Undercover Economist

From Tim Hartfod:

I am secretary of a local baby-sitting circle, and I have a problem. Members are simply not going out enough - everybody is trying to build up a reserve of baby-sitting coupons. But if nobody goes out, nobody baby-sits and nobody builds the reserve they desire. Should we introduce rules compelling people to go out, say, twice a month?

Yours sincerely,

- Mrs Janine Broughton, Lowestoft



Dear Mrs Broughton,

Your baby-sitting circle is in recession.
This is hardly surprising: you are running tight monetary policy, have constitutionally rigid prices, and suffer severe capital market failures.

You are correct in thinking that as long as everybody is trying to save simultaneously, they will all be frustrated and the circle will never work well. Forcing people to go out and hire baby- sitters will create the illusion of economic activity, but there is no guarantee that your centrally planned solution will be what people really wanted.

A simple fix would be to create a spot of inflation. This worked well for Mr and Mrs R.J. Sweeney, as described in their famous paper "Monetary Theory and the Great Capitol Hill Baby-Sitting Co- op Crisis". If everybody is issued with extra baby-sitting coupons, they will all feel that they have the reserve they need and start hiring each other more freely. The risk is that inflation gets out of hand and too many baby-sitting coupons start chasing too few willing baby-sitters.
An alternative would be to set up a coupon bank that lends coupons out at an agreed rate of interest. If too few people are willing to go out, lower the rate of interest; if there are too few baby- sitters, raise it.

You may wish to establish some kind of committee to decide interest rates.

The value of coupons should also be allowed to float. In winter, when few people wish to go out and everybody is glad enough of a warm evening watching television with other people's children, the value of coupons will rise.

Come the summer, coupons will not buy much baby-sitting. This price flexibility will work better than the most ingenious central banker.

Thanks Tyler Cowen
[AF]