Friday, May 29, 2015

The age of open financial imperialism

Nate Silver’s piece on FIFA and how it should be either reformed or broken up is a remarkable piece of journalism. It is not remarkable by what it says about how a soccer governing body should be run. It is remarkable by what it says about how global governance should be in the future. As I wrote in my yesterday’s blog it was always wrong to regard the issues surrounding FIFA as a mere problem of corruption in sports.  It is a much broader issue as to whether in the new globalized world small counties and ordinary people should have a voice or not.

            So I will not discuss obvious soccer-related incoherencies in Nate Silver’s piece. The piece illustrates that a combination of good statistics with lack of knowledge of history, produces useless results. It is as if one were to study today’s racial wage gap in the US without knowing that there ever was slavery.

            But let us consider the key part of Nate’s idea. He thinks that a new FIFA should be formed of the countries that bring most money to the current FIFA and the rest should be left out in the cold. Let the poor countries with awful soccer turfs, with these miserable human creatures that cannot pay $100 per game, stay out on their own, and keep on playing their game on dirt fields, not seen on TV screens or by anyone else except their neighbors. In the  meantime, we the new rich and shiny FIFA will come to the game in our Audis and Mercedeses, and play on the impeccable fields full of fun commercials, and shall flood every TV screen of every nation in the world.

The  importance  of countries reflects, Nate says, how much money they bring to FIFA. If a country is rich, populous and lots of people watch the World Cup, and thus add to FIFA’s revenues, then that country should matter more. OECD is big and rich enough to go it alone.

            The matters of global governance which have been, since the foundation of the international organizations, based on the principle of one-country one-vote (indeed slightly modified in some cases as with UN Security Council’s permanent members) would be entirely overhauled. In Nate’s world, international organizations’ voting structure should be based on the rule one unit of GDP = one vote. He thus openly introduces into global governance, income as its sole metric.

There are two, I think, defensible metrics in global governance. The first is the standard one, from the League of Nations until today, of each country counting in principle the same. The other would be an extension  to the global  level of the existing national voting rules where each individual counts the same. The problem with that  metric is not only that it would lead to the domination by just a few  countries, but that it  makes sense only when individuals themselves have a chance to cast a vote. If we could have all Chinese  and all Americans take individually a vote on an international issue, that would be fine. But such a system cannot be organized at the current stage of development (although in the future, and especially thanks to the Internet, perhaps it could).

            But a totally unacceptable global metric is the one Nate is proposing: Money. As simple as that. I am  not surprised that he proposed it so baldly because it is an idea that has been in the air for a while. Rich people are annoyed that UN seems to give too much power to small countries. In an era when money alone matters, would it not make more sense to get rid of these obstreperous small countries and just let a couple of rich and powerful nations decide all? After all, this is exactly what G7 is doing. Then we have a G20 which is a slightly more democratized version of G7 but is still based on the same principle that the affairs of the world should be managed by a small moneyed elite. And of course we have the World Bank and the IMF where that principle, one dollar = one vote, was enshrined at the organizations’ founding and still broadly reflects relative income ratios from 70 years ago.

            Notice that when we introduce GDP as the base of one’s international importance, that means that every individual in the world implicitly has a voting power that is equal to the GDP per capita of his/her country. So some 100 people in Congo would have the same voting power as a single American. This is, according to Nate Silver, the idea around which the new global governance should be based.

            At the level of the nation-state, this idea logically entails weighted voting where each person vote would be proportional to his/her income or taxes paid (this existed in the past: in many countries there was an income census for the right to vote). It would just legalize the plutocracy which  those who have read the heavily empirical  books by Martin Gilens (“Affluence and influence”) and Larry Bartels’ (“Unequal democracy”) know already exists in the United States. As Gilens shows, the elasticity of politicians’ responsiveness to the concerns  of the rich is very high. (A simple way of saying this is that the politicians vote in accordance with the wishes of the rich.) But when it comes to the middle class (the 50th percentile of the income distribution) or the poor, the politicians’ responsiveness is close to zero. In other words, whatever the concerns of the middle class (so long as they are not the same as the concerns of the rich) politically, they do not matter.

So Nate has simply decided to project to the global level what currently exists (although only in practice, not legally) in the United States, or differently to take Romney’s view that 47% of US population that does not pay federal income tax should somehow be disenfranchised.  

Until some twenty years ago, the world was structured (at least in principle) around two simple rules: within nations: 1 person = 1 vote; at the international level: 1 country = 1 vote.  Globalization requires some changes in the latter. But surely, it would be thoroughly regressive, although not in discord with the spirit of our age, to go both nationally and globally to the new single rule, as proposed by Nate: 1 dollar = 1 vote.

