Thoughts on Football Wealth

https://footballsci.files.wordpress.com/2013/10/soc_bubble_576.jpg

I haven't had much time to write my thoughts down for a while, but now while watching the match day in the Premier League I would like to discuss briefly on the current economical situation of the European football.

The current economical situation in Europe is challenging. The European Central Bank tries to stimulate the economy with historically low interest rates, a migrant crisis exists currently in the Eurozone and Great-Britain is considering to abandon the EU. Not to mention the debt-crisis of Greece, Portugal, Spain and perhaps Italy very soon.

The European football however blooms. The European football-clubs spend enormous amounts of money into players, stadiums and the wages of the managers. How on earth do the football clubs in Spanish La Liga, England's Premier League and Italy's Serie A have hundereds of millions of euros to spend? Even the administration of FIFA (Fédération Internationale de Football Association) has been allegated of receiveing billions of euros in bribes. FIFA paid $88.6m in salaries in 2014, for just 103 employees!

Has the European football completely lost its sense of reality? Where does the money come from and on what it is used? How long can this continue when the economical situation in Europe is becoming more and more challenging? These are the questions I might be interested to answer more thoroughly for example in my bachelor's thesis. And because of that, I would like to provide an introduction to the topic.

The wealthiest football clubs in Europe are Real Madrid, FC Barcelona and Manchester United. The combined yearly revenue of these clubs is estimated to be more than 1,5bn€. The revenue comes mainly from commercials, broadcasting and also from match days: The Economist has provided a table concerning the revenues of European football clubs in the season 2014-2015 and it's illustrated below.

The games themselves don't bring much wealth to the clubs, but the marketing and other affairs outside the field are crucial sources of revenue. As we can see, the revenue comes mostly from the commercials and broadcasts. Most of us have perhaps seen the Pepsi-ads on TV with Sergio Aguero, Lionel Messi and Alexis Sanchez and Gillette ads with Liverpool FC's players. In the stadiums there exists several ads in the side of the field, and stadiums themselves are named after the most valuable sponsors. (Emirates Stadium, Etihad Stadium etc)

So what do the clubs do with all this revenue? Most of that goes to the wages of the club's staff, managers and of course for the players. The star-players can earn astronomical sums: For instance Real Madrid's Cristiano Ronaldo earns more then 50,000,000€ in a year (over 500,000€ per week).  Other major uses of the revenue is to buy new players for the club: The net spending of the Premier League in the 2015-2016 transfer windows was more than £1bn. This spending grew by £100m.

One of the major concerns concerning this spending is the financial situation of the football clubs. The clubs, leagues and the countries all have lots of debt. For example, the average net debt of the Premier League teams during the season 2013-2014 was roughly £110m and 5 clubs experienced losses of tens of millions of pounds.

It is clear that decent amounts of money flow in the world of football. So what would be the opportunity cost of this spending? With just the £1bn used in buying the players during the transfer window, the Premier League football clubs could have provided over 8 % on the EU's subsidies on competitiveness for growth and jobs.

I've been asked if the next European financial crisis could come from the expenditure of the European football. When the Eurozone is experiencing an economic slowdown and the countries like Great-Britain, Spain and Italy which hold the greatest football-leagues in Europe are in the edge of different kinds of economical crisis, it is clear that something has to be done with the cash-flows in the European football.

http://heartlandfootball.org/wp-content/uploads/2015/08/european-leagues.jpg

But still I wouldn't think that the next crisis would emerge from football. The economical situation in football is currently relatively stable: The clubs earn great amounts of revenue but mostly make profit in the end of the year. If a firm in some industry does the same, that is considered as good am I right? Modern football is a business as any other business.

But unlike firms, I wouldn't think that the main purpose of the football-clubs is to make profits for the Arabic millionaire owners and for other stockholders. The main purpose of this noble sport is to give the fans and people emotions, excitement and a sense of belonging.

Now if you'll excuse me, I'm off to getting ready for the Reds' match against Newcastle.

Test: SW
Pictures don't belong to me

The Troubles of the Taxman

https://blog.helpingadvisors.com/wp-content/uploads/2011/04/taxman1.gif

As inspired from the compliments I’ve received concerning my previous post and from the leaked so called Panama Papers, I want to talk about taxation.

Ah yes, the taxes. No-one likes them and no-one wants to pay them. Corporations, businessmen, politicians, celebrities and even a well-known Nordic financial services group try to avoid them by different kinds of shady arrangements. They rather recycle their money through a holding company in the British Virgin Islands or other tax havens which facilitate reduced taxes. Why couldn’t everyone be the good tax-paying citizen that every government needs?

The Panama Papers have gotten a decent slide of media attention during the past week and organizations and people around the world judge this kind of tax-avoidance completely. Tax-avoidance can be highly advantageous to corporations and wealthy people, so the incentive to this kind of behavior is also considerably high. Everyone likes money and want to have that as much as they can. When the taxes are high or there exists a lower alternative tax-rate, there’s always an incentive to try to avoid the higher tax-rate. Makes sense.

