could use to make his strategy look like a good one. He didn’t exactly lie but he did intentionally mislead people, which I think is every bit as bad.

Let’s have a look now at Theresa May. Theresa’s new policy is scrapping the Human Rights Act. Unsurprisingly, this has come in for a huge amount of criticism from all sides. Like Lansley before her, Teresa was forced into telling a fib in order to maintain her creationist ideals. See if you can spot the fib:

What Theresa said:

We all know the stories about the Human Rights Act… about the illegal immigrant who cannot be deported because, and I am not making this up, he had a pet cat.

What Theresa said minus fib:

“We all know the stories about the Human Rights Act… about the illegal immigrant who cannot be deported because, and I am making this up, he had a pet cat.”

Let me summarise my thoughts:

  • It is not possible within a complex environment to devise a perfect initial strategy.
  • It is therefore necessary to monitor and adapt a strategy in order for it to be ultimately successful.
  • Politicians deny these things as they are creationist economists

You may not have realised this but most likely you are an evolutionary economist. Suppose you are making your first ever Sunday roast and when making the gravy you decide how much corn flour to add and it all goes thick and lumpy. Next time you do it you learn from your failed strategy and add less corn flour. Congratulations, you are an evolutionary economist. Would you ignore the evidence and continue to put the same amount of corn flour in your gravy forever? If so then you are a creationist economist.

To me it seems clear that our politicians are not governing our country in a particularly efficient way. It’s not just the current government – the opposition parties would and do embrace their own creationist themes. My complaint is with no particular political party it is with our system. If a politician tried evolutionary economics the media would crucify them for “flip-flopping”. It is much more beneficial for a politician to just get it wrong to start with, never waver from being wrong and spend their time and effort on misleading people into thinking they are right.

And while this is the case, we will all have to endure poor political strategies and politicians will have lumpy gravy every Sunday.

RedEaredRabbit

Filed under 10 Posts You Should Read, Economics, Politics Tagged with , , , , ,

The Greatest Democracy on Earth

22/09/2011 1 Comment

The United States is often marketed as the Greatest Democracy on Earth. I’m not sure I agree.

A couple of months ago there was a lot of worry in the global markets that the US was about to default on its debt. As I wrote about here, this was a very different situation to that of Greece who is very much in danger of default at the moment.

So, why is it different? After all, both of them need money. Let’s take a look.

The USA

Investors are banging on the door to lend the US more money.

Greece

Finding someone who wants to lend to Greece at the moment is harder than finding a dodo who can simultaneously breakdance, juggle six elephants and recite its seven times table in Welsh.

While both countries need money, investors believe that the US will be able to pay it back and Greece won’t. It is probably not a bad judgment.

So if the US isn’t a risk to lend to, if people are queuing up to lend it money – why was there ever talk of a default?

To understand this we need to look at US politicians. In the US (to all intents and purposes) there are just two parties, the Democrats and the Republicans and things are always very close between the two. With nothing to back this up, I am going to lazily say that 45% of the US public always vote Republican and 45% always vote Democrat. The remaining 10% decide who is in government and even they are often fairly evenly split.

Because of this the US always has a fairly evenly split Senate, which in turn leads to both parties needing to agree in order to pass changes to US policy. There’s nothing wrong with this in theory; in some ways it is quite good but it does require that to get anything done the two parties need to work together in a reasonably constructive manner.

That’s where the problem lies – they can’t. Or at least they don’t.

The President of the United States, is often referred to as the most powerful person in the world. Evidence clearly shows this is far from true. Take that “almost default” example. Without the Senate agreeing, Obama couldn’t even make the decision to take the money that the US needed and not default on their debt repayments.

Instead the decision went to the Senate.

Defaulting on your debt when people want to lend you money very cheaply would be more than a bit daft. In fact it would be so daft that even the Republicans knew it would be much worse for the US than just borrowing the money that people wanted to lend it.

The Republicans also know though, that their votes are needed for the decision to pass so instead of just saying “Fine borrow the money, let’s move on to something important.” They instead said, “You can borrow the money only if you do something totally unrelated that we want.”

