Babysitting bankers

It’s interesting how much high-falutin economics seems to come down to analogies to baby-sitting. Quite a racketThe most recent example (via Russ Nelson a few days ago), is an article by Paul Krugman (actually from 1998) extrapolating from a baby sitter’s co-op to the Asian monetary crisis. Basically, the idea is that a bunch of parents get together and decide to make coupons for baby-sitting, so when you babysit for someone else for a night, you get a coupon, and when you want a night out without the kids, you give that to someone else. Unfortunately, this goes pear-shaped because parents decide they want to save up coupons in case they want a few nights out in a row, eventually leading to a babysitting recession: people would like to babysit and others would like to go out, but they’ve decided not to in order to save their coupons.

Krugman reports attempts at “legislative” solutions — requiring each couple in the co-op to go out twice a week and thus ensuring some circulation, but basically advocates the “economic” (or more precisely “monetary policy”) solution of just issuing more coupons to everyone. Voila, their saving is done for them, and they can go ahead and spend, and the baby-sitting economy functions again. (Although, there’s also the telling comment “Eventually, of course, the co-op issued too much scrip, leading to different problems …“)

That’s pretty close to the remedy proposed for today’s worries — “It’s a credit crisis: banks won’t give out money because they want to keep lots themselves, but they can’t get any themselves because other banks won’t give it out. So let’s just give them more money so they can forget about saving and get on with it!” with concerns about inflation or balanced budgets relegated to an off-hand comment.

But at least in the baby-sitting case, a monetary solution isn’t the only one available. You could also simply “float” the baby-sitting coupons — instead of one coupon always being worth one hour of baby-sitting, no matter if it’s a stay-at-home Monday or an out-on-the-town Saturday, let the couples negotiate rates. If it so happens that everyone wants to save coupons, then that might mean that a couple who wants to go out will only offer one coupon for three hours’ baby-sitting, and another couple will be happy to accept that, because gosh, their supply is running really low. And, of course, if that discounting continues and sets a new benchmark price (one coupon for an entire evening out), you have baby-sitting deflation, and everyone’s coupons increase in value by 200%, and your problem’s solved.

That also seems like it addresses the real problem case Krugman identifies in his sidebar: namely wanting to be able to vary your monetary policy seasonally. An hour of baby-sitting in winter, when nobody wants to go out as much, isn’t worth an hour of baby-sitting in summer, when everyone wants to go out. And baby-sitting on Fridays and Saturdays anytime is probably more valuable than baby-sitting on Sunday through Thursday, too. And then, of course, there’s the prospect of baby-sitting Calvin…

(If you really trust everyone involved, then you can give people credit and there’s no great need for savings. Instead of a coupon they’ve saved up, they can just write an IOU, and as long as they fulfill that later, everything’s good. That takes away the self-regulating aspect though — you have to check that someone isn’t just writing up hundreds of IOUs and never making good on them. An interesting system for IOUs is Yahoo’s yootles project, which sadly seems to be bit-rotting a bit, but allows automated tracking of IOUs, including dealing with credit, making boring historical debts disappear, and some really fancy calculations of the best way to divide leftover ravioli)

Changing prices is where economic rubber hits the road, though: high prices make the ACCC investigate petrol companies for collusion, low prices make people complain that Walmart doesn’t care about its employees. This gameEconomists and politicians tend to consider wage levels in particular to be “inelastic” — in that people will refuse to accept lower face-value wages where it would be warranted (your work is less valuable than it used to be: heck, a robot can do it, and not that may people are interested anyway…). Even worse, it’s possible that that’s not actually true: some people do accept wage cuts. But the general expectation seems to be that wages will either get slowly eaten away by inflation (which is why economists like to have a lower limit on inflation as well as an upper one), or disappear entirely when people get fired or companies go bust.

And in the baby-sitting example it’s pretty simple to see why people don’t like price changes: “I baby-sat your brat last month for three nights, now you’re telling me that you’ll only baby-sit my lovely angel for one? Screw you!” But if the price has changed over that month, that’s actual the fair result — perhaps everyone was wanting to stay at home last month anyway, and they could’ve gotten baby-sitting from five other couples; and this week there’s a concert on that everyone wants to go to, and the only couple’s that are staying at home are completely booked out for their baby-sitting. Or maybe they are being completely arbitrary in raising the price — in which case “screw you” is completely the right response, because there are other baby-sitters who aren’t unreasonable available, and you haven’t been robbed because your coupons will work for them. And the result’s still fair, because you get baby-sitting at a fair rate from someone else, and they lose the chance to do baby-sitting for you in future, because you’ve stopped trusting them.

That point hits worst when you extend the delay to extremes — which is what you get when you look at saving for retirement or going on a pension. Ultimately, you’re hoping that the value the next generation assign to either your savings or even the generic value of your worth as a person is enough to do what it takes to keep you fed and healthy and happy, without you having to do another damn thing in return. Hopefully, that’s pretty easy: in twenty or forty years, there’s a good chance that we’ll have invented more stuff, and feeding people, doctoring them, and entertaining them will be even easier than today. But there are two fundamental difficulties: one is people generally start taking new advances for granted, and upgrade their expectations accordingly, and the other is that in a bunch of countries, there’ll simply be less people actively doing work in future: ie, the mass of babies produced in “the baby-boom” hit retirement age, and have to hope their generation’s 2.01 kids can support them, just as well as their parents’ generation’s 3.5 kids supported them. Or perhaps they’ll have to hope that China and India can provide enough new immigrants to keep Western economies ticking over, maintaining the value of their savings, and funding their pensions — and that those immigrants won’t be more interested in supporting their own parents back home.

Actually, having a look at recent US Presidents is interesting on that score. Pre-baby-boomers, Ford, Carter, Reagan, and GHW Bush (born 1913, 1924, 1911 and 1924) had four, four, five, and six children respectively; baby-boomers Clinton, GW Bush and Obama (born 1946, 1946, and 1961), by contrast, have one, two and two, respectively. According to Wikipedia, the baby-boom is actual split into the baby-boomers (Clinton and GW Bush) and “Generation Jones” (maybe Obama, depending on when you draw the line), but the baby-boom included both anyway.

In any event, it’s going to be interesting to see how financially and demographically sound things turn out to be over the next ten or twenty years, because I somehow guess going to be Gen-X and Gen-Y that ultimately get to decide just how long and pleasant the baby-boomers retirement works out to be.

The baby sitter flag

One Comment

  1. mgregoire says:

    For a link to the original paper, and a disagreement with Prof. Krugman’s interpretation, see

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