Globollocks from the Globe and Mail

Globollocks is, according to Daniel Davies, aka dsquared, "breathless and/or mendacious “Globalisation” pieces from neo-liberal commentators". Davies has a magnificently complete scorecard on this, and today’s Globe and Mail editorial (I read the dead tree version: the online version is all but the first paragraph behind the wall) scores highly. From dsquared’s scorecard:

  • Mentions China as “globaliser” without qualification—3 points.
  • Refers to Botswana, Singapore or Hong Kong as if they provided development models—2 points
  • General failure to distinguish between capital and goods openness – 1 points
  • Says or implies that there is no anti-globalisation movement in developing countries – 2 points
  • Says or implies that developed world antiglobalisation movement “has no
    idea of what it is in favour of”, “is opposed to trade” or “wants poor
    countries to stay poor”—1 point each
  • In general, argues back and forth between general statements about
    trade and specific statements about currently live negotiations – 1-4
    points on a sliding scale
    (I award 4 on this one).

So I’d award the Globe about 12 points, which is pretty good, especially for a 5-paragraph editorial. Pretty high scoring.

Adverse selection is so the problem

Alex Tabarrok at Marginal Revolution claims that Adverse selection is NOT the problem. This is not surprising given his enthusiasm for Markets Everywhere. Most of the comments address the empirical aspects of one particular case, which is the insurance industry. But while I can’t get at the papers he references (they are behind the institutional subscriber firewall) I think there is a more general issue here about asymmetric information.

For me, the key line in the post is this:

You can buy a decent used car, for example just get it inspected or certified. Only if such adjustments are illegal, or in some other way not allowed, will adverse selection become important.

But the whole thing about asymmetric information is surely that information is not non-existent, but it is costly. No one thinks that the lemons scenario is more than a first-order approximation, and signalling and screening make second-order corrections, but the problem may still remain and be important. The information problem becomes central to the whole practice of the industry, as anyone reading an insurance contract will know. Alex Tabarrok is very close to saying that costs can be neglected as long as adjustments are "illegal, or in some other way not allowed". This claim that transaction costs are unimportant seems to be one of the dividing lines between market enthusiasts (AT) and market sceptics (me).

What is more, there is often a collective action problem in obtaining that information that is particularly important when the buyers are those who are ill-informed. When the seller is ill-informed, it may be the case that they can compensate: I think that Alex Tabarrok is right that, for example, the insurance company knows as much about my life expectancy as I do, and I know considerably less about the details of my coverage than they do. I would say that in this case overcoming asymmetric information becomes a fixed
cost, leading to economies of scale in the insurance industry (which at
least in Canada is an oligopoly with fewer members by the year) and leading to market failures of a variety of types. On the other hand, when the consumer is ill-informed, the collective action problem is real.

My favourite example of an asymmetric information problem comes from beer-drinking in the UK. Small independent breweries have no mechanism for establishing a reputation (and thereby overcoming the lemons problem) unless there is a critical mass of well-informed beer drinkers who will transmit that reputation to others. In the 1970’s the beer industry in the UK was in a
Catch-22 that is typical of asymmetric information problems: there was no demand for real ale because there was no supply, and there was no supply because there was no demand. The big breweries offered low quality, but predictability. AT would have claimed, I believe, that the market was working.

The problem has been resolved to some extent by the efforts of the Campaign for Real Ale (CAMRA), who included a prominent Trotskyist in their leadership and had a strong anti-big-business slant. Their efforts have led to 300 new breweries being set up, while in the 50 years before their formation not one was founded. CAMRA has moved the equilibrium in the market, which is presumably evidence that it was failing before. And unless AT is prepared to
accept anti-business volunteer lobbying and protest groups in the requirements for a properly functioning market, it would seem that the problem was fixed by a successful organization overcoming the collective action problem.

So yes, I think asymmetric information, including adverse selection, is really a problem in many markets.

