How not to do reform: lessons from the FA « Untold Arsenal: Arsenal News. Supporting the Lord Wenger; coach of the decade

By Phil Gregory

In recent days the excellent David Conn of the Guardian has published an article on the fallout of the Commons Inquiry into Football Governance’s inquiry and the FA’s subsequent reply to that document. As longer-term readers may recall, I submitted a report to the committee and was cited in their final report on the topic of topic of the financial gulf between the top flight and the Premier League.

In that area, I argued that the reason for financial insanity in the Football and Premier League is because there is no incentive towards good financial practice. Clubs feel they must spend on transfers and wages in order to secure the best players: failure to do so would impinge their prospects of promotion to the Premier League. Thus a club who runs up a substantial wage bill that it cannot afford in the long run has in theory a better chance of getting promoted, and promotion would enable them to cover the enormous wage bill. The end result is that clubs go for a “double or nothing” approach, where you have to overspend to have a feasible chance of getting promoted and should you secure promotion, you can pay the bills anyway. Well, unless you are Hull City.

The problem is exacerbated by parachute payments. Relegated clubs get a stack of money (£48m over four years, with £16m each of the first two years) to soften the blow of the reduced revenue available in the Championship. The problem is this further exacerbated the overspending in the Football League: parachute payments ensure that the relegated sides’ wage bills are much higher than they would otherwise be, and so other Championship sides spend money they don’t have to be attractive to a similar calibre of player.

While there are other issues that I raised in my submission, this is the key one. Light touch regulation will simply not work given the incentives demonstrated above. A free market is normally the way to do things: if the price of bread rises dramatically, individuals have the freedom to set up bakeries in recognition of the fact there are substantial profits being made. Thus in a short while, the price of bread falls given the new supply coming on stream. The entrepreneurs who set up bakeries benefit, consumers benefit, it is a win-win situation as the interests of everyone are aligned in this situation, and the price mechanism provides a crucial signalling function. If the bread market was tightly regulated however, with licences required to set up a bakery, it would be difficult to get extra supply on line quickly if at all, and everyone loses out.

That is not to say that markets are perfect however: government’s role is to provide the framework in which the market works (law and order, respect of property rights etc) and should there be a clear market failure, it is the duty of government to attempt to improve the situation. The incentive of football clubs, with a clear incentive to overspend is a clear example of a market failure, and so some form of intervention is required.

Which, unfortunately, is why the FA’s report is so disappointing. They abdicate responsibility for the financial side of the leagues to the responsibility of the Premier League. As I outlined earlier, the problem is there is a) too much money in the Premier League compared to the Football League and b) parachute payments reward failure and encourage excessive spending. Clearly the only two solutions to those problems – greater revenue distribution to the lower leagues and the abolition of parachute payments – are not in the current Premier League clubs’ interests: parachute payments almost create a closed shop, with relegated sides favourites for promotion, while greater distribution of revenue would invariably mean Premier League club’s receiving less. Clearly, neither of those two things are in the interest of the Premier League, and thus they will not reform in this area.

This is why regulators are supposed to be independent, third parties: proposals are made from a standpoint of “what fixes the problem?” whereas the Premier League has its own inherent self-interest to contend with, unfortunately, and hence little will be done.

As an aside to the general thrust of this article, I would also like to make the point that generally when analysing issues such as this, people focus on the minutiae, instead of considering the wider, systemic problems. People wonder why Portsmouth overspent, why Hull did, why Birmingham did instead of focusing in on the wider question of “why did they all overspend?”

As an economics student, I see this mistake made in the wider world all too often. In the aftermath of the Financial Crisis, everybody nitpicked and debated the smaller causes and tried to regulate out of existence the mistakes that the banks made. This is the wrong approach. Instead they should be asking: why can’t the banks make mistakes? Why, every time a bank makes a mistake does it threaten to drag the whole system down? Even with Greece, nobody is asking the question of how a small percentage of the Eurozone economy (Greece accounts for 2% after all) can threaten to bring down the whole system via a domino effect? People focus in on the details of each individual case, as opposed to the wider problems that bind all of them together. In the case of the above financial examples, it’s the bank leverage – banks can’t make mistakes, as they only have a tiny % of genuine loss absorbing capital to cover losses on enormous piles of assets. Fix that, and most recent banking crises would never recur.

The same applies to football. Instead of trying to address a myriad of minor issues the authorities should grab the bull by the horns, and fix the issue of poor financial distribution. Once clubs have no incentive to spend wildly, many other issues will be dealt with as a result. Of course, there are other issues unrelated to the financial side of the game, but the depressingly regular bankruptcies/administrations of football clubs suggest to me that financial mismanagement should be a key priority.