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Paul Ormerod: June 2010

Sunday, 27 June 2010

World Cup: increasingly random outcomes

The most striking feature of world soccer is that it has become far more egalitarian in terms of performance. The gap between good and bad teams has narrowed dramatically over time. An obvious measure of this is the average number of goals scored each game in the World Cup finals. Large differences in ability will be reflected in games in which teams are defeated by many goals.

The average was 3.89 in the first competition in 1930, rising to a record 5.38 in 1954. There was then a sharp fall to 2.78 in 1962, and ever since then it has fluctuated around 2.5, with the 2002 finals averaging 2.52 goals per game.

This is despite a big expansion in the number of teams in the final. At first there were only 13 teams, and from 1954 to 1978 just 16. The 1982-1990 competitions saw 24 teams, and in the last three there have been 32.

This trend to greater similarity of performance amongst teams is reflected in the qualifying rounds. In 1934, the first time there was a qualifying tournament to get into the finals, only 27 games were played. In 1990, there were 314 games, and for the 2006 finals no fewer than 847 games have already been played to decide which teams are in the finals.

The highest average goals per game was 5.22 in 1934 itself. After the Second World War there was a gradual fall to 2.74 in 1974, and it has since stayed around that level, with the 2006 qualifying rounds seeing an average of 2.91 goals per game.

Many matches are decided by a single goal, even between teams many places apart in the world rankings. This relatively narrow gap between teams implies a substantial element of randomness in success or failure. But perhaps this is part of the persistent appeal of an essentially trivial game which has few possibilities for innovation.

Thursday, 10 June 2010

cutting the deficit

The new Government's plans to reduce the deficit much more sharply than most people expected. Will this stimulate or depress the economy?

Not surprisingly there is a fierce debate about this.

But it is a situation in which econometric evidence is not going to be of much use at all in arbitrating the dispute. So much depends upon sentiment, upon mood.

Obviously, a reduction in public expenditure - sacking some public sector workers to take a clear example - takes spending power and demand out of the economy. On the face of it, it is an open and shut case that cutting spending depresses the economy.

But here is where sentiment comes into play, in several dimensions:

1. Suppose the cuts lead to the interest rate on long dated Government bonds ('gilts') being lower than it otherwise would be. This is likely, but we don't know by how much

2. This leads to an increase in the value of existing bonds, held by individuals, companies and pension funds. So wealth increases. It may also stimulate the commercial property market, for example. Investors compare yields on property with those on bonds, so property becomes more attractive, prices rise, and the debt problems of developers are eased

3. Firms in general may become more optimistic as a result of lower long rates - their 'animal spirits' are more buoyant: this is Keynes' phrase, he set great store by the long run rate of interest as a determinant of sentiment. If this happens, investment increases, jobs are created

4. Household wealth rises, so consumption may rise

The extent to which all these sentiment-related effects operate - from the amount by which long rates are lower than they would otherwise be to the household wealth effect - the impact of cutting public expenditure will be offset.

There is a further offset, rather esoteric but which might apply in the current circumstances. Deficits mean higher taxes in the future, and some people might save in anticipation of this. A lower deficit may encourage spending not saving.

But all of this is a matter of judgment, of appraising sentiment, not of formal economic modelling.

opening round

I've just opened this blog and will be posting on a variety of topics from time to time