November 30, 2011
– Comments (1)
Krugman is a hack.
This doesn't seem to have much to do with Keynesian policies, however; so I think Schiff is making a stretch making that comparison. He's definitely right about the money issues --- but I'd go deeper.
The biggest problem with the scheme is that it replaced a freely transferable currency (the US Dollar) with a much more limited one (babysitting coupons), with a fixed price (the coupons value babysitting at the same price regardless of market supply and demand).
Not a huge shock it didn't work. The benefit of money is that you can exchange it for goods and services; even if you have no particular goods and services that the other party needs. Instead, the other party can use the money to purchase goods and services from someone else.
Since the scheme also pegged the currency to babysitting services, it resulted in distorted preferences; since the value of babysitting services should fluctuate depending on time of day, day of week, and occasion.
But I'd also say the co-op's coupon scheme shows why the gold standard is flawed --- it fixes prices to a volatile commodity.
When there's an undersupply of gold, it's highly valuable, therefore money becomes highly valuable and investment unattractive. When there's an oversupply of gold, money becomes less valuable and investment becomes more attractive. In essence, investment in the real economy becomes dependent on the supply and demand for one particularly volatile commodity.
That's exactly what happens here! Babysitting services aren't that valuable on a Wednesday night, but become very valuable on a Saturday night or, particularly, on New Year's Eve (as Schiff points out.) So, in essence, the value of the "currency" is extremely volatile. People hoard the currency to use it when babysitting services are scarce. No one spends the currency when babysitting services are abundant.
So I agree with Schiff that it's a boneheaded scheme and Krugman's ideas are ridiculous on this --- but ultimately, I think the scheme shows why fixing the value of a currency to a good or service (including gold) doesn't work. It distorts market preferences.