Thursday, May 28, 2015

The real stakes behind the FIFA scandal

When the arrests of FIFA officials, leading probably to the overhaul of the entire organization, were announced a couple of days ago, many well-meaning and reasonable people were delighted: these guys are crooks and it is good that finally somebody strong enough was able to stand in their way and stop them in their misdeeds. My argument here will be to show that while this reaction is understandable it either does not know or ignores much broader implications of what the “cleaning” of FIFA’s  Augean stables really means and may entail.

Now, to be quite clear, I will not discuss here two points.

1) I will not discuss whether the indicted officials are corrupt or not, or whether FIFA is corrupt. I take it that they are. 

2) I will not discuss what motivated US authorities to suddenly come up with the indictment. I believe that there are political motives behind the move but whether I am right or wrong does not affect my argument. 

To understand what FIFA is, one has to go back into history. Not unlike the International Olympic  Committee, FIFA was founded by aristocratic European white men. It was ruled as you would expect Rhodesia to have been ruled while it was a colony: through a combination of discrimination, benevolence and autocracy, from the first World Cup in 1930 to the late 1960s. While after World War II practically all countries participated, the pegging order was unmistakable: rich European countries first, then several Latin American countries that wrested some power because they were soccer giants, and then the rest was just an indistinguishable mass. 

The “aristocrats” called all the shots. I remember how in the first World Cup I watched live (on TV, obviously), in 1966, in England, Stanley Rous, then the president of FIFA, single-handedly decided to change the venue of the semi-final match between England and Portugal 24 hours before it was to be played. England did not want to move away from Wembley. As simple as that. That’s the way FIFA was ruled in its uncorrupt incarnation. 

The election of Joao Havelange, the head of the Brazilian federation, in 1974 was a geopolitical earthquake and the reflection of the changing relations of power between the Third World and the “old” Europe. In effect, non-European countries, after decolonization, were much more conscious of their  power, in soccer especially, and Havelange was their candidate. 

When Havelange became the head of FIFA, as he describes in his memoirs,  the secretariat had 8 people and they lived hand-to-mouth. But then the veritable bonanza of soccer revenues occurred, and by the time Havelange left in 1998, FIFA’s revenues were running into billions of dollars. Havelange introduced or allowed corruption and was later involved in several separate financial scandals in Brazil. 

So, while to understand the first phase of FIFA, you have to think of how colonies were run, to understand the second phase, or rather the third, the Blatter phase, you have to think of how newly independent countries with an entrenched elite and sudden inflow of natural resource money are run by populist leaders. 

That’s where Sepp Blatter’s comes in. Like every populist who wants to create a more inclusive society and displace the old elite, Blatter had to create his own constituency. He created it by spreading the new soccer wealth to the associations in Africa, Asia, and South and Central America. But the conduits for this wealth redistribution were local caciques who would support Blatter and the top nomenklatura of FIFA only if their federations got some money and they themselves were allowed to keep some too. 

Thus the decentralization of power, especially to the African nations, and the spread of the game to the rest of the world occurred together with increasing corruption within FIFA. Indeed, like in many populist regimes, the only way to change the power relations is to try to create a new elite from the hitherto disenfranchised populace that supports the new leader if he plies it with cheap bread and wine. But it is wrong to believe that the whole story is one of corruption only: corruption is an integral part of a political machinery that delivers benefits throughout: new training facilities for the youth in Africa, new stadiums, better dressing rooms, nicer jerseys. And indeed it is the decentralization that allowed FIFA to hold World Cups in Japan and South Korea, and against everybody’s prediction, to hold a very successful one in South Africa. The World Cups in Russia, and more importantly in an Arab country, Qatar were just a continuation of this trend.

What is the alternative to this corrupt FIFA? The return to the rule of the few as before the 1970s. And to see how that would look just compare what the corrupt FIFA is doing to popularize sport across the globe and spread the wealth, and what a “clean” organization like the World Tennis Association does: organize top competitions, year in year out, in the same four venues, all in rich countries, with basically the same players and with an audience composed of only global top 1% or rather 1% of the top 1%. No effort to spread the game, to be inclusive or people-friendly.

Or differently, compare FIFA with its UEFA nemesis that runs a very successful Champions’ League in Europe which practically excludes all small counties and clubs. Indeed the stadiums are full, money is plentiful, the soccer pitches are perfect but it is boring to watch every year the same 4 or 5 teams be always  on the top. 

So, the clean FIFA will get rid of African and Asian influence, host World Cups in impeccable stadiums in Germany and the US, become ever more commercialized and ignore ¾ of the poor world. It will make soccer lose its soul. “Everything will be ordered, and the stains of human passions will be lost amid the chromium gleam” (Jacques Ellul). 

