Month: February 2010

Why it’s hard for Greece to back out of the Euro

Talk of Euro abandonment would trigger an immediate run on Greek banks, sending the country into an even deeper hole.  Who wants a Euro deposit to be converted into a drachma deposit?

You could imagine keeping current Euro-denominated deposits and adding new drachmas to the system, circulating at a flexible exchange rate.  That still might trigger a bank run (who expects the parallel currencies to last forever?).  Furthermore the new drachmas would bring seigniorage only if the law forces their overvaluation in some manner; refer back to the earlier discussion of the bank run.

You could imagine a surprise freeze on all bank deposits, thereby preventing an immediate bank run but leading to a later bank run.  Plus in the meantime there is no working banking system.  And if this doesn't come as a true surprise, you end up with the immediate bank run.

What is the chance of a bank run very soon — if only driven by "sunspots" — thereby forcing the Greek government to suspend redemption and devalue those deposits, effectively turning them back into drachmas?

Looking to history, there are plenty of countries which break pegs or leave currency zones.  But they all seem poor enough, banana republic enough, or insulated from "currency competition" more than a new Greek drachma would be insulated from competition with Euro-denominated banking.

Have I mentioned that currency substitution models do not in general imply stability or well-behaved quantity theory relations?

Can you see any coherent scenarios in which Greece (or other EU countries) can leave the Eurozone?  The forcing, immediate bank run is the only option I see and that is not a pretty one.  It also implies that the "policy decision" is up to Greek account holders and not up to the Greek government.  At best, the Greek government is making decisions about the fiscal side of the equation.

Are the nominal interest rates rising on Euro-denominated accounts in Greek banks?  (Are they allowed to rise?)  That is one good barometer for Greek depositor discontent.

*The Cartoon Introduction to Economics*

It's now out and my review copy has arrived; the authors are Yoram Bauman and illustrator Grady Klein.  It is the next step in economics education.  You can buy it here.

Bauman is not just a good economist he is a very good economist, with an insightful philosophical bent and the natural inclinations of an educator, in the best sense of that term.  His website is

Here is Yoram (and others, including Paul Krugman) on PBS, discussing economics and humor.

Beware of Greeks bearing gifts

In an interview in Ta Nea newspaper, Papaconstantinou also insisted that middle- and low-income earners would pay less tax.

The full article is here.  Is that a sign they're not so serious?  There was a recent poll:

…most Greeks back Prime Minister George Papandreou's plans to freeze civil servants' wages and cut their bonuses. But the majority of respondents also opposed a hike in the fuel tax and the introduction of new taxes.


The author is John North and the subtitle is An Illustrated History of Astronomy and Cosmology.  Excerpt:

Other alternatives to Einstein's general theory of relativity were the theories of gravitation developed by G.D. Birkhoff, A.N. Whitehead, and J.L. Synge.  All of them had cosmological implications.  They were symptomatic of a period of great intellectual vitality.  They were no doubt partly motivated by a desire to create something comparable with what Einstein had produced.  Some ideas of a very different kind were then being put forth by Hermann Weyl, Eddington, and Dirac — the first two in 1930, and Dirac in 1937-38.  They seemed to many to be suggesting that cosmological observation was superfluous, and that all could be deducted from the constants of physics.  Eddington, for instance, thought that all the dimensionless constants (pure numbers) obtained by suitably multiplying and dividing powers of the constants of physics — the mass of a proton, the charge on an electron, and so forth — turn out to be close to unity, or of the order of 10 raised to the power 79.  This vast number he thought might characterize the number of particles in the universe. 

This is a truly splendid history of science book, especially if you are snowed in for a weekend.  It has plenty of material on the early history of astronomy and on the one topic I know something about — the Aztecs — it seems very good to me and very accurate.

Revisiting the Marriage Supermarket

In comments to yesterday's post on the effects on dating style of a declining number of university men a number of people asked why a relatively small change in the sex ratio (m:w) from 50:50 to say 40:60 should make such a big difference.  In the Logic of Life, Tim Harford gave a characteristically excellent explanation.