(For more on that read my charming, metaphorical story about Obama flying an aeroplane. Or should that be an “airplane”?)

Had the bill not passed, the people who would have lost out would firstly have been the US citizens as their economy went down the pan. Then everyone else in the world would have been in trouble (as the health of the US economy affects us all).

Although there was a lot of posturing and political bravdo thrown around by both sides, that situation can be neatly summarised like this:

The Republican Party held the US government to ransom with the American people as the hostages.

I’m not being theatrical, this is simply what happened. The Republicans wanted some spending cuts and held the country ransome to get them and it was truly shameful. A far better way of doing things (without causing global economic chaos) would have been to say:

“We all agree that we need to borrow some more and while we would like to discuss other fiscal measures we will do so once this is sorted out. After all whatever we agree on those items, paying our bills is essential.”

Unfortunately this isn’t a one off. Obama has recently announced a new bill aimed at boosting the US economy through closing tax loopholes for the wealthy and increasing government spending. It is actually a very sensible bill but it doesn’t matter – it will be shot down by the Republicans and it won’t pass.

Is that stupid? No, it is ludicrous. Republicans, hate taxes on rich people and hate government spending. Their political campaigns are funded by the rich and that is of more interest to them than doing something sensible to actually help sort out the problem.

The US government needs to act decisively but can’t because of their politicians and sadly, their economy will experience far lower growth than it should do and we’ll all be worse off because of it.

Have you ever wondered why the US can’t bring in public health care or cut greenhouse gas emissions? Same reason – any sensible policy can be easily blocked by a few right-wing half-wits with their own agenda.

In light of this, is the US the greatest democracy on Earth or a bit of a fucking mess?

It’s not just the US though. Europe is in a big mess too. Do you see any sign of some decisive action from European politicians to put forward a clear plan to sort their mess out? If you’ve spotted one then let me know, it must have passed me by.

Politicians just don’t seem to realise that part of the remit we gave them when we elected them was to be able to sort this stuff out. In the US, Obama is trying but he’s ultimately powerless in achieving anything. In Europe they’re doing nothing and hoping it blows over. (It won’t.)

So what of the UK? The UK government has favoured spending cuts and austerity over any attempt to boost the economy. With interest rates at the zero lower bound and unable to be cut further to offset the cuts, this is at best a dangerous game. Basic economics shows that spending cuts in such a situation will harm growth but the government crossed their fingers and hoped that the economy would somehow sort itself out on its own. In the long run it probably will but that’s hardly a reason to dismiss opportunities to sort things out now.

The IMF has said that if the UK is not going to meet the government’s 2011 economic growth targets (it doesn’t have a chance by the way) that it should reconsider its policy of spending cuts and look instead at a policy of stimulating the economy.

After the election in 2010 it would have been very difficult for any political party to forsee the future and build the perfect fiscal policy to cope with such unknowns. In such circumstances, the elected government should:

– Have used macroeconomic theory as the foundation for their policies. (They didn’t)

– Absolutely be prepared to adapt their policies to match the continually changing and unpredictable economic climate. (They aren’t.)

The government based their policy of spending cuts on the hope that economic growth would happen anyway. It hasn’t and now is the time for them to understand that blindly pursuing this will only cause further harm to the economy.

When looked at objectively, the ability to assess and adapt seems like common sense but asking a politician to consider changing policy is not so simple. A lot of that is our own fault. When a government changes its policy we all say, “It’s a U-turn! You got it wrong! You’re rubbish!”

That really is missing the point. An effective government will not be made up of fortune tellers. Therefore an effective govrnment needs to be able to continually adapt their policies to fit with a volatile and unpredictable world. If, next week, George Osborne says that he is going to scrap some cuts and instead focus on some policies to stimulate the economy, we should not all be criticising him as a weak policitian for changing his mind. If he does this we should be commending him as a strong politician – someone who is able to adapt their policies to fit the situation in which they find themselves.

