Krugman and the Baby-sitting Economy - Economics -- Two Plus Two Poker Forums

maddog2030 · 11-24-2008, 08:35 PM

I did a search and this hasn't been discussed as far as I know. Please point me to the thread if I missed it.

Krugman attempts to illustrate why monetary policy (printing money) can boost an economy out of a recession: Baby-Sitting the Economy

Read the article first. Also be sure to follow the sidebar links where more details of the model economy are discussed. Here is a short snippet:

Quote:

Originally Posted by Paul Krugman

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.

...

Here is my attempt at isolating the key argument of the model:
1. Aggregate demand for liquidity past a tipping point relative to supply.
2. Sticky prices. In this case, 100% stickiness.
3. Central bank/currency.
Solution: Print scrip.

The question is: Is this model close enough to the real world to draw any conclusions from? Or is it missing any vital pieces of information that would change the solution?

Note: This isn't about what would happen in an AC free market economy. It's whether this accurately reflects the US (or another country's) system today and whether its conclusion has any real world merit. I have my own thoughts on these questions but will hold them for now.

Discuss.

maddog2030 · 11-24-2008, 08:38 PM

Also, to the charge that the inflation is eroding savings, Krugman explains:

Quote:

Originally Posted by Paul Krugman

The basic problem with the winter co-op is that people want to save the credit they earn from baby-sitting in the winter to use in the summer, even at a zero interest rate. But in the aggregate, the co-op's members can't save up winter baby-sitting for summer use. So individual efforts to do so end up producing nothing but a winter slump.

The answer is to make it clear that points earned in the winter will be devalued if held until the summer—say, to make five hours of baby-sitting credit earned in the winter melt into only four hours by summer. This will encourage people to use their baby-sitting hours sooner and hence create more baby-sitting opportunities. You might be tempted to think there is something unfair about this—that it means expropriating people's savings. But the reality is that the co-op as a whole cannot bank winter baby-sitting for summer use, so it is actually distorting members' incentives to allow them to trade winter hours for summer hours on a one-for-one basis.

TomVeil · 11-24-2008, 10:32 PM

Quote:

Eventually, of course, the co-op issued too much scrip, leading to different problems ...

That part seems right.

The obvious difference is that 1/2 of all transactions are based on the dollar. The babysitting scrip was only good for babysitting, so having a flood of them into the system only affects one part of the "economy". When you devalue the dollar, you alter the makeup of every transaction that happens.

Decent article but it seems like he's just finding excuses for his failed ideas.

maddog2030 · 11-24-2008, 10:57 PM

Quote:

Originally Posted by TomVeil

The obvious difference is that 1/2 of all transactions are based on the dollar. The babysitting scrip was only good for babysitting, so having a flood of them into the system only affects one part of the "economy". When you devalue the dollar, you alter the makeup of every transaction that happens.

What invalidates the model when the piece of paper can be traded for multiple different things (any good or service) versus one thing (an hour of baby sitting)?

Borodog · 11-24-2008, 11:44 PM

Krugman never ceases to amaze. His "model" has no price system; the only price has been fixed by fiat. Were this not the case, if the supply of tickets relative to the demand for them was low, then tickets would simply appreciate in terms of the things you could trade them for, i.e. babysitting.

Seether · 11-24-2008, 11:47 PM

Quote:

Originally Posted by maddog2030

What invalidates the model when the piece of paper can be traded for multiple different things (any good or service) versus one thing (an hour of baby sitting)?

When people save in the real economy, they are not simply putting their paper under their mattress. By forgoing their consumption they store the money in the bank, which then allocates the capital towards loans for people who will produce more. This results in more wealth for all parties (barring the possibility of the receiver of the bank loan defaulting).

Seether · 11-24-2008, 11:53 PM

Quote:

Originally Posted by Borodog

Krugman never ceases to amaze. His "model" has no price system; the only price has been fixed by fiat. Were this not the case, if the supply of tickets relative to the demand for them was low, then tickets would simply appreciate in terms of the things you could trade them for, i.e. babysitting.