Imagine, says Tim, a marriage supermarket.  In this supermarket any man and woman who pair up get $100 to split between them.  Suppose 20 men and 20 women show up at the supermarket, it's pretty clear that all the men and women will pair up and split the $100 gain about equally, $50,$50.  Now imagine that the sex ratio changes to 19 men and 20 women.  Surprisingly, a tiny change in the ratio has a big effect on the outcome.

Imagine that 19 men and women have paired up splitting the gains $50:$50 but leaving one woman with neither a spouse nor any gain.  Being rational this unmatched woman is unlikely to accede to being left with nothing and will instead muscle in on an existing pairing offering the man say a $60:$40 split.  The man being rational will accept but this still leaves one women unpaired and she will now counter-offer $70:$30.  And so it goes.

If you follow through on the logic it becomes clear that in the final equilibrium no married (paired) woman can be significantly better off than the unmarried woman (otherwise the unmarried woman would have an incentive to muscle in with a better deal) and so because the unmarried woman gets nothing the married women can't get much more nothing.  Thus when the sex ratio is 20:20 the split is $50:$50 and when the sex ratio is 19:20 the split is more like to $99:$1 in favor of the men.

The key simplification of the marriage supermarket is that the next best option to marriage (pairing) is worth $0–thus there is a long way to fall from the equal sex ratio equilibrium of $50.  If the outside option is worth more then changes in the sex ratio will have smaller effects.  Nevertheless, the logic of the marriage supermarket explains why a relatively small change in the sex ratio can lead to a large change in sexual and other mores affecting the marriage equilibrium.

“When Politics is Stuck in the Middle”

That's the header of my New York Times column today, here are some excerpts, starting with the health care issue:

The point here is not to belittle or praise the president, but to point out that his hands are tied. The biggest leftward move in American economic policy occurred during the Roosevelt and Truman years, when the Democrats had the upper hand for five consecutive presidential terms. Because of depression and war, people were looking for real change. Competitive forces in politics were relatively weak, and the Democrats had the chance to make their policies stick.

The Supreme Court‘s recent ruling on campaign spending also comes into clearer focus through the median voter theorem. The court ruled that the government may not ban political spending by corporations in candidate elections. Critics fear that the political influence of corporations will grow, but some academic specialists in campaign finance aren’t so sure.

For all the anecdotal evidence, it’s hard to show statistically that money has a large and systematic influence on political outcomes. That is partly because politicians cannot stray too far from public opinion. (In part, it is also because interest groups get their way on many issues by supplying an understaffed Congress with ideas and intellectual resources, not by running ads or making donations.) It is quite possible that the court’s decision won’t affect election results very much.

Here are the concluding two paragraphs:

The median voter theorem doesn’t predict that the legacy of the Obama administration will be a wash. But it does imply that we might find the most important achievements in areas that don’t always linger on the front page. For instance, the president’s ideas on education, which involve accountability and charter schools and pay for performance, may please the American public and thus make their way into policy. And because education transforms the knowledge and interests of the median voter for generations to come, such acceptance could make for a lot of other improvements.

If you’re looking for change to believe in, and change that will last, the odds are best when political competition is pushing the world in your direction.

Jacob Weisberg has a not unrelated column.  And, for another perspective, here are the comments over at Mark Thoma's blog.  A few further points:

1. "How tough Obama is" matters less than is usually portrayed.  That is the fallacy of anthromorphizing the outcome of political battles.  Obsessing over either positive or negative evaluations of key actors probably interferes with one's abilities to understand underlying structural forces.  

2. Even the Supreme Court usually tracks voter sentiment reasonably well.

3. On the health care issue, I don't think the electoral calculations of  the Democrats are over.

The economics of supermarkets in snow storms

Bryan Caplan raises an excellent puzzle, following his visit to the supermarket (I can confirm similar observations, even earlier in the day):

They were out of milk and bread, but there was still plenty of cheese and chocolate.  That was easily explained – people knew they could shop again in a few days, so they only needed to stock up on staples.  But the more I looked around, the more puzzled I was.

Here's what I noticed: For any given type of product, the most popular brand always sold out first.  There were no Eggo waffles, but plenty of Wegmans brand waffles.  All the national brands of hot dogs and sausages were gone, but there were plenty of obscure sausages still on the shelves.  If you broadened the categories, the pattern remained.  In produce, all the bananas were gone, but there were still plenty of apples.