Of course this is all wishful thinking. In reality what will happen next week is that:

  • Obama will bang his head against a wall because the Republicans will block his sensible policies
  • Angela Merkel will keep her head in the sand and hope it all goes away
  • George Osborne will fly in the face of logic and stick with spending cuts

The really sad thing is that now, more than any time in the last three years, it is easier to know what a good fiscal policy is.

It just seems harder than ever for a politican to spot one.

RedEaredRabbit

Filed under Economics, Politics Tagged with , , , , ,

The Tax Delusion

09/09/2011 5 Comments

Have you ever met a climate change denier? I wonder why they don’t believe in global warming. Using some fairly basic maths you can calculate the Earth’s surface temperature assuming no greenhouse effect exists – it’s about minus 18°C. The reason we’re not in a permanent ice age is because of the greenhouse effect.

“Rubbish!”  you say, “the greenhouse effect is something new, we didn’t have it before and it wasn’t that cold!”

The greenhouse effect is actually nothing new – it’s been around as long as carbon dioxide, water vapour and other greenhouse gases have existed in our atmosphere. The problem now is that our activities are increasing the concentration of these gases. Basic physics states that this should increase the Earth’s surface temperature and lo and behold that’s exactly what we observe. Of course there are many factors that affect our climate at any one time and while we cannot be 100% sure how much the greenhouse effect will affect the surface temperature in any one given year, we can be sure of these two facts, which are absolutely indisputable:

a) We are increasing the concentration of greenhouse gases in the atmosphere

b) Greenhouse gases increase the surface temperature of the planet

When the temperature starts going up in line with this it is surprising that lots of people choose to put their heads in the sand and deny what theory and evidence shows is very clearly happening. The reason I think, that this denial-phenonmenon exists, is simply that it is much more convenient for people to live in denial than it is for them to accept reality.

Accepting the true scale of the problem means significantly changing our lifestyles and a lot of people don’t want to do that. Pretending that climate-change skepticism has any basis outside cloud-cuckoo land allows people to continue doing what they’re doing and avoiding this massive inconvenience.

This blog isn’t about climate change though.

Have you ever met a supply-sider? Supply-siders have a lot in common with climate change deniers. I should explain what I mean by a supply-sider. It’s about tax though, so grab a coffee before you continue.

Cutting income tax has a positive effect on economic growth because people have more incentive to work and have more disposable income to spend. The problem though is that tax cuts need to be financed by cutting public spending and that has a negative effect on economic growth and a negative effect on people’s quality of life. As an alternative to cutting spending, we could borrow to cover short-term tax cuts but we can’t make permanent tax cuts and still have a functioning NHS, education system, armed forces etc. etc.

That much is, again, basic maths and uncontroversial. Unless you are a supply-sider. Supply-siders believe that the effects of tax cuts is so ridiculously large that they more than pay for themselves – that cutting taxes actually increases government revenue and everyone becomes better off because of it.

Nowhere are supply-siders more prominent and militant than in America. When Bill Clinton took office he took over a large budget deficit. He responded to this by introducing tax rises on the middle-classes and wealthy. Supply-siders went mad – claiming that this would starve the economy and usher in financial disaster! In fact what happened was that the economy grew, unemployment went down and the deficit turned into a surplus.

Enter George W. Bush. As a supply-sider, Bush brought in an era of tax cuts and the richer you were, the more you benefitted. This, he assured everyone would make a massive boost to the economy. The surplus quickly turned back into a massive deficit.

Of course these are just two examples (albeit good ones) and there were many other things going on which would have contributed to these two outcomes. Importantly though, supply-siders said that Clinton’s policy to raise taxes on rich people to pay off the deficit would spectacularly backfire and they said Bush’s policy to cut taxes on rich people would boost the economy. In both cases they were 100% wrong.

Like, climate-change deniers, supply-siders ignore logic and evidence simply because the reality is inconvenient. Supply-siders organise huge campaigns to tell voters that their taxes are harming the economy.  They tell people that if they just paid less tax to the government and kept more money for themselves, we’d all be better off. This is voodoo economics. This is one of the ultimate examples of bad marketing. This is to economics what homeopathy is to medicine.

