Recession (economics)/Tutorials

The baby-sitting crisis - an analogy

This baby-sitting cooperative provided its members with coupons, each of which entitled the bearer to one hour of baby-sitting - payable to the baby-sitter who undertook it. The crisis had its origin in the practice, adopted by some parents, of accumulating coupons in order to provide reserves against times when they expected to want a lot of baby-sitting. The result of that practice was to diminish the number of coupons that were in active circulation. The time came when other couples found they had fewer coupons than they needed, but were unable to earn more coupons because other couples, who were also short of coupons, were reluctant to spend them in order to pay for baby-sitters. The result seemed paradoxical - although there were plenty of couples who wanted to baby-sit, there were few who were prepared to pay them to do so. The cooperative was experiencing a baby-sitting-shortage crisis analogous to a recession.

According to Paul Krugman, this was a common problem with an easy solution - but one which the managers of the cooperative were reluctant to accept. The solution was to issue more coupons, and when it was adopted, the motive for hoarding coupons disappeared and baby-sitting resumed as before.