The biggest problem with tax-avoidance is that it isn’t completely illegal, but it is just widely condemned. The most common way of tax-avoidance is by moving individuals’ or corporations’ tax residence to a tax haven, such as Switzerland or Luxembourg. The definition of tax-haven states that a country can be classified as a tax-haven if certain tax-rates are very low or zero. With that token, any country could become a tax-haven if it wanted to do so. The country just needs to stop taxing its residents or lower the tax-rates close to zero. Could this work?

Surprisingly, the answer is no. There are a couple of good reasons for high tax-rates if the taxation system is designed proper and the government acts right.

http://dailysignal.com/wp-content/uploads/RobinHood.jpg

First of all, taxation exists because the government acts as an agent in distribution of income. We all know the story of Robin Hood, who stoles from the wealthy and distributes that wealth to the people who actually are in a desperate need for income. And because of that, the story has the happy ending it deserves. In real life, the one major function of taxation is to even the economic inequality in the economy. When the tax-burden of the wealthy in the economy is high for example through progressive taxation, that income is distributed to the poor through transfer payments, for instance. This balances the economic inequality.

There’s a good reason for this kind of distribution of income. If you are more interested in the economic inequality, I suggest you to watch former U.S. Labor Secretary Robert Reich’s documentary Inequality for All (2013). In the documentary, Reich emphasizes the significance of the distribution of income by taking the case of the middle-class in the economy. According to him, the middle-class is the most crucial focus group in the U.S. when it comes to aggregate demand in an economy. The high-numbered middle-class is the class which consumes the most in the economy, and therefore would need the income to consume and to contribute economic growth. This income can be only attained by taxing “the richest 1 %”.

But as you might guess, high-tax rates in a hope for better distribution of income encourage more wealthy people and corporations to the use of tax-havens. So, the question is, that is there an inverse relationship between the tax-rate and the amount of government revenue? There actually is, and the theory behind it is called the Laffer curve which is illustrated below.

https://upload.wikimedia.org/wikipedia/commons/thumb/3/36/Laffer-Curve.svg/933px-Laffer-Curve.svg.png

With a higher tax-rate than t* people are more willing to try to avoid paying their taxes with different kinds of actions, which results in a decrease in government revenue. There exists some good real-life examples of the phenomenon. For instance, lowering the tax-rate of vehicle taxation of new cars in Finland resulted “against all odds” an increase in government revenue. So this theory of lowering the tax-rates seems to work for the government and for the economy.

Should all of the taxes in that case be lowered to result the increase in governments wealth? I would say no. Clearly by lowering the tax-rate the government is entitled to more revenue, but more revenue isn’t necessarily the same thing as increase in welfare. The reason to my denying answer is the existence of so called demerit goods with their negative externalities.

Demerit goods are goods that the government would like to see consumed in a lesser degree, or not at all. These kinds of demerit goods are for example alcohol, cigarettes and pornography. For example alcohol consumption creates negative externalities when consumed: Intoxicated people can hurt themselves or others, be encouraged to criminal activities such as theft and vandalism, and cause anxiety among other people and in the worst case cause a death. The government tries to reduce these externalities with taxation, as the figure below illustrates.

https://shakurpoliticalparty.files.wordpress.com/2014/07/negative-externalities-of-consumption.jpg

The figure illustrates the marginal social cost and the marginal social benefit of the good for the economy. The marginal private benefit illustrates the maximization of consumer’s private benefit, so they consume the good in a free-market where MPB = MSC. This means that they overconsume by drinking amount Q1 alcohol at a price of P1 and the potential welfare loss is indicated as the blue triangle. When the government imposes an indirect tax on the good, it causes the MSC-curve to shift upwards, until the point of MPB = MSC is in the socially efficient output level of Q*. And since the demand of alcohol, cigarettes and pornography can be considered as relatively inelastic, the amount of imposed tax needs to be very high to effect the amount consumed.

As a conclusion we could argue on the solution to tax-avoidance. The obvious solution would be to simply ban all kinds of shady tax-avoidance activities. Because banning this kind of activity is much harder than it seems, should the economies consider to loosen their tax policies? Even though demerit goods with their negative externalities exist, I believe that with lower tax-rates it is possible for the government to increase their revenue as shown in the Laffer curve. In Finland where the price of alcohol is considered as high, people decide to buy their alcohol from Estonia and Sweden and pay zero tax to their country. In a country where the income tax-rate and corporate tax-rate are high, individuals and corporations have an incentive to use tax havens, and pay minimal or zero tax to their country.

Lowering the tax-rates to an optimum level could be a seriously adequate solution. The countries need to seek their level of t* as shown in the Laffer curve. With more revenue, the government could provide the essential services and public goods for the economy, and most of all, ensure the equity in the distribution of income. Lowering the tax-rate isn’t a threat to economic development, just take a look at the current situation of welfare in Switzerland and Luxembourg.