Update: on asymmetrical information in insurance, see December 18th’s Dilbert.

Who shops with an eye to the big picture?

Two-thirds of the way down the oddly-named Lionel Shriver’s column "Nativity scenes are out, carols are banned, and don’t dare wish anyone merry Christmas: the festive season, US-style" is some interesting stuff about how freely-made consumer choices takes us to places we don’t want to be. She writes it well, as you would expect from the author of "We Need to Talk About Kevin".

Books make good gifts this year, since discounts offered by UK chains are now as drastic as 50%. But don’t imagine that high-street behemoths alone are sacrificing for the affordability of your winter presents. Publishers are out of pocket, as are authors like me. Discount deals in trade for volume are not yet as unsustainable as in the dairy industry; the 17p per litre that supermarkets pay for milk is often less than it costs to produce. But publishing has become less profitable, and so has writing books.

I don’t know what the answer is. Wal-Mart-writ-large seems the natural end point of capitalism, which thrives on economies of scale. With the clout to demand rock-bottom prices from suppliers and pass the savings to customers, big fish eat little fish until the commercial ocean floats only a few whales. Hence the local greengrocer gives way to Sainsbury’s, the family-owned hardware store to Home Depot, the independent bookseller to Waterstone’s (now mounting a take-over bid for Ottakar’s). Alan Bennett’s appeal to buy his book from independents is laudable but unrealistic. I can’t ask prospective buyers of my own novels to pay full-price, when I purchase most books on Amazon myself. Aside from a few toffs who spurn the ambience of the cut-rate, we’re all going to buy our milk, nails, and hardbacks where they’re cheapest.

In the big picture, everyone is the poorer when producers and employees are low-balled, and thus pump less money into the economy. But who shops with an eye to the big picture? In the short-term, Wal-mart employees are so poorly paid that the only place they can afford to shop is Wal-mart.

This is pretty much exactly the argument I make in Chapter 1. If we don’t want to end up with nothing but Wal-Marts, we need to take collective action, not individual action.

December 6: in memoriam

A timely reminder by This Magazine. Victims of December 6, 1989

Genevieve Bergeron
Helene Colgan
Nathalie Croteau
Barbara Daigneault
Anne-Marie Edward
Maud Haviernick
Barbara Klucznik Widajewicz
Maryse Laganiere
Maryse Leclair
Anne-Marie Lemay
Sonia Pelletier
Michele Richard
Annie St-Arneault
Annie Turcotte

Update: remembrance also posted by Feministe.

On Their Own in Battered New Orleans – Los Angeles Times

Via Brad DeLong, an essay in the Los Angeles Times about the difficulties of reconstruction in New Orleans: On Their Own in Battered New Orleans – Los Angeles Times.

The article picks up on two ways in which sensible individual choices may lead to very different outcomes.

What seems to have happened is that the US government has decided that the free market will take care of rebuilding New Orleans, as "the agencies that were stepping up to help guide the city’s comeback have stepped back down again" and "[t]o an extent almost inconceivable a few months ago, the only real
actors in the rebuilding drama at the moment are the city’s homeowners
and business owners."

Reconstruction of a city is different from buying cauliflower though, and the article quotes Thomas Schelling as saying "There is no market solution to New Orleans… It essentially is a problem of coordinating expectations. 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 seems impossible."

The LA Times interviews one woman who is trying to decide whether to return and rebuild or to just move out. She would like to rebuild, but only if she would be surrounded by a neighbourhood. There is no sense rebuilding in a wasteland:

As a work crew gutted 1249 Granada Drive on Monday, heaping appliances,
sofas and sheetrock in a 6-foot pile on the curb, Laurie Vignaud
suddenly realized her only evidence that any of her neighbors had
returned since Katrina was similar heaps outside their houses.

But do those piles mean that Granada Drive residents are ready to
rebuild, or simply are picking through the wreckage and trying to buy
time by stopping the mold’s spread?

