If you read Paul Krugman with any regularity, you’re surely familiar with his baby-sitting co-op story. In the 1970′s a group of young couples living on Capitol Hill formed a club aimed at facilitating the barter of baby-sitting services. Each couple received a certain amount of coupons which could be traded with any other couple in exchange for 30 minutes of babysitting. The problem, Krugman explains, was that people would hoard their coupons, saving them for special occasions or popular nights to go out. Members of the group had a harder and harder time redeeming their coupons, and before long, very little baby-sitting was going on. The co-op, in other words, fell into a recession. The problem was alleviated, Krugman contends, when some economists in the group explained to the other members that they were suffering from a liquidity crisis that could be resolved by printing more coupons. More coupons were eventually issued and, the story goes, “couples became more willing to go out, opportunities to baby-sit multiplied, and everyone was happy.” But then the co-opers went over board and “eventually, of course, the co-op issued too much script, leading to different problems…”
What a fun little experiment in central planning these Capitol Hill staffers got to participate in!
For Krugman, reading about this co-op was life changing. “I think about that story often,” he has written, “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.” The reason for this, of course, is that he sees the story as the perfect allegory for a liquidity trap in a modern economy. As he puts it, “[The] story tells you more about what economic slumps are and why they happen than you will get from reading 500 pages of William Greider and a year’s worth of Wall Street Journal editorials.”
So this story of a small group with similar preferences who are providing each other with one service is, apparently, the linchpin for Krugman’s ideas about the whole economy.
Obviously, there are many problems with the allegory; foremost among them is that the coupons are a poor substitute for money, since the “price” of babysitting can never change in response to changing demand. I’ll let Peter Schiff explain further, as his following criticism of the allegory is devastating.
And Keynesians take this ridiculous story very seriously. Look at the huge Wikipedia page the co-op has.
Such is the theory behind maintaining a $1.5 trillion deficit.