Exactly. If there were a bidding system attached to having your children baby sat on a specific date then the system would be much more effective.

tolbiny · 11-24-2008, 11:54 PM

Quote:

Originally Posted by maddog2030

What invalidates the model when the piece of paper can be traded for multiple different things (any good or service) versus one thing (an hour of baby sitting)?

There are lots of reasons. In an economy a high savings rate signals to entrepreneurs that there is dissatisfaction with current products and a potential large demand if they can come up with a product or service that is wanted. Limiting what the scrips can be traded for limits their value and thus the incentive to find a way to pry them from holders.

Quote:

Also, to the charge that the inflation is eroding savings, Krugman explains:

His 'inflation' argument is a retarded comparison. If you go to the grocery store in at different times of year prices on produce rise and fall based on the season. Its simple supply and demand, no one calls this cyclical change in prices inflation.

AlbertoKnox · 11-25-2008, 12:00 AM

I read it. Interesting. Here's what I'm thinking.

Instead of 'management' issuing coupons, charging dues, and trying to guess the 'correct' interest rates. Why not do this.

Let anyone (as if they need permission) issue a "Certificate of 1 Hour of Babysitting" with their own name attached to it and use this future promise as payment. Now this Cert could be returned to the named person in return for an hour of sitting.

If sitting is a commodity (Joan = Lisa = Tammy) then people might choose to pay with and accept Certs written by others previously. If there is variation among sitting (Joan is friendlier or more frequently available) they may trade at a discount or a premium. "I'll give you 4 Joan hours for 5 hours of sitting"

If there are seasonal variations in demand price can move. Even subtle or unexpected (by management) variations can be handled. "The Washington Nationals are playing and everyone wants to go, pay my 2 hours per hour and I'll miss it."

There will be no currency shortage because people can write new ones. If you write Certs, but won't accept them people will stop sitting for you or at least stop taking your Certs, which means you must sit first for others to get their Certs. This is an incentive to not over-write and therefore devalue your own Certs.

Please poke holes or explain why a centralized system is better.

maddog2030 · 11-25-2008, 12:05 AM

Quote:

Originally Posted by Borodog

Krugman never ceases to amaze. His "model" has no price system; the only price has been fixed by fiat. Were this not the case, if the supply of tickets relative to the demand for them was low, then tickets would simply appreciate in terms of the things you could trade them for, i.e. babysitting.

This is price stickiness condition as mentioned in #2. I agree what you say is true with no price stickiness. Does his conclusion still hold for some value of stickiness between full and no stickiness?

AlbertoKnox · 11-25-2008, 12:05 AM

Didn't realize this was the Nobel guy. Um, wtf? I'm guessing the market doesn't determine Nobel winners.

TomVeil · 11-25-2008, 12:07 AM

Quote:

Originally Posted by maddog2030

What invalidates the model when the piece of paper can be traded for multiple different things (any good or service) versus one thing (an hour of baby sitting)?

I can't say it any better than they did. I will add, the only way to "earn" these credits was to do a specific activity. The only way to "spend" them was on another particular activity. Clearly this is not a "currency".

maddog2030 · 11-25-2008, 12:10 AM

Quote:

Originally Posted by Seether

When people save in the real economy, they are not simply putting their paper under their mattress. By forgoing their consumption they store the money in the bank, which then allocates the capital towards loans for people who will produce more. This results in more wealth for all parties (barring the possibility of the receiver of the bank loan defaulting).

Capital wouldn't be allocated because aggregate liquidity demand is too high per #1 if we were to expand the model to include this.

tolbiny · 11-25-2008, 12:12 AM

Quote:

Originally Posted by AlbertoKnox

Didn't realize this was the Nobel guy. Um, wtf? I'm guessing the market doesn't determine Nobel winners.

Krugman's main strength seems to be to take economic situations and make them sound incredible simple. Of course while doing this he brushes aside huge issues (Eventually, of course, the co-op issued too much scrip, leading to different problems ...) that would complicate things (ie real world situations).

maddog2030 · 11-25-2008, 12:15 AM

Quote:

Originally Posted by AlbertoKnox

Please poke holes or explain why a centralized system is better.

We can debate whether all types proposals would be more efficient. At the moment, though, I'm more interested in given the system we have, what is the best way to promote positive economic activity? And whether this has anything to do with the real world.