Coordinating Success

I want to follow up on Krugman's column which takes a cue from an LA Times article by Peter Gosselin, who in turn cites recent Nobel prize winner Thomas Schelling:

On Their Own in Battered New Orleans, by Peter Gosselin, Los Angeles Times: ..."There is no market solution to New Orleans," said Thomas C. Schelling ... who won this year's Nobel Memorial Prize in Economic Sciences for his analysis of the complicated bargaining behavior... "It essentially is a problem of coordinating expectations," Schelling said of the task ... "If we all expect each other to come back, we will. If we don't, we won't. But achieving this coordination in the circumstances of New Orleans,'' he said, "seems impossible." ... "There are classes of problems that free markets simply do not deal with well," Schelling said. "If ever there was an example, the rebuilding of New Orleans is it."

Though microeconomists generally acknowledge coordination failure can be a problem in individual markets, its importance to the macroeconomy is a point of division among macroeconomists. Leigh Tesfatsion explains:

Nonwalrasian Equilibriun: Illustrative Examples: 1. Introduction In previous lectures it was seen that market clearing constitutes an essential part of the definition of a Walrasian equilibrium. ... But must markets clear in order for economies to be in equilibrium, in the sense of an unchanging situation (rest point)? In particular, can an economy become stuck at a point where positive “involuntary” unemployment persists? Or do ... decentralized market economies..., assuming flexible prices, and absent government intervention, ... tend to converge over time to points where all markets clear?

This issue is at the heart of the debate between ... economists; see King (1993) and Mankiw (1993). In general, [the alternative view is] that decentralized market economies are inherently stable, tending naturally towards an equilibrium state in the sense of Walras, whereas new Keynesian economists do not believe this to be the case. More precisely, new Keynesians believe that a decentralized market economy might or might not tend towards an equilibrium state depending on its supporting institutional structure and circumstances. Moreover, the meaning of “equilibrium state” does not presuppose any optimality or efficiency properties. ...

New Keynesians also stress that, in general, a given economy can have multiple possible equilibrium states, some more socially desirable than others. A key factor affecting the ability of macroeconomies to coordinate on a socially desirable equilibrium state is whether agents are credibly able to signal their intended actions to each other. For example, if other market participants fail to signal (communicate) to agent A in a credible (believable) way what actions they intend to take, how can agent A rationally take these intended actions into account in planning his own actions? And if agent A cannot take these intended actions into account in his planned actions, what guarantees that his actions will be coordinated with the actions of these other market participants? For example, if agent A is a producer, and consumers do not credibly signal to him today their intended future purchases of his goods, how can he take these intended purchases into account when planning today for future production? And if he cannot take these intended purchases into account, what ensures that future demand for his goods will equal future supply? In summary, new Keynesians identify two basic types of signalling problems that can give rise to coordination problems among economic agents: Problem 1: Incomplete Signalling ... Problem 2: Signalling Not Credible...

In New Orleans, the problem is that agents cannot signal each other in a compete and credible way what their intentions are through the market process. When that happens, the market can breakdown into a suboptimal equilibrium. The solution in such a case is for somebody to coordinate expectations. Would you show up, for example, at a pickup baseball game if you didn't think anyone else would show up? Usually such games require a coordinator to set them up. In the case of New Orleans, it is up to government to set expectations so that everyone believes everyone else will "show up for the game" and hence are willing to show up themselves. Expecting such "pickup games" to occur spontaneously through the market process is often wishful thinking.

That is not to say the private sector can never solve these problems, a tradition might develop where everyone simply shows up a particular field at a particular time each week to play baseball. These often take time to develop, and such implicit agreements tend to break down over time without some sort of coordinator. It is the belief that others will show up if you do, the coordination of expectations, that makes it work, and this often requires centralized credible signaling through government action and commitment. We want to avoid, if we can, situations where everyone would love to play baseball, but no game occurs because nobody knows if others will show up to play. And, as with New Orleans where people may decide to live elsewhere due to lack of faith in the rebuilding effort, if you wait too long to start the coordination process, people may have already committed to other less desirable, but unchangeable plans.

