kitchen table math, the sequel: boom and bust

Tuesday, August 16, 2011

boom and bust

in 1977:
Two of Washington D.C.'s most splendid institutions -- the Board of Governors of the Federal Reserve System and the Capitol Hill Baby Sitting Co-operative -- are currently fighting their own separate battles against the scourge of inflation. Neither seems to be winning.

Whatever the lessons of the board's experience, the lessons from the co-op's are clear. (1) The co-op has been increasing its money supply ("scrip") per capita, by running budget deficits, and this has generated inflationary forces. (2) However, the main "commodity" this scrip money buys is baby-sitting time, and the price of baby sitting is constitutionally pegged at one unit of scrip for every one-half hour of baby sitting. Hence, this system of price controls means the inflationary pressure does not drive up the scrip-price of baby sitting, inflation is suppressed, and shortages are found. (3) The political process of rectifying the situation holds little hope. Few members see the problem as fundamentally monetary, but instead believe others are not doing their part in removing the shortages.

Monetary Theory and the Great Capitol Hill Baby Sitting Co-op Crisis: Comment (pdf file)
Author(s): Joan Sweeney and Richard James Sweeney
Source: Journal of Money, Credit and Banking, Vol. 9, No. 1, Part 1 (Feb., 1977), pp. 86-89
I love this!

A tiny, 200-person economy complete with recessions, inflations, and even -- potentially -- a Great Depression, all of its very own.

In an odd sort of way, the Sweeneys' tale reminds me of Colleen Moore's fairy castle at the Museum of Science and Industry, which my parents took us to see every year when we were growing up.

Like the fairy castle only not fun.


PhysicistDave said...

Catherine said:
>A tiny, 200-person economy complete with recessions, inflations, and even -- potentially -- a Great Depression, all of its very own.

Ah, but Catherine, there is some good news!

I got interested in the underlying economic theory of how inflation causes booms and busts forty years ago (I actually plowed through Mises' "Theory of Money and Credit" as a high-school student). I even had an offer to do a post-doc in econ after I got my Ph.D. in physics (which I foolishly declined). Back then, those of us who were interested in such things were a tiny, eccentric remnant.

But, in the last couple months I have run into a professional dancer who raised the subject, a homeschooling mom who lives on a farm who discussed the issues involved, etc.

It’s taken a century, but the victims are figuring out the scam.

The most telling point comes from the end of the essay you link to:

>Now, if goodhearted people in an area that offers little scope for chicanery can so bungle economic management, can we really be surprised at the results of turning our economy over to the tender mercies of political experts? Indeed, unlike the co-op, the national economy seems virtually indestructible, not having died yet.

I fear the operative word is “yet.” It’s a race between the destructive activities of the fiscal and monetary authorities and the ordinary citizens’ figuring out what they are doing to us.

Dave Miller in Sacramento

Catherine Johnson said...

Well, I have become a quasi-monetarist. Not that I can define the term.

We had a funny moment in Philadelphia. We were seeing the sights, visiting the Museum of the Constitution, etc. Turned out our path took us by the Philadelphia Federal Reserve, which I insisted on entering. No enthusiasm from Ed or C. on this score, though I can't say C. was any more enthusiastic about the Liberty Bell, which we didn't manage to see.

I told them my plan was to speak to the manager and ask them to stop targeting inflation and start targeting NGDP.

Turned out it was 4:15 and the bank was closed.