Coment on Paul Krugman¶s ³Babysitting the economy´

In this article, the author makes an analogy between economic crises and a situation he had read about, regarding the ³Great Capitol Hill Babysitting Coop´. Briefly, this describes the problem that a group of people who agreed to babysit for each other met while developing this co-op. The author considers that the babysitting co-op can be viewed just like an economy on a much smaller scale, each action of the committee representing a possible movement of the central bank. For example, the issue of scrip pieces of paper, each representing one hour of babysitting, can be equivalent to the issue of money by the central bank. However, this can be argued using the argument of the purchasing power of money, since those papers had the single function of ³buying´ babysitting hours. The main problem that appeared the moment the couples started building reserves. In real economies, this can be associated to the phenomenon of hoarding money, since those coupons reserves did not bring any profits. Because of these ³savings´, fewer coupons were left circulating, therefore creating a recession. The ³central bank´- the committee took action and issued more coupons, the equivalent of inflation, solving the problem temporarily, but they couldn¶t keep it under control and issued too many supplementary coupons. One of the things Krugman emphasizes is that this recession wasn¶t caused by the fact that there were faults in the babysitting activity, but it was rather due to a technical problem- too many couples chasing too little script. Returning to the large scale, this means that depressions aren¶t caused by faulty entrepreneurial activity. The solution offered by the author in this case would be giving the couples the possibility to borrow coupons, in exchange for some penalties= interest. According to the objectives of the ³central bank´, the interest rate can be lowered, in order to stimulate consumption, or vice-versa to discourage it. Another problem brought into discussions consists in the seasonality of these activities. Going back to the babysitting example, more people go out during the summer, while during winter more couples are willing to babysit; as a result, couples will be interested in building reserves event at a 0% interest rate. In this case, Krugman suggests a system in which points accumulated lose their value over time, so people would be motivated to use them sooner. A side- problem tackled by this article is the Japanese economic crisis, which the author is trying to solve by offering these apparently simple solutions.

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