The following story, one that I find most enlightening, appears in two textbooks written by Professor Krugman who maintains, only slightly tongue-in-cheek, that this is all we need to know about economics.
A group of young families began a babysitting club. Each time one family did a babysit evening they would earn a coupon from the family for whom they sat. In turn, they could use that coupon to pay another family when they wanted to go out without the kids. During periods when a particular family was unable to go out for whatever reason, they would accumulate coupons. Then, when they were free again, they could go out several nights in a row if they so chose. The system worked very well – for a while.
Then one family whose children were grown decided to become big-time babysitters. They gradually accumulated huge numbers of coupons from babysitting for all the other young families in the club. Eventually, they had accumulated most all of the coupons. None of the other young families were able to go out because they lacked coupons. Restaurants in the area went bankrupt because young families were unable to go to them because they could never go out. Gas stations closed because people were using less gas. With more unemployed people on the streets, taxes fell, medical bills went unpaid, schools began to close because the government could not pay the teachers, and doctors began to move out of town. The entire economy fell into a terrible recession.
The family that had accumulated all the coupons said that the problem was all the fault of the young people who had been profligate and used up all their coupons. They were not going to do anything about the situation because it wasn’t their fault. Some people tried to argue with them, saying but with the schools closing children wouldn’t be able to get an education, with restaurants closing there wouldn’t be a place to go to eat, and with doctors moving out none would have medical care. But all of this fell on deaf ears. Not our problem, they said. A little more austerity will solve their problem.
Finally, someone had a brain wave — maybe even had read a book by Professor Krugman. They got the families together and printed a bunch of new coupons and simply distributed ten of these coupons to everyone. With the new coupons in hand, young families were able to go out again, shops and restaurants came back to life, taxes got paid, schools reopened and life got back to normal.
As the Bible sometimes says, he that has ears let him hear!!!!
I think it is a great story. Thank you Professor Krugman.