You might say, "What's the puzzle?  Of course the most popular stuff sells out first."  But that's a feeble explanation.  After all, if X is ten times more popular than Y, then you'd expect stores to simply carry ten times as much X as Y.  Why would X sell out faster in a blizzard if stores have already taken its greater popularity into account?

I see it like this.  When visits to the store are in "normal times," the store weighs "mass goods" vs. "niche goods" when stocking the shelves.  Some niche goods will be given shelf space because they get some minority of customers into the store in the first place.  (I go to Whole Foods for Spelt Flakes, two or three key cheeses, and my favorite dark chocolate.  While I'm there, I end up paying the higher prices for their milk and green peppers, neither of which is better for me than competing products at Shoppers Food Warehouse.)  If the store stocks too few niche goods, it attracts too few niche-oriented customers and loses money on milk, meat, etc.  

Note also that the niche buyers tend to hold stocks of their favored goods, so if they have a sudden, unexpected supermarket trip, they don't necessarily need to buy more.

Enter the snowstorm.  People are forced to visit the store, more or less.  The previous calculations of mass vs. niche goods are no longer appropriate for the new emergency.  The store, temporarily, would prefer to have more mass goods and fewer niche goods.  The niche goods served the function of "motivating 47 visits a year rather than 23" but in the new short run they are nearly useless for this purpose.  We will see too many of them left on the shelves.  

Read Bryan's comments section as well.  I pondered the "rate of restocking" answers, but slow turnover and slow inventories imply a higher profit margin (if the product can compete for shelf space) and I believe for this to work it has to invoke customer heterogeneity in some manner, as I have done above.

Addendum: Imagine the same problem in the context of a book store.  There is an emergency edict which requires everyone to read three newly purchased books over the next week.  Borders will be swamped, They will end up short on bestsellers, not their niche books.

Yet another Haitian worry

Most of the sanatorium’s several hundred surviving patients fled and are now living in the densely packed tent cities where experts say they are probably spreading the disease. Most of these patients have also stopped taking their daily regimen of pills, thereby heightening the chance that there will be an outbreak of a strain resistant to treatment, experts say.

There is a tuberculosis clinic in Port-au-Prince, but of the 20 doctors and 50 nurses who worked there, only one nurse is showing up for work.  The others have either died, are injured, are dealing with family problems, fear the collapse of the building, or they fear the heavy work burden and the chance of infection.  The full story is here.

Supply and Demand

The sex ratio on many U.S. campuses is around 60/40 and rising.  The NYTimes has an excellent piece on the predictable consequences for dating.

North Carolina, with a student body that is nearly 60 percent female, is just one of many large universities that at times feel eerily like women’s colleges…Needless to say, this puts guys in a position to play the field, and tends to mean that even the ones willing to make a commitment come with storied romantic histories. Rachel Sasser, a senior history major at the table, said that before she and her boyfriend started dating, he had “hooked up with a least five of my friends in my sorority – that I know of.”

Only at the IVYs and universities with engineering schools does the sex ratio tend to even out (no doubt for obvious, albeit politically incorrect reasons), which in itself will have consequences for future sexual mores.  A number of universities would like to institute affirmative action for males.  

Economists’ petitions

Dan Klein, Carrie Milton, and David Hedengren are starting a new project, namely a study of petitions signed by economists.  Their list is here, can you add to it?  This is part of a longer-term project to understand the behavior of economists and to treat us as rational, maximizing agents, not just disinterested truth-seekers.

I wonder why institutions bother to generate petitions signed by economists.  Is it to influence the world?  To signal which economists are on their side?  To cultivate better connections with economists and create an excuse to contact them and affiliate with them?  Something else?

I've signed petitions once or twice but in general I don't like doing it, in part because I don't understand the game I am playing in doing so.

Zero price markets in everything

The first time I entered ChatRoulette–a new website that brings you face-to-face, via webcam, with an endless stream of random strangers all over the world–I was primed for a full-on Walt Whitman experience: an ecstatic surrender to the miraculous variety and abundance of humankind.

That's the premise, the actual story is at this link.  Here is one excerpt:

The first eighteen people who saw me disconnected immediately.