Babysitters, Booms, and Busts: A Capitol Hill Tale
- stefanmincic04
- Jan 27
- 5 min read
Introduction:
In the late 1970s and early 1980s, a group of young couples on Capitol Hill in Washington, D.C. established a baby-sitting co-op, intending to trade babysitting services among themselves. Though seemingly simple, this experiment in economic coordination became a classic case study illustrating broader economic principles.
Economist Paul Krugman famously used this example to explain a Keynesian view on “liquidity traps” and the importance of having sufficient money (or in this case, babysitting coupons) in an economy. Others, particularly those leaning toward an Austrian School perspective, point out that the real flaw was the attempt to fix the price of babysitting services at a static rate, regardless of demand variations.
Below, we’ll delve into how the co-op operated, why it struggled, and how both Keynesians and Austrians interpret its lessons.
How the Co-Op Worked:
The group created baby-sitting coupons as a form of currency, where each coupon paid for one hour of baby sitting. Therefore, if you chose to babysit for one hour, you would trade an hour of your time for a coupon from a member of the group.
The goal was to create an easy and fair system where parents could trade babysitting hours without the need to pay actual money.
The Problems:
1 - Price Fixing of Coupons per hour:
One of the major flaws with the coupons was that there was a fixed price for babysitting, at one coupon per hour.
Lets assume that on a regular Monday, where there is no public holiday or special event, that the price of 1 coupon per hour is the equilibrium price in the market. At this price the market is willing to provide 4 hours of baby sitting.
Therefore, a person providing babysitting will earn 1 coupon per hour and is willing to work for 4 hours. The parents are also willing to pay 4 coupons for 4 hours of baby sitting.
Components of the diagram:
S1: Supply Curve: How many hours people are willing to babysit at various coupon 'prices'
D1: Demand Curve: How many hours people want to hire a babysitter at various coupon 'prices'
Equilibrium Price: The market-clearing price (coupons per hour).
However, it is now Friday night and many of the couples in the community want to go out, causing demand to increase and the demand curve to shift to the right.
At the fixed price of 1 coupon per hour, there becomes a shortage. This is because people now want 6 hours of babysitting at the cost of 1 coupon per hour but there are only 4 hours willing to be worked by providers.
If the market was able to self regulate and adjust price, the equilibrium price would increase to 2 coupons per hour causing supply to expand and demand to contract to an equal 5 hours of baby sitting. However, with a fixed price of 1 coupon per hour in the market, the shortage remains.
This diagram shows how a fixed coupon price (1 coupon/hour) can result in mismatches between supply and demand - especially on high-demand nights (like New Year's Eve) versus low demand nights like a random Tuesday.
2 - Hoarding Behaviour
Members began to realise that the static value of the coupons (fixed price at one coupon per hour) was most advantageous for high-demand nights. This is because this system values one hour on Monday night the same as one hour on New Year's Eve which is an obvious flaw.
Many people began hoarding these coupons to save them for high-demand occasions like New Year's Eve or weekends. Since parents wanted to reserve these 'fixed-value' coupons for special nights, fewer coupons circulated day-to-day. Gradually, people were unwilling to go out on regular evenings (Tuesdays, