RBA Rate Decisions More Powerful in Smaller Doses (AFR Piece)

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The Australian Financial Review ran an opinion piece of mine (with my colleague, Jan Libich) that appeared in this morning’s edition (Tuesday 7 April), titled: “RBA Medicine Should be Dispensed in Smaller Doses” on p.43 (some of you will find the link to be gated)…or e-mail me a request if you cannot access it any other way.

It discusses an idea of ours to improve the impact of central bank interest-rate setting in Australia, which is to reduce the increment of change to the cash target rate (the main monetary policy instrument), from 25 to 10 basis points. Such a change would incur a relatively small adjustment cost, while providing a good return on extra ‘signalling power’. Read the piece to get more detail.

The ‘REAL’ Winners of the Asian Cup

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The green-and-gold heaven that was the AFC Asian Cup Final (or as I referred to it, Confederations Cup qualifier) was undoubtedly a watershed moment for the World game in Australia, one of the few remaining markets where football is not (yet, at least) the number one sport. The 2-1 (ET) match was indeed a thriller, and I’ll take it; even though a penalty shoot-out would have better reinforced our case for penalties before extra-time.

However, this post is intended to make a very different point – one about the more general matter of cost-benefit analysis of the whole event itself. Us sports economists of the academic variety are generally united in the view that typically, use of public funds to subsidise bids for a major sports event, as well as to run the event itself (if the bid is successful), is inherently profligate. Refer to my 2009 (Australian Financial Review) characterisation of a case in point – the colossal waste of $46.5 million of Federal government funds on the FFA’s 2018/2022 FIFA World Cup bid. In that case, like so many others, the ‘boosters’ of the event tried to convince us that the economic benefits would be huge (they are always much smaller), while the costs (and timelines) invariably blow out. This is a lesson that is still most freshly (and bitterly) experienced by ordinary Brazilian citizens.

This case had a few differences to the usual story, however. Other potential suitors to the AFC for hosting rights dropped out of the race during 2010, leaving Australia as the sole bidder – the formal announcement on 5 January 2011 came as no surprise to anybody (and, curiously in hindsight, received scant media coverage). The next day on ABC News Breakfast (skip to 6:05), I was actually quite sanguine about the economics of hosting it.

The reason, as I saw it then, was as follows: unlike the World Cup, not having to compete with other ‘buyers’ for the event, Australia was effectively bestowed as hosts for a low ‘price’ – without having to promise so much (comparative to other such cases) in the way of upgraded facilities and the like. It also meant that the AFC as the ‘seller’ was forced to accept that lower price. This did not stop the Organising Committee from trying to provoke various state governments to bid against each other to host the matches themselves. It is no coincidence that Perth and Adelaide were excluded from the venue list – the WA and SA governments declining to pay – despite each being much bigger media markets than both Canberra and Newcastle combined.

So, I surmise that the REAL winners of the Asian Cup were Australian taxpayers, who in a rare example, paid a relatively modest amount for the hosting rights for this event!!! Furthermore, given that the hosts prevailed in a thrilling Final, the sporting gods delivered them even more bang for their tax dollar buck than they might have expected.

A final word of caution: if in the aftermath of this success, you are inclined to believe that Australia should once again throw its hat in the ring for World Cup hosting rights in 2026 or beyond, hold your horses. The last decade has taught us that Australia should stick to the smaller-scale international football events that it can host well and economically. Other examples would include the Women’s World Cup, Youth (U/20) World Cup or Club World Cup. Let us allow other countries – the largest national and continental media markets (or even those with massive reserves of oil) – to fight with each other for the ‘privilege’ of grossly overpaying for the World Cup.

More on Optimal Sequencing: Soccer Edition

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[Cross-posted at: Wages of Wins Journal, 7 August 2014]

This earlier Wages of Wins piece by Shane Sanders (July 29, 2014) generated plenty of discussion. It highlighted the problem of Triathlon deaths in the swim leg. One crucial point to make with many economic policy analogies on which to draw is that sequencing of the legs (or phases) matters – all other considerations aside, the ‘best’ sequence of phases can be optimized according to some objective (in this case, minimizing fatalities).

