Paul Krugman and the Congressional Baby Sitting Co-Op

[TWiley]

This is from a very interesting article by written by Paul Krugman is based on a true story about Congressional Baby-Sitting co-op that has current fiscal implications.

Exerpt:

The story is told in an article titled "Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis." Joan and Richard Sweeney published it in the Journal of Money, Credit, and Banking in 1978. I've used their story in two of my books, Peddling Prosperity and The Accidental Theorist, but it bears retelling, this time with an Asian twist.

<snip>

Above all, the story of the co-op tells you that economic slumps are not punishments for our sins, pains that we are fated to suffer. The Capitol Hill co-op did not get into trouble because its members were bad, inefficient baby sitters; its troubles did not reveal the fundamental flaws of "Capitol Hill values" or "crony baby-sittingism." It had a technical problem--too many people chasing too little scrip--which could be, and was, solved with a little clear thinking. And so, as I said, the co-op's story helps me to resist the pull of fatalism and pessimism.

Story Here: http://www.slate.com/id/1937/

Sidebar Link to the same story: http://www.slate.com/id/1937/sidebar/42410/

<snip>

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.

<snip>

Indeed, some economists and commentators have tried to claim that despite all appearances, Japan is not in a liquidity trap, perhaps even that such a thing can't really happen. But the extended baby-sitting story tells us it can--and that inflation is actually the economically correct way out.

[Oregone]

1. Really great article

Its definately an interesting thought. Another way to decentatize savings would be to tax them (wealth tax), but it would seem much easier to increase inflation with spending/lending.