Even baby-sitting can't avoid recessions


Over the past generation, the U.S. economy has grown by about 2.7% in an average year. but just as there are no average families -- how many couples do you know with 1.3 children? -- there have been no average years. Indeed, in six of the past 25 years the economy grew more than 4%, while in five years its output actually declined. If you graph America's gross domestic product over time, you see not a smooth curve but rather a line that wiggles up and down, although it gradually trends upward. Economists call the stretches where that line wiggles down "recessions" and stretches where it wiggles up "recoveries"; and they call the alternation of recessions and recoveries the "business cycle."

The business cycle has been a fact of life for more than a century. Yet every once in a while people begin to imagine that from now on it will be steady growth all the way. The last great outbreak of such optimism was back in the late 1960s, when economists were publishing books with titles like Is the Business Cycle Obsolete?; even Richard Nixon got into the act, promising to "fine-tine" the economy so it wouldn't give anyone a bumpy ride. sure enough, within a few months the nation slid into recession.

But now the "business cycles are obsolete" crowd is back. Over the past few months articles have appeared in practically every major newspaper, insisting that our businessmen have become too smart and our policymakers too sophisticated to make the old mistakes.

How foolish. The inevitability of the business cycle is as near as you can get to an economic law. It has been a feature of ever economy that goes beyond subsistence agriculture, and it is not about to go away. The path of economic growth never did run smoothly, and it never will.

Let me tell you a true story which may explain why.

Back in the early 1970s, a group of families in Washington formed a baby-sitting cooperative -- that is, an arrangement under which couples would baby-sit for each other's children. Such cooperatives are fairly common, but this one had two unusual features: It was bigger than most (containing about 150 couples), and two of its members, Joan and Richard Sweeney, not only understood what was happening but also wrote about it in an article entitled "Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis."

Such a co-op requires some system to ensure that members do their fair share. Like many co-ops, the Capitol Hill organization used a scrip system. New members were issued a certain number of coupons, each responding to one hour of baby-sitting time. When one couple watched another's children, the baby sitters received the appropriate number of coupons from the baby sittees -- coupons which the sitting couple would then "spend" on some other occasion.

What the co-op eventually discovered, however, was that this system worked only if there were neither too many nor too few coupons in circulation. Couples made decisions both about whether to baby-sit and whether to go out for the evening based on their reserves of coupons. If they had small reserves, couples were reluctant to use them up, preferring to save them for a rainy day; but they were quite willing to baby-sit to build up their hoard. If they had large reserves, they were eager to go out but reluctant to sit.

But one couple's decision to go out was another's opportunity to baby-sit, and vice versa. In the early days of the co-op, it turned out that there was too little scrip in circulation. that meant people were eager to baby-sit but reluctant to go out -- which meant that many people who were willing to baby-sit could not find takers. And the realization that it was hard to find opportunities to replenish their coupons made people even more anxious to save their reserves for special occasions, which made opportunities to baby-sit even scarcer.

Eventually, the people who ran the co-op issued more coupons. The result was a dramatic improvement: More people went out, which meant coupons were easier to earn, which led to even more people going out, and so on. But then, inevitably, they overdid it. Once there were too many coupons in circulation, people became eager to go out, but it became hard to find baby sitters; as people realized that coupons often could not be used, they became even less willing to baby-sit in order to earn them.

What does all this have to do with the business cycle? the baby-sitting co-op was, in effect, a miniature macroeconomy; its problems were simplified versions of the problems faced by the U.S. economy as a whole. In particular, the downward spiral the co-op experienced when there were too few coupons in circulation was a recession -- no more, no less. when America as a whole experiences a slump, the details are more complex, but the principle is the same. And Federal Reserve Chairman Alan Greenspan is simply the man who controls the number of coupons, otherwise known as the money supply.

And here is the crucial point: the managers of the co-op almost never got it right. They did experience a brief "golden age" when the supply of coupons was neither too large nor too small; but that was luck, not skill, and it didn't last.

And if the people trying to manage such a tiny, simple, relatively unchanging economy could not get it right, how can we possibly imagine that the task of keeping that vast, complex, ever-changing organism we call the American economy growing smoothly will be any easier? The job can be done well or badly -- and so far Greenspan has done it pretty well -- but no mere mortal can do it perfectly.

So here is an ironclad forecast: There will be more recessions in the future. Making that forecast isn't hard. In fact, it's childishly simple.

Originally published, 1.30.97