Update: Tim Haab at Environmental Economics has more on the need for credible coordination efforts:

Who would you believe?, by Tim Haab: For people to make rational economic decision they must have accurate information on the expected consequences of their decision.  Many times, such information is tough to get.  Take for example the decision to return to New Orleans.  Who would you believe? From Reuters:

State and federal officials gave the "all-clear" to residents and tourists, saying recent alarming reports by environmentalists about toxic sediment are unfounded. In fact, the state's chief environmental officer said the deluge that covered 80 percent of the city was no more polluted than typical floodwater. [...]
In fact, McDaniel said neighboring Lake Pontchartrain's water quality is now "about as good as we've seen them," and is fit for swimming and harvesting seafood. Air quality actually is better than normal because of reduced industrial and vehicular activity, he said.

But:

Environmentalists, led by the Natural Resources Defense Council, have released their own testing they said shows potentially dangerous levels of several contaminants in the dried sediment left behind by floodwaters. Environmental chemist Wilma Subra, working for the council and the Sierra Club said arsenic was a particular worry, but that sediment also contains chromium, lead, barium, cadmium, mercury and hydrocarbons. "The government has a legal obligation to begin the cleanup immediately," said Monique Hardin, co-director of the New Orleans-based Advocates for Environmental Human Rights. "People have a right to return to healthy homes and neighborhoods."

Government officials counter that residents can do so now.  "We're not seeing anything out of the ordinary that we wouldn't normally see this time of year from the standpoint of upper respiratory illnesses," said Louisiana State Health Officer Dr. Jimmy Guidry. The two biggest health issues in post-Katrina New Orleans, Guidry said, are cleanup-related injuries and mold that has grown unabated in moist structures. "Mold is a major issue -- we do want people to be very careful with that," he said.

Now that you have the information, would you move back?

Comments

[anne]

http://www.nytimes.com/2005/12/07/opinion/07opchart.html?ex=1291611600&en=f8fc3dcac6ea34f6&ei=5090&partner=rssuserland&emc=rss

December 7, 2005

The State of New Orleans
By BRUCE KATZ, MATT FELLOWES and NIGEL HOLMES

[Notice a graphics display of selective progress being made in New Orleans through the continuing emergency.]

[anne]

Why do I not have the sense that there is a concentrated focus on infrastructure? Is there a large scale public clean-up and restoring of street by street services? Not home by home, but street services such as lighting. What of gas lines? Public transport? Then, are there potential jobs for those who have still not returned? Jobs enough to have a household move from Atlanta? Curious....

[anne]

http://www.nytimes.com/2005/10/09/business/09view.html?ex=1286510400&en=c8791d57e51fdae6&ei=5090&partner=rssuserland&emc=rss

October 9, 2005

Blueprints From Cities That Rose From Their Ashes
By ANNA BERNASEK

ECONOMICS is often referred to as science, yet the discipline suffers from a profound limitation. Economists theorize from their observations but find it almost impossible to conduct definitive experiments, particularly in the realm of macroeconomics. There simply isn't a laboratory where they can go to experiment on the general public.

Until disaster strikes.

A major disaster, like Hurricane Katrina, acts as an involuntary experiment on the economic system. It's a bit like giving a patient a severe wound and then studying whether she survives.

The results can be revealing. In the case of a disaster that levels a city, it's quite clear what the city looked like just beforehand, so we can judge its recovery by how quickly and thoroughly it returns to normal. It's rare for a city to die, the way ancient Pompeii did, but the pace of recovery can vary greatly from city to city, and those differences can shed light on how to accelerate recovery from future disasters.

What's more, urban disasters may provide clues to some great puzzles of economics. One of these is how to organize an economy, maximizing prosperity by getting the right mix of government and private involvement.