So we can see that while cutting taxes stimulates economic growth, it does not pay for itself. Cutting taxes will cost money and if it is the rich receiving the benefit, it is everyone else who is receiving the cost of it.

It was therefore, with sadness that I read this week’s story about 20 economists writing to the FT to campaign for a lowering of the top tax rate, stating that it was harming the economy.

I do agree we need something to stimulate the economy. As I’ve discussed before on here – we won’t get rid of the deficit without economic growth and there is precious little of it at the moment. I do though have a big problem with attempting to do this through a tax cut on the 320,000 richest people in the country. Don’t misunderstand me – I am not so much of a liberal that I want to advocate the punishment of rich people, I simply think that if you are in the top 320,000 richest people in the country you should not be at the front of the queue when it comes to government handouts.

The supply-siders’ excuse is that by giving rich people even more money we will boost the economy and it will filter down to the poor people.

So which of these boosts the economy more?

a) Giving 10 rich people £1,000,000 each

b) Giving a million poor people £10 each

The letter to the FT offered nothing more than vague anecdote to say why we should go for a). 24% of income tax, it said, is paid by the richest 1%. This could be because taxes are grossly unfair. It isn’t though.

The income gap between rich and poor has been rising for a long time and is now bigger than it has ever been. When a small number of people earn lots of the income, a small number of people pay lots of the income tax. On its own, that figure of 24% paid by 1% tells us nothing useful at all. (I wrote more about this here.)

I reread the letter a few times and couldn’t really understand how 20 economists (a few of them with senior academic positions) could so strongly advocate such a tax cut and only provide a weak argument of vague anecdote to back it up.

To say the least it was a wish-washy argument: “Some rich people might all move somewhere else with a lower tax rate.” Well they might indeed – we all understand incentives. I would have thought though – no I would absolutely have expected that 20 economists arguing for tax cuts for rich people, between them could have come up with something concrete to show why, in the circumstances, this is a good policy. The US has (and has had for a long time) a far lower top income tax rate compared with the large economies in Europe and they’re doing worse than we are. I haven’t see a huge number of UK companies abandoning ship and moving to the US.

Supply-siders argue that when taxes on top-earners are raised that top-earners find ways to avoid and evade the taxes. That’s also true, but it isn’t necessarily a reason to sort it out through a policy of:

“Damn those rich people, they’re so wiley! We’ll have to recoup that money from the less-wiley poor people!”

If our tax rules are this easily side-stepped by rich people then we should look at the tax rules and make them tighter. We should not be saying that poor people should be picking up the bill because we have loop-holes in our tax law.

A very important point that the letter ignored though is what people do with the extra money they receive through tax cuts. If we go with option a) and give 10 rich people £1,000,000 they might spend a bit of it but most likely a lot will go into their savings – they already have plenty of money to finance their lifestyles.

If we go with option b) and give 1,000,000 poor people £10 each they will spend it. When people are really struggling to get by on what they earn they don’t open a savings account.

This is very important because the key reason that tax cuts help to stimulate an economy is because people have more money to spend and in spending that money they stimulate the economy. If we make a tax cut where the extra money goes straight into people’s bank accounts then no economic growth is realised. These are two very basic and indisputable economic rules:

  • Rich people save a greater proportion of their income than poor people
  • Spending money stimulates the economy
It is therefore absolutely the case that option b) would lead to more of the realised tax benefits being pumped back into the economy. Wouldn’t it be a good idea to have at least mentioned this in the letter? Maybe shown how they could be so sure that the effect of the disappearing, tax avoiding rich people outweighed this effect?

Anyway, as it transpired, the 20 economists’ letter to the FT had been organised by a PR company. I’ve no idea why a PR company decided to set out to find 20 economists to sign their letter but something fishy is definitely going on.

Labour’s alternative is to make a temporary cut in VAT. This might work quite well as an economic boost – everything is cheaper for a year, buy it now! It isn’t a perfect way of targeting the poorest – VAT has a reasonably equal effect on everyone. The Lib Dems (remember them?) are said to favour raising the threshold below which no income tax is paid to £10,000. I like that one the best.