Text. SW

Pictures don't belong to me

Feeling Lucky Every Day

http://www.animationinsider.com/wp-content/uploads/2012/02/The-Team.Spike-TV.Slot-Machines.jpg

Today I made a visit to my local grocery store in Rovaniemi, Finland in a quest to buy some milk for my regular afternoon coffee. When I paid my groceries for the young cashier with cash and started to made my walk towards the exit, I noticed that I would have the easiest possibility to earn some more money. Only three steps away from the cashier was an alluring slot machine with 6 different game options, on which I could have invested my all current liquid funds I was carrying with me on that very moment.

I was only 3 steps away to spend my whole fortune on that very slot machine if I decided to do so. I had no intention to gamble today when I decided to go and get some milk, but the opportunity was out there and it would have been so easy to gamble on my trip.
The sight is nothing else but familiar in Finland. Gas-stations, kiosks, supermarkets, grocery stores and even pubs are filled with slot machines and people who are willing to put their money on them in a hope for easy money. Unfortunately, according to some studies on these slot machines, the expected values on these slot machines is about 90 % (rahapeliopas.fi). If you are allergic to the mathematical terminology and want to still know what that number means, let me explain: It means that if people play with 100 euros, 90 euros of that 100 are distributed as winnings to the players. The house indeed wins.

For those of you who aren't familiar with the gambling legislation in Finland, here's a bit background: Gambling in Finland is an industry that is regulated with a monopoly with 3 different organizations. Finland's Slot Machine Association (RAY) is in charge of the slot machines and casino-games, Veikkaus organizes sport-betting and FinToto has the area of horse racing. All of these organizations distribute all of their revenues into charity for their own "peer-groups": RAY distributes it's revenues into organizations dealing with society and general welfare such as associations for mentally or physically disabled. Veikkaus distributes its money to culture and sport and FinToto for horse associations.

http://im.mtv.fi/image/4934070/landscape16_9/1024/576/e6bd93e796cfc81f9eebedb2f4790718/uf/fintoto-veikkaus-ray-logot.png

I want to focus on this writing to RAY and the slot machines. How it could be, that in our beloved country where alcohol, business administration, food, agriculture and everything is regulated so strictly, gambling is made so ordinary as it is nowadays. How it could be, that it's so easy to lose your money and even get yourself a gambling addiction is brought so close to everyone and regulated so little. Luckily though, all gambling in Finland is prohibited from everyone under 18 years old by law.

One of the grounds the monopoly on gambling is maintained, is to prevent, supervise and take care of gambling problems, which are a huge cost for the society and economy. People lose their money and cannot consume, they can lose their homes and can even cause problems to their beloved ones with their addiction. Gambling addiction is a major cost for the society and it shouldn't be underestimated, so I'm with the government in this matter that the matter of monitoring these problems is to be left with trusted professional gambling associations.

But what I don't understand is how the prerequisites for the birth of gambling addictions and financial troubles are made so convenient. People go to the grocery stores many times a week, and on every time there's an opportunity to gamble.

Even in the local pubs there is an excellent chance to lose your money on a dark Friday-night. While I worked part-time as a croupier for RAY, I encountered hundreds and hundreds of intoxicated people who walked to the BlackJack table and lost plenty of their money. When I asked them, were they planning to gamble tonight with 200 euros, they usually said ''No''. Of course, according to the morals of RAY and everyone, no-one should gamble while intoxicated. But rarely (especially in Finland) you find sober people on a place where alcohol is served through-out the night.

Possibly because of the easy availability, to my great surprise Finland is on the top-countries in the world when it comes to the amount of gambling. I've visited some countries on my travels such as Italy, Malta, France etc and I've never seen the way of positioning gambling opportunities into everyday facilities in such a way they are in Finland. I would like to state again, that gambling is considered as a cost for the economy. The chart underneath states the biggest gambling countries as loss per reisident adult in 2010 in USD.

http://media.economist.com/sites/default/files/imagecache/original-size/20110521_WOC747_0.gif

Source: The Economist http://www.economist.com/blogs/dailychart/2011/05/gambling

My question is, that is the era of RAY and other associations soon to be end if things are continuing to develop in a way like this. Online-gambling on other gambling sites exists strong in Finland and the monopoly-status of our gambling firms is clearly under threat. This kind of competition cannot be easilly blocked or controlled by our gambling firms anymore.

It is illegal in Finland to organize gambling if you're not RAY, Veikkaus or FinToto. However, Helsingin Sanomat reported last autumn on many Finns, who have founded online-casinos in Malta. Founding your own online-casino is completely legal in Malta, but the effect is that Finnish people are able to gamble on these sites from their homes in Finland. This kind of activity is almost impossible to prevent in a modern society.

Finnish gambling is a matter I would like the government and the Finnish people to pay more attention to. Is the monopoly of our gambling firms justified and are all their actions morally acceptable, even though they help a considerable amount of organizations with their revenue? This revenue comes from the people who decide to gamble their money, instead of consuming or investing it. The costs of society are reduced with the expense of potential new, rising costs of society. And this is the problem I would like to asses to all of you that were willing to read this to the very end.

PS: I didn't gamble on my trip, cause I'm a risk-averse.

Text: SW
Pictures don't belong to me.