Wednesday, May 16, 2012

Want to understand the economic woes in Europe?

International Money Pile in Cash and Coins
Photo by epSos.de
Read Krugman Wishes He Were Wrong Amid EU Austerity Backlash. And if you're struggling to understand what a recession really is, read this story about a baby-sitting co-op that failed because ... it went into recession. This is relevant because in my post covering whether or not it's a bad time to move to Paris, one respondent argued that with the economic uncertainty in Europe, of course it's a bad time.

In the baby-sitting co-op mentioned above, couples agreed to baby sit for other couple's babies. They would receive a coupon if they babysat and pay one out if they needed baby-sitting. It worked well until at one point, a lot of couples wound up having babysat quite a bit and had reserves of coupons and there were few coupons in circulation. Other people were afraid to pay coupons for a baby sitter because they were worried that there wouldn't be coupons left for them to earn later. Thus, they only spent their coupons if they had to.

The co-op, thus, went into a recession. How could you get out? You could, um, try to force people to spend their coupons, but people aren't going to be very happy about that. What's the point of the co-op if it forces you to do something? You could try to take the coupons and forcibly redistribute them, but people certainly hadn't signed up for that! (For those who are thinking "taxes", don't forget that most major economies allow voting and people have a say in how taxes work).

Maybe pass rules against hording? How are you going to enforce those? Maybe you could fiddle with prices and say that you only need to spend a half coupon to hire a baby sitter and you still get a whole one to baby sit. That might work in the short run, but as any economist will tell you, you could easily have more people wanting to baby sit than to have their children babysat (this would make more sense if the coupons were fungible, but eventually a "black market" in coupons could arise quite innocently).

Well, you could print more coupons, but people argue that this would be inflationary. But that's the point! I've argued against this in that past, but now I'm pretty sure I'm wrong. Here you print more coupons, break the hoarding cycle and things are running smooth again, you remove some of the coupons from circulation or you invite more people into the co-op.

Which is the exact opposite of what most governments in Europe are doing. Nobody's buying, so the governments are demanding austerity programs where we continue to not buy. Anybody see a problem with that? Yeah, I thought so.

Interesting, the US government may come to Europe's rescue. The FATCA program is creating a huge new banking industry sector across the planet. I'm guessing it's not enough, by itself, to pull Europe out of its crisis, but it could certainly help.
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