There is no market solution to New Orleans' problem

Laurie Vignaud faces a double dilemma: If she rebuilds her wrecked ranch house at 1249 Granada Drive in the great suburban expanse south of Lake Pontchartrain, will her neighbors do the same?

This is essentially the inverse of the classic "prisoner's dilemma" from game theory. In the absence of repeated plays, the inevitable outcome of the prisoner's dilemma is that two criminal accomplices will each confess their crimes (defect), because each prisoner fears the other prisoner will get a better deal in exchange for a confession.

In the case of homeowners rebuilding their flooded houses, the greatest fear is that their investment will never be recouped unless everyone else in their neighborhood rebuilds. The tendency, then, is for individual homeowners to wait until the rest of the neighborhood develops, with the end result that nobody rebuilds.

To complicate matters, because of the insecurity of the present levee system, owners have to gamble their investments against the prospect of another devastating levee breach.

It's a perfect example of market failure which, economist Thomas Schelling explained for the Los Angeles Times, the federal government must fix. Nothing short of a massive federal financial commitment now will convince New Orleanians to return to rebuild the city.

"There is no market solution to New Orleans," said Thomas C. Schelling of the University of Maryland, who won this year's Nobel Memorial Prize in Economic Sciences for his analysis of the complicated bargaining behavior that underpins everything from simple sales to nuclear confrontations.

"It essentially is a problem of coordinating expectations," Schelling said of the task that Vignaud and her neighbors must grapple with. "If we all expect each other to come back, we will. If we don't, we won't. ...

According to Schelling, the key to making almost any kind of human activity work is "credible commitments." Buyers must make them to sellers. Governments must make them to citizens. Nations must make them to each other.

The credible commitment that virtually every resident of New Orleans wants more than any other is a pledge from the Army Corps of Engineers to rebuild the levee system bigger and better than before Katrina.

Every New Orleanian is weighing their private risk against the public benefit -- against their deepest wishes that the city they love will be restored to what it once was, and more. But without a federal commitment to rebuild whole neighborhoods, they think they're just being taken for suckers by a president who sells himself as a "compassionate conservative," but who in reality is conservatively compassionate.

The Corrente Wire put it this way:

For 66 days now, 62-year-old Florence Jackson has been waiting for help from FEMA. "I worked all my life," she says. "Where is my government? I’m so disappointed."

Boy, the Republicans must be having a good laugh at that one! Worked all her life? Work is for suckers!

(A very special thanks to Mixter's Mix for sending me the Corrente post, which contained the link to the LA Times article by Peter Gosselin).