Let’s be clear, though – none of these ideas is going to suddenly pay for itself. Despite the claims of the supply-siders, all tax reduction policies would increase the deficit (or mean additional, unplanned spending cuts.) While increasing the already massive deficit is not ideal, I would be in favour of doing so if it kick-started some growth and simultaneously helped out the poorest people who are struggling the most.

If, when you started off reading this blog post you were an advocate of tax cuts for the rich and are now considering your position then this post has done its job.

If, when you started off reading this blog post you were an advocate of tax cuts for the rich and are not now considering your position then don’t worry, you’re not on your own – George W. Bush is on your side too.

RedEaredRabbit

Filed under Economics Tagged with , , ,

Scotland and Filettino

04/09/2011 Leave a comment

Yesterday I read this rather wonderful story in which the Italian town of Filettino, population 550, has declared independence from the rest of Italy in protest at the government’s austerity measures.

This got me thinking about whether the move was in fact a good one. Sure Berlusconi isn’t running things for them now but he has been replaced by someone whose first act was to print bank notes with his own face on so the jury will have to remain out on the leadership point for now.

Since I don’t know too much about Filettino, I decided to first think about a more familiar independence argument – should Scotland be independent from the United Kingdom? I wasn’t sure about this either so I do what I always do in such situations – I asked Twitter. I also cunningly asked respondees to give me their nationality.

These were the results:

Votes for Independence for Scotland

Overall things are a bit mixed but we can say that the Scottish respondees were mostly against independence and everyone else was split about evenly. (Except in North America where Canadians were 100% against independence and US was 100% in favour. It was a small sample though.)

Quite a few of the English Yes votes were accompanied by a brief “we should stop paying for them” type quote. This always seems to be what the argument boils down to but the SNP argues that Scotland more than pays its way because of North Sea Oil.

Let’s look at this. If Scotland became independent and international waters were divided up according to standard methods then they would certainly have a far larger share of the North Sea oil per head of population than England. Scotland isn’t Abu Dhabi though, so is it enough for them to successfully function independently?

The price of oil is hugely volatile. It varies between $50 and $150 a barrel and seems to shoot between these two extremes all the time. Major oil producers like Abu Dhabi hold lots of oil in reserve and actually help to set the oil price by controlling its supply into the market. Scotland could not do that – if it based its economic independence on oil then it would have a very volatile income. Because the UK economy is much larger than an independent Scottish economy, this volatility in the oil price has a much lower effect on it. Scotland could however, get around this through borrowing money when the oil prices were low and paying it back when oil prices were high, it’s a more expensive way of doing things but probably not a big issue.

You could though, argue that oil is going to run out at some point and that relying on it for your income is not a particularly clever long term strategy. That’s true but like it or not, oil will be around for a while yet and there would be plenty of time for an independent Scotland to invest in other industries before the oil is all gone.

Anyway, back to the key question – is the rest of the UK funding Scotland or vice versa? More or Less on Radio 4 recently did the maths. They calculated that over the past 27 years Scotland had been subsidised by the rest of the UK to the tune of £20 billion. It might sound like a lot but £20 billion over 27 years is nigh on nothing. It’s about £741m per year, or to look at it another way it is equivalent to 20 tonnes of platinum at today’s prices. 20 tonnes of platinum is handily pretty much exactly a block of one cubic metre. (One cubic metre of platinum weighs 20 tonnes! Pretty cool, no? No? Oh.)

Why is that nothing to worry about? Last year the UK as a whole borrowed the equivalent of more than twice the height of Big Ben in such blocks – one block really isn’t an argument defining amount.

(If you just read that and said, “Actually Big Ben is the bell, not the clocktower, this RedEaredRabbit is an idiot!” then you are both a pedant and a poo.)

My point is that in reality, the rest of the UK does not fund Scotland and Scotland does not fund the rest of the UK. Ok, the rest of the UK funds it a little bit but everywhere outside London is like that. London is a huge, global financial centre – why should we not expect it to generate more money per head than other parts of the country? Of course it will. Accepting this is not having a dig at any particular region, it is just obviously going to be the case. On the other hand, saying that because London does produce a lot of money, it should keep it all for itself and not give anything to the rest of the country is frankly, a bit silly.

