Cricket lessons

I enjoy watching cricket, particularly the long-form version of the game, in which a match can last for up to five days.  The short-form variant – in which each side bats for a set number of overs (or balls) – lasts only for a few hours, and while it can be exciting, it tends to be less engrossing, less subtle, less amenable to connoisseurship.  Just as I prefer the Grand Tours to velodrome cycle-racing, and the 10,000m to the 100m on the athletics track, so too I prefer Test Matches to T20 cricket games, mostly because the extended forms of each of these sports allows for lengthier and more sophisticated pleasures.  Why rush such a good thing?

In the past two-and-a-half years, the English cricket team have introduced certain elements of short-form tactics into the longer-form version of the game.  The results have been impressive.  In the first year of this new style, the English team scored at a rate of 4.76 runs per over, whereas all other of the eight full Test Match nations scored at rates of between 3.03 and 3.56 runs per over.  (England’s run rate in their twelve games prior to the change in style was 2.97).  This new run rate is also the highest in cricket history – surpassing the 4.12 achieved by the Australians in 2003, which cricket aficionados have long considered to be exceptional.    Although England have just lost a three-match Test series in Pakistan, they won the first game in impressive fashion, scoring 823 runs in their first innings, their highest total since 1938.  Their improved performance is due to both to the material increase in their run rate per over, as well as high individual scores throughout the team, for not only their specialist batters, but also their bowlers and wicket-keeper are regularly making plenty of runs. 

During the past month, I have been reflecting on the parallels between English cricket and the British economy.  This started shortly after my recent post on this website, Re-entry.  As usual, I advertised the text on my LinkedIn feed, where it received, by my standards, a healthy number of “likes” and “views” from people in my network.  However, one commentator – someone I do not know – took offence at my argument, and posted a couple of critical replies: what a load of tosh, he wrote, in that constructively engaging manner that is now commonplace on social media.  Although initially inclined to dismiss his view because of the contemptuous way in which it was expressed, I later decided to take some time to read one of the articles that he posted in response to my text.  Written by a former City economist who now runs his own independent research consultancy, this article reminded me of the days when my professional work required me to spend hours reading opinionated economic research, where data is selected and organised solely to make a trenchant point about what policy makers or market traders should do next. 

In this instance, the author set out to challenge the views of the Office for Budget Responsibility (OBR) regarding the size of the negative impact of Brexit on British economic growth, and he made some reasonable points about the problems of aggregating economic forecasts to produce an average.  Not all economic models measure the same things and, when they do, not all measure them in the same way.  That is why, unsurprisingly, they generate different answers to the same question.  What the OBR had done in its Brexit forecast was to take an average of thirteen forecasts, to produce its own estimate.  The idea is that the errors, approximations, and other idiosyncrasies of each forecast get balanced out by blending them with a range of others.  The same technique is regularly used to produce improved opinion polling forecasts for elections, aggregating many individual polls (all slightly different in scale and methodology) to generate a more plausible aggregate forecast outcome. 

The author’s eventual conclusion was that “there is an economic cost to leaving the EU single market and customs union”, but his big reveal is that by his estimate, this cost might only be around 1% of GDP rather than the 4% that the OBR suggests.  After many tendentious exclusions and amendments to the OBR model, the very best that this leading member of the Brexit Intelligentsia can manage is the claim that Brexit truly was bad for Britain but just not as bad as some others had claimed it would be.  I think that if I were in their party I would be writing fewer articles and keeping a low profile instead.  I was reminded of a trading-desk colleague who, in the wake of England’s thrashing by New Zealand at the Rugby World Cup of 1995, said to me “at least we won the second half”.  No, this was not the time for quibbles: the final score was 45-29, which means that they won the match comprehensibly and we lost comprehensibly.

Towards the end of the article, the author stepped back from the minutiae of his critique to make a more general observation, namely that the big problem for Europe is that its level of productivity is falling well behind that of the US.  I was pleased to discover that he thought productivity was important, but dismayed that he thought the solution to the problem was Brexit.  The superiority of American productivity rates is a story that has also been recently covered by The Economist, whose views on the global economy I find to be rather more balanced and rather less partisan. 

According to The Economist, this year average productivity per worker in the US will generate around $171k in output, compared (using purchasing-power parity) to $120k in the EU, and $118k in the UK.  Typically, it was thought that growth has been higher per capita in the US because workers took fewer holidays and worked more hours per year (a lifestyle choice for higher income over greater leisure time).  But these figures show that productivity is much higher per worker per hour. In brief, Americans both work longer hours and produce significantly more in those hours than European workers do.  Consequently, Americans are becoming much richer than Europeans, as anyone who travels from Europe to the US today will immediately notice.  For example, average wages in Mississippi, America’s poorest state, are higher than average wages in Britain and Germany. 

Why is this relevant to the Brexit discussion?  Well, consider the reasons why America has a more productive workforce.  First, if we think about economic efficiency (productivity per hour worked), the United States benefits from being a continental economy, with product standardisation and open labour markets, supplying consumer goods and services for a population of 350 million people.  Good ideas and innovations spread fast, without national boundaries and local regulation to impede them.  In addition, the US benefits from the world’s deepest pool of finance, which supplies equity and loans in a wide variety of formats, for major global corporations and for small family-run businesses.  Its policy makers were more speedy and effective in dealing with the global financial crisis of 2008, and its large and well-resourced higher education system generates significant volumes of research, much of which can be applied to innovative economic activity, and provides widespread management education, which supports improvements in business efficiency. 