Start with two success stories stemming from disasters at the turn of the last century, in Galveston, Tex., and San Francisco.

The hurricane that hit Galveston in 1900 killed perhaps 10,000 people, about 25 percent of the city's residents at the time, and destroyed 8,000 buildings. By 1907, Galveston had largely recovered - regaining its population and its status as a major port. It then ranked second only to New York City in the value of its exports, doing substantially more business than New Orleans.

In 1906, most of San Francisco survived the initial earthquake only to be leveled in an inferno that raged unchecked. Some 28,000 buildings were destroyed. Nearly five square miles burned, and 3,000 people were killed. But in just three years, 25,000 new buildings lined the streets, and by 1911, San Francisco had substantially recovered....

[anne]

http://www.nytimes.com/2005/09/08/opinion/08winchester.html?ex=1283832000&en=e2245867b06326c3&ei=5090&partner=rssuserland&emc=rss

September 8, 2005

Before the Flood
By SIMON WINCHESTER

THE last time a great American city was destroyed by a violent caprice of nature, the response was shockingly different from what we have seen in New Orleans. In tone and tempo, residents, government institutions and the nation as a whole responded to the earthquake that brought San Francisco to its knees a century ago in a manner that was well-nigh impeccable, something from which the country was long able to derive a considerable measure of pride.

This was all the more remarkable for taking place at a time when civilized existence was a far more grueling business, an age bereft of cellphones and Black Hawks and conditioned air, with no Federal Emergency Management Agency to give us a false sense of security and no Weather Channel to tell us what to expect.

Nobody in the "cool gray city of love," as the poet George Sterling called it, had the faintest inkling that anything might go wrong on the early morning of April 18, 1906. Enrico Caruso and John Barrymore - who both happened to be in town - and 400,000 others slumbered on, with only a slight lightening of eggshell-blue in the skies over Oakland and the clank of the first cable cars suggesting the beginning of another ordinary day.

Then at 5:12 a.m. a giant granite hand rose from the California earth and tore through the city. Palaces of brick held up no better than gold-rush shanties of pine and redwood siding; hot chimneys, electric wires and gas pipes toppled, setting a series of fires that, with the water mains broken and the hydrants dry, proceeded over the next three dreadful days and nights to destroy what remained of the imperial city. In the end, at least 3,000 were dead and 225,000 homeless.

Everyone who survived remembered: there was at first a shocked silence; then the screams of the injured; and then, in a score of ways and at a speed that matched the ferocity of the wind-whipped fires, people picked themselves up, dusted themselves off, took stock and took charge.

A stentorian Army general named Frederick Funston realized he was on his own - his superior officer was at a daughter's wedding in Chicago - and sent orders to the Presidio military base. Within two hours scores of soldiers were marching in to the city, platoons wheeling around the fires, each man with bayonet fixed and 20 rounds of ball issued; they presented themselves to Mayor Eugene Schmitz by 7:45 a.m. - just 153 minutes after the shaking began....

[anne]

http://www.nytimes.com/2005/09/09/business/09jobs.html?ex=1283918400&en=1d098b5e15249770&ei=5090&partner=rssuserland&emc=rss

September 9, 2005

Willing Workers but With the Wrong Job Skills
By DAVID LEONHARDT and LOUIS UCHITELLE

With some one million people from New Orleans and the Mississippi Gulf Coast suddenly tossed out of their jobs by Hurricane Katrina, the newly unemployed are now fanning out across the South and the rest of the country, getting help from friends, family, employers or government agencies. In many ways, the potpourri of relief efforts is serving as a testament to the economy's flexibility.

But the makeup of the Gulf Coast work force - heavy on warehouse employees and blackjack dealers, light on bankers and factory workers - has already complicated relief efforts and appears likely to add to Hurricane Katrina's economic damage.