So we can see that with all things average, Scotland can take care of itself financially. Sadly though – things are not always average and I think an independent Scottish economy would have struggled more during the financial crisis than the UK economy has – not least because its two major banks HBOS and RBS failed in the most spectacular fashion. In tough times, being part of a major economy, with access to borrow an awful lot of money cheaply is very handy and that is probably my biggest economic argument for Scotland to stay as part of the UK.

I got sidetracked massively then. I was talking about Italy.

So then, what of Filettino? Well Italy’s national debt is about €31,000 per person and it’s going up all the time. I don’t really see that Filettino can declare independence and avoid taking its share of the debt so now the 550 people in Filettino need to pay off €17m on their own. If the town has a (very) disproportionately large economy then they can do this and they might be ok. If they don’t though they are going to find it extremely hard to continue borrowing at any reasonable rate. Although it’s a fun story, I can’t help thinking that the motives behind it were based less on economics and more on a crazy mayor with a power trip.

In conclusion, I don’t see economic benefit to a declaration of independence in either of these two situations but economics isn’t everything. I’ve grown up in the United Kingdom, I love it and I love all four countries. Of course they each have their own history and culture – I would never want it any other way and I think it’s a big part of what the UK is.

From my perspective, without any one of the four countries, it just wouldn’t be the UK any more. If Scotland receives a tiny bit more money one year and then pays a tiny bit more money the next year, should we really be talking about splitting up over it? I don’t think so.

I think we’re pretty good at the moment.

Besides which, when Andy Murray wins Wimbledon next year I want to claim some of the glory for myself.

RedEaredRabbit

Filed under Economics Tagged with , , , , ,

Politicians & Petitions

31/08/2011 4 Comments

Where I live in London it is free for someone to park a car on the street. My local council however, has recently been debating whether or not they should start charging people for this privilege. A couple of months ago a man knocked on my door. He was asking people to sign his petition to say “No” to paid parking. I didn’t sign it. I will explain why but not immediately. I never explain myself immediately. First I want to philosophise.

Democracy is the worst form of government. Except for all the others that have been tried.

I don’t know who said that but it’s quite good and I hope they gave themselves a big pat on the back afterwards.

I haven’t bothered looking up the definition of democracy but I suspect that if I did it would say something about everyone’s opinions being equal. If that’s the case then no country should really consider themselves a true democracy. The United States, for example, markets itself as the greatest democracy in the world. It isn’t though. It is sort of a democracy in that everyone is allowed to vote but are their opinions really equal? No. They’re not even close.

We can see a good example of this by looking at the US sugar subsidy. The US government guarantees American sugar producers a minimum price for sugar. This guaranteed price is way above prices on the world market. Why can’t people just buy sugar from overseas producers? The US slaps a big import tariff on imported sugar to ensure it can’t be cheaper than the home grown alternative. This means that US citizens pay much more for sugar than they should. A 2006 Department of Commerce study estimated the cost to US consumers was about $2bn per year. This is great if you own a sugar manufacturer in the US but bad if you live in the US and don’t own a sugar manufacturer (that’s most people who live in the US).

This subsidy gives benefits to a few at a cost to many. So why is it in place? The reason is fairly simple – the people who stand to gain from this are a well-organised group who will gain a lot each. The people who stand to lose (the American public) are a much bigger but less well-organised group who will lose a small amount each.

The well-organised people lobby the government, fund political campaigns and offer block-votes from their unions. A presidential candidate would be a bit silly to say they were going to repeal the subsidies if it meant that their opponent got lots of extra funding to their campaign plus some block votes from a few thousand union members in a swing state like Florida.

A democratic approach would be to ask Americans if they wanted to pay twice as much for sugar as everyone else does. I suspect the outcome would be different.

