The babysitting co-op: Crises of confidence – The Economist

In light of concerns about a looming double-dip recession, Matthew Klein at Between the Balance Sheets takes a look at a 1998 piece from Paul Krugman, in which,...

In light of concerns about a looming double-dip recession, Matthew Klein at Between the Balance Sheets takes a look at a 1998 piece from Paul Krugman, in which, thinking about the financial woes in Asia, he discusses a 1977 article from the Journal of Money, Credit, and Banking by Joan Sweeney and Richard James Sweeney. The older article discusses a liquidity crisis that happened in the Capitol Hill Baby-Sitting Co-operative, an arrangement under which members earned scrip by baby-sitting for other families and exchanged that scrip in turn for baby-sitting services. At one point, for structural reasons, the supply of scrip in circulation dwindled to a noticeable degree. This generated broader problem within the co-op because members, worried about their ability to replenish their stores of scrip, were reluctant to relinquish the scrip they held. Essentially, the co-op had fallen into recession because of restrictive monetary policy.

“I think about that story often,” wrote Mr Krugman. “It helps me to stay calm in the face of crisis, to remain hopeful in times of depression, and to resist the pull of fatalism and pessimism”—a striking endorsement from an economist who usually comes across aspretty Eeyore-ish. What he meant was that the problem was a technical one. It would therefore have been susceptible to government intervention. The solution to the co-op’s problems, he continued, was “obvious”, and just what he would recommend for Japan circa 1998—use monetary policy to goose spending. Either boost the supply by issuing more scrip (analogous to lending at low interest rates) or set inflationary expectations (so people understand that their money will buy more now than later, giving them an incentive to spend.)

Mr Klein counters that this is not, actually, the obvious solution, and the co-op’s own story makes that clear. After a controversial effort to mandate spending, by requiring members to go out once every six months, failed to yield the desired results, the co-op did turn to monetary policy; they gave everyone ten extra units of scrip. But this caused a seesaw effect: suddenly they had too many people wanting to go out, and not enough sitters.

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