Babies are a real pain. They need to be fed, washed, entertained, put to sleep, kept away from sharp objects, etc. In the 1950s, a group of young lawyers working for the US Congress and their spouses decided to help each other out by forming a babysitting co-operative. One of those families was a young couple, Joan Sweeney and Richard James Sweeney, who also happened to be pretty sharp economists. During their period of membership, the co-op experienced phenomena that they realized resembled the ones the US economy was experiencing at the time. In 1977, they published a paper entitled Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis, in which they compared the babysitting co-operative to an economy in a demand-led recession. No one took this paper seriously until, two decades later, Paul Krugman popularized it in his book Peddling Prosperity.
“I think about that story often. 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” – Paul Krugman
First, let’s explain how the co-operative worked. When a member-couple wanted to go out for a night, rather than hiring a professional babysitter, another member-couple would babysit their child. To ensure that every couple was contributing their fair share of babysitting, the co-op introduced a currency in the form of vouchers, called scrip. One scrip represented 30 minutes of babysitting. For example, if a couple decided to go out for two-hour dinner, they would pay their babysitters four scrip, which the latter could then spend at a later date.
Each member-couple started off with 40 scrip. To pay for the administration costs, each family contributed 28 scrip annually, leaving only 12 for them to play in the meantime. Knowing full well that social occasions often arise unexpectedly, couples wanted to build up their reserves of scrip before spending them on a regular basis. As a result, couples offered to babysit at every opportunity. However, since for a couple to babysit, another couple must go out, there was a shortage of demand for babysitters. The co-op was experiencing a paradox fo thrift and, as a result, fell into a demand-led recession!
“Oh my God, you would kill for scrip. You would sell your children for scrip.” – A former member of the co-op
The administration of the co-op did not understand that this recession could have easily been solved by injecting more scrip into the system. It consisted of Washington-based lawyers who, instead, believed that the recession was caused by some fundamental flaw in the system that can only be eradicated with tough legislation. They passed a bylaw that required every couple to go out at least twice a month. When this failed to encourage couples to go out more, the administration was finally convinced that the problem was monetary – there were too many people chasing too few scrip – and the solution was simple – print more scrip.
The administration started awarding 60 scrip to each new family that joined the co-operative, resulting in a “golden age,” when the amount of scrip in the system was “just right.” A few years later, however, the co-op faced a different problem. There was now too much scrip. Couples wanted to go out more than they wanted to babysit, leading to a shortage of babysitters.
Again the solution to this problem was simple. The administration levied a one time tax of 10 scrip from every member-family, reducing the amount in circulation and bringing it back in line with the optimal scrip-to-couple ratio.
So why is it that real-world macroeconomics seems a lot more complicated? Would it not be lovely if all macroeconomic woes could be solved with a simple adjustment of the money supply? Consider the recession Japan was experiencing at the turn of the century. Between 1990 and 1998, real property prices plummeted by 80%. In the meantime, unemployment rate more than doubled from 2.1% to 4.7%. GDP growth stagnated and had been negative since 1999. There was a severe shortage of aggregate demand in Japan that, according to Keynesian macroeconomic theory, should have been combated with expansionary fiscal and monetary policies (i.e printing more scrip). Here’s the conundrum: the Japanese government was injecting billions into the economy and the central bank had actually decreased the base rate to almost 0% and, even after all those efforts, spending barely rose.
To begin explaining what happened, let’s add an additional layer of complexity to our macroeconomic model of the babysitting co-op. Imagine that now, if a member-couple runs out of scrip, but finds themselves still desiring to go out, it is allowed to borrow some scrip from the administration at a specified interest rate. The lower the rate set by the administration, the more incentive couples have to spend and run down their reserves, since they know that they will be able to repay any scrip that they borrow relatively easily. In this scenario, the administration acts as an analogue to a central bank.
Now imagine that there is a seasonality to how much member-couples want to go out: more in total would want to go out in the summer than in the winter. To avoid shortages of babysitting opportunities in the winter and babysitters in the summer, the administration can lower the interest rate in winter, encouraging spending of scrip, and raise them in the summer, discouraging spending. So far so good. But what if the seasonality is so strong that even at 0% interest rate on borrowing scrip, too few couples want to go out? The opportunities to babysit become so scarce in the winter that couples have even more incentive to stay in and be prudent with their reserves of scrip.
In the real-world, this is called a liquidity trap and is precisely what happened to Japan in the 1990s. Even when the Japanese central bank was giving money virtually for free, consumers were not borrowing and, as a result, not spending enough. While the allegory of the babysitting co-op does not offer an explanation as to why demand was so weak in Japan, it does make one thing clear; having a kid is too much like hard work.
I would recommend reading the original paper by Joan Sweeney and Richard James Sweeney for a more detailed explanation of the co-operative as a macroeconomic model.
I would also encourage reading The Return of Depression Economics by Paul Krugman. He often refers to the co-operative to explain economic crises in Asia, Mexico and the US in layman terms. Seb Carpanini published an excellent review of this book.