Transcript The baby-sitting cooperative`s depression, and

Macroeconomics
Depression Model
Why do depressions happen?
• Any economy based on money can collapse
spontaneously
• All it takes is for people to reduce spending
What solves depressions?
• Somebody spends money
Money
• Money has two roles
– Medium of exchange
– Store of value
– The basic problem that leads to depressions:
• You can store money
• But you can’t store labor
Depressions modeled
• DC babysitting coop
DC babysitting coop (late 1970s)
• Over 100 families babysitting for each other
• Certificates or coupons exchanged for
babysitting
• Committee gave out coupons to new
members, collected coupons from departing
members
• Limited the number of times you got a
babysitter minus the number of times you
babysat.
Problem arose when …
• Some families saved coupons for future needs.
• Made it harder for other families to earn
coupons.
• Led to more families saving coupons for future
needs.
• Led to lots of families wanting to babysit, way
more than the number of families willing to
hire a babysitter. That’s a depression!
Vicious circle or
downward spiral
People save coupons for
future use.
People worry that they
won’t have coupons
when they need them.
Fewer people are hiring.
People who want
coupons lack
opportunities to earn
them.
Depression economics –
common sense, upside-down
• Thrift a virtue?
– Paradox of thrift
• Better skills needed?
– Babysitter training program?
Depression economics –
common sense upside-down
Normal times
• Saving helps society –
provides funds for
investment
Depression times
• Saving, which means not
spending, reduces
opportunities for
investment.
• Education makes you more
productive, which makes
society more productive
• Education gets you out of
the labor force, and
provides an excuse for the
government to give away
money
What they tried …
• Lawyers: Committee should make a rule that
each family must get a babysitter once a
week.
– Forced spending – unpopular, hard to enforce
• Economist: Committee should give out more
coupons to everybody
– Once families had enough coupons to satisfy their
expected future needs, they started spending.
What solved the depression
• Giving out certificates
– Solved the baby sitting coop depression
• Giving out money -- through government
spending
– Solved the Great Depression of the 1930s
Too many certificates?
• Equity in babysitting requires members not be
flooded with certificates
– How many times you can go out = How many
times you’ve babysat + how many certificates the
committee gave you
• If everyone has all the certificates they expect
to need, the certificates are worthless
– Functional equivalent of inflation
The problem of giving out money
• Money tied to morality
• People who work hard for their money resent
giveaways
• So we look for excuses to give out money
– “deserving” people
– Government contracts and hiring to do something
useful
Babysitting coop as a model economy
with special limitations
• One commodity, plus money
– (Common in macroeconomic models)
– The special limitations:
• Fixed price – fixed value of a certificate
• No borrowing or lending
– These limitations are two sides of the same coin
Real economies have lending and
borrowing
• Credit older than coins
• Most transactions on credit
– Even when prices reckoned in weights of gold or
silver
• Lending and borrowing could create
babysitting certificates
– And later destroy them
Money and banking
• The U.S. does have lending and borrowing
– which can expand or contract the money stock.
• Our committee in charge of money is the
Federal Reserve System
– which can manipulate the financial system to
affect how much money people and institutions
are borrowing and lending, which affects how
much is being spent in any period of time.