We can therefore see that even in the world’s largest economy, a true superpower which prides itself on the democratic basis of its constitution, people do not get an equal say in things. Their voting system is completely manipulated by organisations. I use the word “organisations” here because the real problem is that an organised group of people wield far more power than a disorganised group of people. It’s essentially how trade unions unfairly skew things in their own favour at the cost of everyone else.

Dave “Web” Cameron’s new policy of e-petitions is very susceptible to this problem. Get 100,000 signatures on a petition and it will automatically be considered for debate in the House of Commons. Does this make it the will of the people?

100,000 is equal to 0.16% of the UK population. That’s right – get 0.16% of the UK population behind you and suddenly your cause is being debated in Westmister’s highest echelons. A petition is often considered to be a reflection of public opinion but it is nothing of the sort. Petitioners have already decided the opinion they want their petition to reflect and therefore they:

  • Only reflect one side of the argument when asking people to sign it
  • Discard opinions of people who disagree with them

There are in fact very few proposals for which you could not get 100,000 signatures if you are organised. You just need to ask enough people and you’ll get there. If you want to save time by asking fewer people you can certainly help yourself along the way.

Do you remember when I proved a correlation between people who like jazz and people who like sushi? As I subsequently admitted, I had in fact proved nothing at all. Although my data appeared to show a statistically significant correlation, I had in fact achieved this brilliant result by violating some simple survey rules:

  • I did not have a random sample
  • I influenced the results of voters by telling them what I hoped to achieve.

I achieved a statistically significant correlation from a couple of hundred responses, just by violating these rules. I didn’t discard votes that went against my favoured result though so it was still better than a petition.

The government though, by promoting e-petitions, think that they are somehow opening a channel to hear the voice of the people. Petitions don’t do that though. A successful petition has little to do with the will of the people and a lot to do with the strength of the organisation behind the campaign. To get 100,000 votes (0.16% of the UK population) on your petition you could have a good argument but you could very easily obtain this with a bad argument as long as you knocked on enough doors.

So, why didn’t I sign the petition for free parking that the nice man brought to my door? He didn’t provide enough information. I asked how much the council would raise through this proposed initiative. He didn’t know. If the council raises money through the scheme then it might mean a lower council tax or better services for me. How could I possibly sign such a petition? I would have no idea whether it was good or bad for me.

It didn’t matter though. In his survey, people who wanted parking charges, people who didn’t know whether they wanted parking charges and people who were not at home on the day they called were all treated in the same way – ignored.

Please don’t misunderstand me. There are many very worthwhile campaigns which petitions help to promote. My argument is simply that I have a lot of trouble taking a petition’s argument into account because, when relying on petitions, I have no way to distinguish a worthwhile campaign from a non-worthwhile campaign. Petitions simply don’t provide enough information for me to tell if it is the will of the people or not.

If, as the government would like, we all decide to put our faith into e-petitions then all we are doing is putting our faith into the best organised purveyors of public campaigns. You already know who they are – the tabloids. And when do they ever give you a balanced argument? If The Sun did a ‘Death to Peados’ petition it would get 100,000 signatures. If the Daily Mail did a ‘No Jobs for Foreigners’ petition it would get 100,000 signatures. If the Daily Express made a ‘Clone Diana from her DNA’ petition, it would get 100,000 signatures.

The promotion of e-petitions as the voice of the people is not a vote for democracy; it is quite the opposite – a transfer of power from the people to small organised groups with an agenda. All this is doing is putting our faith into The Sun, The Express and the Daily Mail to make our arguments for us.

If you think that’s a good idea then please – don’t sign here.

RedEaredRabbit

Filed under 10 Posts You Should Read, Politics Tagged with ,

Maths & Sport

26/08/2011 2 Comments

I like sport. I like maths. I like sport and I like maths. This book therefore looks very interesting indeed.

The Hidden Mathematics of Sport

The Hidden Mathematics of Sport

There is an awful lot of interesting mathematics within sport. For example, I love all of the statistics that are available in cricket. I like browsing batting averages, bowling averages, run rates and strike rates. In football these days, they track things like number of passes attempted and their success rates for every player in every game. They even track things like how far each player has run – I absolutely love this kind of thing.

