Krugman Story

Paul Krugman, in an old article talks about a beautiful (for an economist) story (originally published by Joan and Richard Sweeney in the Journal of Money, Credit, and Banking in 1978).

The Sweeneys tell the story of--you guessed it--a baby-sitting co-op, one to which they belonged in the early 1970s. Such co-ops are quite common: A group of people (in this case about 150 young couples with congressional connections) agrees to baby-sit for one another, obviating the need for cash payments to adolescents. It's a mutually beneficial arrangement: A couple that already has children around may find that watching another couple's kids for an evening is not that much of an additional burden, certainly compared with the benefit of receiving the same service some other evening. But there must be a system for making sure each couple does its fair share.
The Capitol Hill co-op adopted one fairly natural solution. It issued scrip--pieces of paper equivalent to one hour of baby-sitting time. Baby sitters would receive the appropriate number of coupons directly from the baby sittees. This made the system self-enforcing: Over time, each couple would automatically do as much baby-sitting as it received in return. As long as the people were reliable--and these young professionals certainly were--what could go wrong?

Well, it turned out that there was a small technical problem. Think about the coupon holdings of a typical couple. During periods when it had few occasions to go out, a couple would probably try to build up a reserve--then run that reserve down when the occasions arose. There would be an averaging out of these demands. One couple would be going out when another was staying at home. But since many couples would be holding reserves of coupons at any given time, the co-op needed to have a fairly large amount of scrip in circulation.
Now what happened in the Sweeneys' co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple's decision to go out was another's chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.

In short, the co-op had fallen into a recession. Since most of the co-op's members were lawyers, it was difficult to convince them the problem was monetary. They tried to legislate recovery--passing a rule requiring each couple to go out at least twice a month. But eventually the economists prevailed. More coupons were issued, couples became more willing to go out, opportunities to baby-sit multiplied, and everyone was happy. Eventually, of course, the co-op issued too much scrip, leading to different problems ...

The story is interesting on so many levels, so reading the whole article is probably a good idea. You can probably use the story to defend the idea that all current problems are monetary and that issuing more coupons would help. Since the story is so cute, someone might buy it.

But I won't. The current problem is not that we all have too much money we prefer to hold. As far as US citizens are concerned, it is exactly the opposite. Let's continue with the babysitting story: there are two groups of people. One of them (US) spent all their coupons and borrowed some more and spent those, too. The other group of people took this coupons and baby-sit for them. What the second group now wants is the opportunity to make the first group baby-sit. Printing more coupons and giving them to that group won't solve the problem, it will merely postpone it. Without coupons, first group cannot trade inside (monetary problem), so more coupons help them. But most of all, they will eventually need to repay the second group. Pilling some more debt may make things go smoothly for a while, but will also make the hangover much worse.
I think USA is looking for a big crisis. Fed may postpone it for a few years, but when it comes, it will big. It will be needed to teach Americans that savings account is not a joke.
P.S. I'm probably wrong. Maybe Americans consume appropriately (based on their expected life-time income), in which case it should be OK. Maybe weak(er) dollar will help the export and industry in the US so that no big crash will be needed. Maybe