In addition to high levels of productivity, the US benefits from a growing labour force, with high levels of immigration (not all of which is legal and documented), which supports an annual population growth rate of 0.67% compared to 0.45% in the UK, 0.20% in France, and -0.12% in Germany (which like more than half of EU countries is currently depopulating.)  This matters because the tax base from which our public services are funded is a product of the total size of the population as well as the efficiency of the tax system.  Consider the economic impact of an ageing population, where many people live for more than 25 years after retirement, often dependent in part on public pensions, and whose health needs are increasingly expensive.  When they can no longer look after themselves, older retirees can only be supported by public services if there is sizeable workforce willing and able to pay taxes.  Given the low birth rates in most wealthy countries, this tax base can only be sustained by immigrant labour.  If the labour force shrinks, so does the tax base, and thus the level of public service provision.   

Therefore, for those Europeans who are worried about falling behind the United States, with regard to productivity and wealth, the obvious set of policy priorities would be these: first, create European-wide consumer and labour markets, that allow all the 500 million or more European citizens to work where they want and to buy products of the same quality and range as everyone else; second, create a large and efficient financial sector, denominated in a stable global currency, that allows investment to flow easily around the European continent, providing resources for major firms and small start-ups; third, improve the speed and effectiveness of policy making, especially around finance, innovation, and regulation; fourth, encourage more young people to go into higher education, including business studies, and invest significantly more money in research and development; fifth, adopt some form of tax harmonization, which ensures that European citizens and European domiciled corporations pay a fair and standard level of tax, to support the public services necessary to maintain the well-being of the citizens; and finally, encourage immigration into Europe, especially from adults with some education and skills, who can join the workforce immediately.  It is a challenging policy agenda, but not impossible.  The Americans, despite the obvious flaws in their political system, have managed to do it. 

However these policies are the complete opposite of what the Brexiteers (and their nationalist/nativist fellow travellers around Europe) advocate.  The UK has opted out of the single market, has opted out of membership of the Euro, has adopted a clownish approach to financial policy management (known on City trading desks as the moron premium), has poor levels of investment in both research and capital projects, and has resisted any form of European tax harmonisation.  In fact, the only relevant public policies that the UK has pursued with any success (both of which are opposed by Brexit politicians) have been, first, to push up the numbers of young people attending higher education and, second, to increase our immigration rate.  On this latter point, despite the UK having a negative natural population growth rate, higher immigration explains why it’s overall population growth rate is the best of any large nation in the EU.  (The six EU nations with a higher population growth rate than the UK are Luxembourg, Cyprus, Ireland, Belgium, Sweden, and Malta, whose combined population is less than half that of the UK.) 

It is notable that back in the 1980s, when Mrs Thatcher championed the creation of the European Single Market, the UK was a leading voice in Europe for many of the sorts of reforms which might have allowed Europe to match the recent economic growth rates of the US.  Given the argument I made in my earlier text, Re-entry, I find myself now forced to recognise that the best thing that could happen to the UK in the next few years is for the Conservative Party to find a second Margaret Thatcher to lead it.  She is now remembered as being rather hostile to certain aspects of the EU, although some of that was more rhetorical than substantive.  Importantly, she was also a pragmatist who wanted the UK to succeed, and she would have had the intelligence and the courage to stand up to the self-indulgent foolishness of recent Tory leaders and the Brexiteer nonsense. 

Which brings me back to cricket.  Improving the run rate (a measure of batter productivity) from 2.97 to 4.76 is essential if you want to win matches.  However, it is not just the rate at which you score, but also the total amount of runs you make.  This year, of the batters from all nine countries that play Test Match cricket, England have 6 in the top 10 for total runs scored, and 9 of the highest 25 scores (including 3 of the highest 6). The point here is that productivity per worker matters, but so too does the total amount produced.  In the global rankings for GDP per capita, the US ranks 12^th, but the countries ahead of it are mostly small and special cases, focussed on offshore financial services or oil extraction.  (They are: Monaco, Liechtenstein, Luxembourg, Bermuda, Ireland, Switzerland, Cayman Islands, Isle of Man, Norway, Qatar, and Singapore).  Ranked by total GDP per annum, the US is way out ahead, at $27tn in 2023, with only China (at $18tn) anywhere close.  If we add the GDP for Germany, UK, France, Italy, Spain and the Netherlands we reach $16tn, which is not much more than half of the US total for roughly the same level of population.

Was my argument about the folly of Brexit a load of tosh?  I do not think so.  Those who say they care about raising productivity levels so that the UK might maintain some semblance of parity with the United States, have only one sensible strategy: to create a large, economically integrated market, with a deep and well-regulated financial system, strong research and investment capabilities, high levels of tertiary education, high levels of capital investment, a fair and robust tax system, plus generous levels of inward immigration.  Without these policies the levels of productivity per capita and the level of total productivity will continue to be lower than the United States, and inevitably UK public services will be poorer by comparison. 

Why are some former City economists unable to work all this out.  Perhaps they should spend more time watching England play cricket: if you score more runs and score them quickly you will be more successful than if you score fewer more slowly. It helps that the current captain and head coach of the England cricket team were both born in New Zealand, where they know about winning.