"I keep looking at all this stuff and wondering whether they’re
coming back or not," said Vignaud. "It’s crazy, like a riddle I can’t

What is needed here is co-ordinated, collective action rather than individual, market-like behaviour. And those communities that have ways of co-ordinating such activity are the ones who are returning:

In fact, a few neighborhoods appear to have solved the riddle, or
at least to have taken a good run at it. But the ways in which they
have says much about the daunting dimensions of the problem facing the
rest of the city.

On the northern edge of the city is New Orleans’ Greek Orthodox
community and its church, Holy Trinity Cathedral. As warnings about
Katrina grew darker in the days before the storm, community leaders
matched up families to whisk the elderly and infirm out of danger. In
the days immediately after, they mobilized to come back again.

"We ran it like a business," said John D. Georges, the parish
council president and chief executive of Imperial Trading Co., a
regional supplier of convenience stores.

Father Anthony Stratis worked the phones and sent out e-mails to
find parishioners. Parish council member Dr. Nick Moustoukas followed
up by wiring money to the neediest. Ten days after the storm, Georges
and council member Christ Kanellakis helicoptered in to rescue the
church’s chalice and tabernacle.

By acting in concert, members of the Greek community have in
effect provided each other with an immense self-insurance policy,
guaranteeing that if one family rebuilds, others will. And, should more
enticement be needed, the church, according to Georges, Moustoukas and
others, is providing returning families with thousands of dollars of
cash aid, has organized bulk purchases of new appliances and has
arranged for crews that repaired the cathedral to be introduced to
people whose houses are in need of work.

By the time the cathedral reopens for its first full service in
two weeks, its marble interior walls will have been repaired, its lawn
will have been resodded and Holy Trinity will be back in business.

The second way in which individual choice may go wrong in New Orleans is not so much about the relationship among the citizens of the city, it is more about the relationship between citizens and government. If citizens are to return, they need a commitment from the government that the city will be made safe. Meanwhile. the government is backing off:

"If they put back good levees to the [Category 3] level authorized
before Katrina and we can get a commitment to build them slowly up to
Category 5, people will come back," said Walter Isaacson, a News
Orleans native, former editor of Time magazine, former chairman of CNN
and co-chairman of the Louisiana Recovery Authority, a new state board
appointed by Gov. Kathleen Babineaux Blanco to oversee reconstruction.
"It won’t be a purely rational decision, but they’ll come."

But the corps has made it clear that it has no intention of making any such grand commitment soon.

In part, the problem is cost; estimates of what it would cost to
bring the city’s levees up to Category 5 range from $4 billion to more
than $30 billion. In addition, the corps’ budget is perhaps the most
closely controlled of any in the federal government, with Congress
ear-marking almost every dollar to particular projects, leaving the
corps little maneuvering room.

But there also appears to be a sense among senior corps officials
that local demands for greater protection, if indulged, would be

"It’s of interest to me," New Orleans district commander Col.
Richard P. Wagenaar told the Los Angeles Times several weeks ago, "that
all the political leaders, all the business leaders and all the
homeowners were all perfectly comfortable with the system on Aug. 28,"
the day before Katrina made landfall. "They knew full well it was being
built to Category 3, and everybody was fine with that," he said.

But when a storm of greater strength struck and overwhelmed the
levees, Wagenaar said, people "suddenly wanted to look back and say,
‘Hey, what happened?’ " The implication: When would calls for still
more ever end?

The concern is apparently one of moral hazard, that by investing in New Orleans the agencies will simply encourage demands for more. I have no way of knowing if there is any basis whatsoever to the concerns (although in other circumstances, such as health care, the concern is overrated as Malcolm Gladwell recently explained). But it is clear that without a real commitment from the government, New Orleans won’t rebuild quickly.

This is what happens when you have a government who doesn’t believe that governments can be useful. It is too bad.