As well as statistics there are the mechanics – the speed of a tennis player’s serve, the maths behind the spin that they put on the ball when they hit a top spin or a back spin. What are the physics behind backspin on a snooker ball or reverse swing in cricket?

Recently, during a game of badminton, I smashed the shuttlecock and it hit @Biltawulf on the shoulder. Within a few seconds a massive red lump sprung up. A shuttlecock weighs about 5 grams. How fast must it have been travelling to cause such an injury? To demonstrate how much of a geek I am, that was the exact thing going through my head while he sat on the floor and blubbed.

Anyway, maths within sport is interesting to me so I’m going to buy this book. I suspect I’ll either love it or hate it. Why might I hate it when it’s about two things I love? Well, just because it combines two subjects I like doesn’t necessarily mean it will combine them well.

The book appears to cover many aspects of the mathematics behind sport but the BBC have reduced it to this on their website:

Can you calculate the world’s greatest sports person?

This makes me more than a bit suspicious. It reminds me a bit of when the Daily Mail does a story like “Scientists find the formula for perfect apple pie” and the equation is something like:

Tastiness of Apple Pie = {[(Colour of apples) + (Temperature of oven)] / (Butteriness of Pastry)} + (Pie Tin)

And it makes no sense to anyone who has ever done a sum in their life. I mean, in what units would the result of the above equation be measured?

When these things come out in the press, Ben Goldacre investigates and finds out that the story was created by some nobody who had been paid by an apple pie manufacturer’s PR company to come up with an equation for their marketing.

The story about making a formula for the world’s greatest sportsman is suspicious for similar reasons. I don’t really see how mathematically you could compare Sachin Tendulkar with Tiger Woods. The sports of cricket and golf are too different to simply make a sum that says one of these great sportsman scores 97/100 and the other scores 96/100.

I would go further and say that even within a sport it is very difficult to make a sum that accurately ranks all competitors.

If you look at Formula 1 statistics then Michael Schumacher is top in most of them. I think Ayrton Senna was better than him though and I think Jim Clark was better than both of them. Schumacher’s stats are relatively inflated due to the fact that he had a very long career and he spent most of it in a faster car than his rivals. Also, he was dominant in a period which featured no other truly great drivers. Senna died just before the start of Schumacher’s period of dominance and Hamilton and Vettel got their chance just after he retired. Mika Hakkinen was a very good driver but it wasn’t exactly the same as having Prost, Piquet and Mansell lining up on the grid next to you. If an equation to measure just the skill of a Formula 1 driver existed it would already be massively complicated just to take into account how good their car was and how good the people they were racing against were.

Let’s now have a look at football and that Man United team who won the treble in 1999. What formula would you use to compare the performances of Peter Schmeichel with those of Eric Cantona? It’s in the same sport, in the same team, in the same year and against the same opposition and it’s still hard to conceive of how one would go about making an equation which would accurately measure their relative performances.

Maths is a fantastic tool for some things but not for all things. “Who is the best sportsman?” is a topic of conversation to be had subjectively over a few beers. Maths cannot solve subjective problems and we shouldn’t expect it to.

Someone could try to make an equation to do just this and the first time they ran it, it might say Phil Neville were better than Paul Scholes. “Bollocks”, they’d think, “I must have got something wrong,” and they’d adjust it until Paul Scholes came out better than Gary Neville. That’s not using maths to solve a problem – that’s knowing that outcome and fitting bad maths around it. After the first round of tinkering, the new equation might say that Audley Harrison were better at boxing than my mum and then it would have to be reworked again.

They’d then continually rework it until at last it fitted perfectly with their opinions. Hoorah!

No, not hoorah. All that has been done in this exercise is trying to manipulate maths to fit with opinions and if that’s all we are doing we should just use our opinions as a basis and leave the maths out.

If this book understands when to apply maths and when not to it could be very good indeed.

Either way, it’s now in the post, so I’ll let you know.

RedEaredRabbit

Filed under Miscellaneous Tagged with ,

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