One such possible economic policy analogy is with respect to unemployment benefits. Imagine a two-phase policy, where in the first six months the recipient is eligible to a relatively unrestricted entitlement of an amount according to some predefined percentage (say 40%) of some benchmark (average weekly earnings or minimum full-time wage). If the recipient is still unemployed after the 6 months have elapsed, a second phase kicks in at which the benefit is now highly restricted thereafter (having to satisfy minimum job search requirements, etc.) and/or reduced in value. Now, many people will disagree as to whether this two-phase policy is too generous or too miserly (or even on the basis of something else entirely). However, one aspect most of us would agree on is that swapping the sequence of these two phases would make absolutely no sense whatsoever.

It got me thinking about other such analogies about sequencing from sport that could be useful in policy circles. Recently, I published an article in the December 2013 issue of Journal of Sports Economics [gated], along with Jan Libich (my colleague at La Trobe) and Petr Stehlίk (University of Western Bohemia, Czech Republic). We took on soccer’s penalty shoot-out problem.  In knock-out matches that are tied after 90 minutes, the following 30 minutes of overtime is often beset with overly-defensive play due to insufficient incentive to attack.   This means that overtimes often finishes goalless, and that nearly 50% of the time, the match is decided via penalty kicks anyway (put differently: in nearly one of every two ties, overtime fails to achieve the one and only thing it is fundamentally there to do).

We show that an alternative sequence – regulation time followed by a penalty shoot-out followed by overtime – improves attacking outcomes. The qualification is that, while the shootout produces a winner – you still play overtime, with the winner of that winning the contest as currently. It is only when overtime fails to resolve the deadlock that the winner becomes the team that had won the shootout already (think of winning the shootout as worth half-a-goal lead at the start of overtime).

Specifically, we show that the probability of at least one goal being scored in overtime rises by approximately 50% (depending on the underlying characteristics of the match). Exactly how we estimate the effect of a policy that’s never existed is outlined in the paper for those of you who are interested to read further.

Coming back to sequencing, why the simple economic intuition (as well as the data) says this rule change will likely work is the following: there will always be one team chasing the next goal, because they will be eliminated unless they do – they have little else to lose. While the other team may correspondingly become more defensive, we show the net effect to be overwhelmingly positive. Furthermore, what you will no longer get are those overtimes where both teams sit back having jointly overestimated the probability that they will win if it goes to a shootout.

Had Mario Götze spurned that chance just minutes from time in the recent World Cup final, and it had have instead gone to spot kicks, the penalty shootout problem would now be far higher on the soccer agenda. Nonetheless, better public policy (optimal sequencing included) should never be far from the agenda, so I hope to see more studies like this make some impact in the broader public policy debate.

Recent Appearance on ABC Brisbane News

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I recently appeared on the ABC nightly Brisbane News (6 September), talking about bidding for NRL State of Origin hosting rights.

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ABC1 (Brisbane) Nightly News Bulletin: Liam Lenten offers opinion on reports of ARL decision to sell hosting rights of one State of Origin game every two years to highest bidder (even if not Sydney or Brisbane).

Another ‘ABC News Breakfast’ Newspaper Segment

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I appeared again on (today’s edition of) ABC News Breakfast with Michael Rowland and Virginia Trioli discussing a handful of notable newspaper stories (details below).

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Liam Lenten – third time on ABC1 News Breakfast, discussing the Mining Tax, Surpluses in the University Sector and two Cricket-Related Stories.

My Appearance on ‘ABC News Breakfast’

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I appeared News Breakfast (ABC2 and ABC News24) back in January (6th) with Michael Rowland and Mary Gearin discussing the Queensland floods, retailers campaign against online competition, changes in the RBA Board, and Australia’s hosting of the 2015 Asian Cup. Only managed to upload it recently…enjoy!

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Liam Lenten on ABC News Breakfast, 6 January 2011 discussing four of the more newsworthy items of the day.