With a population less educated than the nation as a whole, New Orleans and coastal Mississippi employed many people without the kind of skills that would help them quickly find new jobs. The Gulf Coast economy also has more than its fair share of workers who made their living waiting tables, fixing houses or otherwise serving a local economy that, for now, does not exist.

"I want to go back and help rebuild New Orleans," said Gregory Woods, 48, a master plumber who spent last weekend in Galveston, Tex., where he and his wife talked to social workers about how they could collect food stamps. "But for the time being, our life is here." ....

[save_the_rustbelt]

I have a theory of useful procrastination, that is, sometimes not rushing forward buys time to provide more useful solutions.

This is hard for academics and journalists to understand perhaps, because they never really plan or implement anything. They "bayonet the wounded" after the battle is over.

Just a thought.

[dryfly]

Just a thought.

I agree... sometimes the right thing to do is flail the arms and yell... "Don't just do something... stand there!"

[jamzo]

is there a"katrina recovery plan"

what committments have been made by the federal, state and local governments?

what committments have been made by the major businesses in the area?

[dilbert dogbert]

dry and rust,
your comments may have better application to our response to 911 than to katrina. this may not have been politically possible however.

[anne]

http://www.nytimes.com/2005/12/10/national/nationalspecial/10exile.html?ex=1291870800&en=6740d5cfeb528d30&ei=5090&partner=rssuserland&emc=rss

December 10, 2005

Wealthy Blacks Oppose Plans for Their Property
By GARY RIVLIN

BATON ROUGE, La. - True Light Baptist Church is located in a down-and-out part of town here, but on Monday nights its parking lot fills with BMW's, Mercedes-Benzes and other late-model sedans that shine with a new-car sparkle.

Since September, hundreds of displaced residents from New Orleans East, the neighborhood that was home to the largest concentration of the city's black elite, gather there for a small taste of the camaraderie and community that they sorely miss. But the residents - whose ranks include lawyers, judges and a few elected officials - are also anxiously mobilizing to save their low-lying corner of the city, which some planners argue should revert to marshland.

So far, the group has used its clout to extract a promise that electricity will be turned on in the neighborhood next month, instead of waiting until June. It has also speeded the return of water service. Without either, many residents say, they must wait in Baton Rouge longer even if their neighborhood is open.

New Orleans's mayor, C. Ray Nagin, spent an evening at one of the group's meetings recently, hearing of the residents' longing to return home. But despite the group's considerable resources, the plan taking shape to remake the city lumps New Orleans East and its 90,000 residents with the Lower Ninth Ward and other deluged neighborhoods as the last priority of the city as it struggles to rebuild. The Urban Land Institute, a planning group advising the city, recommended that the city begin rebuilding less damaged neighborhoods first, provoking outrage from residents of the flood zones.

"It would kill the black psyche if New Orleans East wasn't rebuilt," said Talmadge Wall, an interior designer who for 15 years has lived with her husband and children in New Orleans East. "Think of what it would mean if the city successfully chased off so many African-Americans who had money, its doctors and successful businesspeople and lawyers and such. People who were aspiring to attain that kind of success would no longer feel like they have a chance."

At last Monday's meeting, organizers handed out black, white and green lawn signs that read, "I am coming home! I will rebuild!" ...

[Movie Guy]

"Why do I not have the sense that there is a concentrated focus on infrastructure? Is there a large scale public clean-up and restoring of street by street services? Not home by home, but street services such as lighting. What of gas lines? Public transport? Then, are there potential jobs for those who have still not returned? Jobs enough to have a household move from Atlanta? Curious...."

I expect that you should fly down one weekend and study the situation on the ground. I'm confident that you can purchase a reasonably priced round trip ticket from NE to NO.

Clue: No one lives in most of the areas that were previously occupied. Public transportation? For what purpose? And so on...

If you drive along the Gulf Coast across Mississippi, there are regions along the highway where nothing exists anymore. It's gone.