Well-meaning people often think that on our menu is both a more inclusive and less corrupt society. But unfortunately, our choices in real life are more likely to be either a more inclusive and less unequal society with greater corruption, or an autocratic, elite-run society with less corruption simply because those in power are already rich and powerful enough. The situation  is the same with FIFA: dirty devolution of power or (seemingly) clean oligarchy.  

Friday, May 22, 2015

Henry and Kant: outsourcing morality

Many might remember the way in which France qualified for the last World Cup. The equalizing goal  (which was enough for France to qualify) was scored because Thierry Henry, perhaps the most famous player on the French national team, kept by hand the ball from going off the pitch, brought it back and it was then easily tapped (by foot) it into the net. The reactions were fierce: from protests of the Irish players in the field, to the disagreements between the Irish and French politicians and requests for a replay. At the end, the Irish Football Association applied that, exceptionally, Ireland be included in the World Cup. Of course it all ended as such things usually end, the goal stood and Ireland stayed home.

But what I found interesting  in this story is not soccer but the role of morality and the institutions. The common defense of Henry’s act was as follows: sure, handball is a violation of soccer rules, but it is no different from a professional foul, or simulations to force a penalty kick. In every soccer game players try to use these tricks in order to win. To quote José Mourinho's famous words: to win is my job. So, the defense of Henry went on: it is the task of the referee, that is of institutions, to catch him, prevent them from breaking the rules and eventually to punish him. Hence Henry’s handball is not his problem (everybody would do the same), but the problem of inefficient institutions. Either the referees were not up to the task or soccer should improve its institutions, for example by the introducing more referees or by the use of video recordings.

Now I would like the reader to forget that we are talking about soccer. Consider it more generally.  Henry’s defense implies that  in life everything is allowed in order to achieve one’s objective,  and one should not feel at all bad or dishonest for doing it.  Institutions ought to prevent the achievement of such goals by illegal means. If I am a trader on Wall Street, my objective is to make money, by whatever means I can. It is the role of institutions to stop me. If they failed and the financial crisis happened, it is because they were badly designed. The entire moral order of society is outsourced, away from individuals and their internal controls to  institutions. We do not expect ourselves to be moral and behave fairly. It is not our duty: it is the duty of society to provide good institutions which would  punish those who steal and lie, and to create a good system of incentives which would reward those who contribute to society through their work, capital or inventiveness.

This position is close to the heart  of many economists. If the institutions and the system of incentives are well “calibrated", the society will move forward because misconduct will be  punished and good behavior rewarded. This will come about because each of us is a rational and profit-seeking individual and will follow own interests. The institutions will ideally “channel” our passions and interests so well that we shall, as “if led by an invisible hand”, be doing the things that are both in our own and social interest.

But is the improvement of institution, that is purely external control of human behavior with an implicit assumption that human nature obeys no rules unless it is punished, really enough to force people to behave morally? Returning to Henry’s handball, should our objective be only to improve the quality of refereeing or to introduce cameras, or should our objective be that the rules are  “internalized” so that people act in accordance with moral requirements regardless of whether they are expedient or not? Even if all other players are playing by hand and thus steal goals, we know that such behavior is immoral, and we shall not resort to it, regardless of  consequences.  But how can one convince people to apply internal breaks in a hyper-competitive capitalist society that rewards only success? Even when they start by behaving morally, would not the behavior of those who behave otherwise and who, behaving thus, become rich and successful, lead the first group also to lose their scruples?

It seems to me that with ever greater commercialization, globalization and the use of money as the sole criterion of success, we have gone further and further away from any attempt to impose internal control and have entirely outsourced it to institutions.  Perhaps it is inevitable because all previous attempts to do it internally, thorough religion or secular religion (like in socialism) have failed either because they led to endless wars (“my religion is better than yours”) or were incompatible with human nature (fall of socialism). So I have no answer to the “outsourcing” of morality. I see it as inevitable although I cannot say that I enjoy that prospect. Being an economist, I cannot even see exactly why I should not enjoy it, but I still do not.

After all, Thierry might have done the right thing. We shall get cameras and another handball will not happen. But something else will.

Tuesday, May 19, 2015

Was everybody under socialism a millionaire?

There was a couple of months ago a lively discussion on the measurement of wealth. It started with two results. First, Ed Wolff’s long-standing (but not widely publicized) results that the Gini for wealth inequality in the United States has reached an unprecedented high value of 87, and that some 30% of the population have zero net assets. Second, by a comparison made by Oxfam between the wealth of the top 1% vs. the wealth of the rest. Oxfam argued, using the Credit Suisse report on global wealth, that the top 1% in the world own almost one-half of global wealth. Some of those wealth-poor are people from rich countries who have no assets even if their income is obviously not zero, nor can they be considered globally or otherwise poor. Actually, many of them might lead relatively comfortable lives, even if they are running credit-card debts and living in homes that are almost 100% owned by the banks.

So, those who did not like either Ed Wolff’s results nor Oxfam’s comparisons went ballistic on what they termed “Oxfam misleading statistics”: “Look, these guys might have zero net assets, but they are not poor”, the critics argued. The argument was factually correct, but substantively wrong simply because there is a difference between income, consumption and wealth. You may be wealth-poor even if you live okay; these are two different things. I wrote about that on my blog.

But there was also another strand of attacks on these numbers that wanted to show them incomplete because the wealth definition used in standard wealth studies like the ones quoted here is the sum total of all marketable assets,  that is consumer durables, housing, shares, bonds, checking and savings deposits, patent right etc. that  you can sell right now. It does not include future, more or less secure claims on (say) Social security benefits, occupational pensions, medical help and the like. (Although Ed Wolff  does include the cash surrender value of pension plans.) Now, people who wanted these benefits to be added (in the amount of  their capitalized values) did so in order to argue that the top 1% are not as rich in relative terms as Oxfam and Credit Suisse claimed, and that it is not true that 30% of Americans have zero net assets. Indeed, if you include Medicaid, Social Security and welfare practically nobody in the US will come out as having zero net assets. It is also true that, if you do an international  comparison of the US with other wealthy countries, the inclusion of such future claims will make US wealth levels and distribution look even worse (because other rich countries generally have more developed social welfare systems), but those who argued for the change in the way wealth is defined, did not, at that point, think much about international comparisons.

However, you cannot do things in isolation, and ignore both the general rules about how private wealth is defined and how the definitions can be applied across various societies. Let me illustrate this. In a conversation over lunch, Ed Wolff and I concluded that private marketable wealth in Communist countries was, for most of the population, zero. How come? First, housing was mostly state- or enterprise-owned (in urban areas), and people who lived in these apartments paid low rent, but did not own them nor could they sell them. Second, there were no financial instruments of any kind: there was no stock market and no shares. There were, in some countries state bonds but they were less of an investment and rather a compulsory borrowing by the state. But the state bonds were minimal in any case. Third, the only asset that existed was savings in domestic or (even if it was illegal in many countries) foreign currencies. That was in reality the only financial asset. (And this is incidentally why people in the West did not sufficiently appreciate the pillage which the Yeltsin’s regime engaged in when it destroyed overnight the years of ruble savings by millions of households.)

Most of the private marketable wealth that existed was in the countryside. In countries like Poland and Yugoslavia, land was mostly private. In addition, urban residents owned their own weekend houses (the famous Russian dachas) and they were indeed privately-owned and marketable.  In addition there were owners of small-scale restaurants, bars, repair shops etc. Thus Ed Wolff and I agreed that if you applied the usual marketable wealth approach to Communist countries you would find that perhaps 80% of the population, or even 90% in the Soviet republics, had zero or wholly negligible net wealth, and 20% (or 10%) had some rather minimal wealth, and these 10-20% were not exactly the people you would associate with high incomes and certainly not with political power under socialism. Obviously, this did not mean that 80-90% of people lived on the edge of subsistence: actually most of them had “normal” middle-class urban lives. It is just that they had no private wealth.

But then I thought a bit more on this issue as I read the critics who wanted to include capitalized value of social security among private wealth. So, I said, let me see what their approach would give you for socialist countries. There first, you had guaranteed pensions for all. So, let’s capitalize that. Then, you had guaranteed jobs for almost all. Let’s capitalized that income too. You had guaranteed other social transfers like child benefits, invalidity pensions and of course free medical care. And although pensions and wages were small in dollar amounts, their capitalization produces a rather big total. Let me take the example of Yugoslavia that I know well. In the early 1980s, the average salary was about 250 dollars per month (post-tax). The average pension was about $200 per month (also post tax). That gives you about $3,000 annually for wages and $2,400 for pensions. In today’s dollars, it works out as $9,000 and $7,200 per year. Suppose then, very roughly, that wages are guaranteed for 30 years and pensions for 20 years. When you apply to the wages and pensions a low discount rate of say, 2% you get that total wealth of almost everybody was $300,000 dollars. Throw in additional medical costs that were also borne by the state and guaranteed to more or less all, and you may get to $400,000 or even to half-a-million US dollars.

So, would then those who argue that US wealth data should include capitalized value of not-marketable, but guaranteed, future incomes streams agree that everybody in socialism was a dollar (half-a-)millionaire and that perhaps two-thirds of the population in Yugoslavia, Hungary or Poland had greater private net assets than the corresponding people in the United States? Does this make sense? If it does not, then you are back to the “usual” calculations where only marketable wealth counts and where 30% of US population have zero wealth. So, you can choose:

  1. Either everybody in socialism was a quasi-millionaire,  or
  2. 30% of Americans have zero net wealth today.

Your call.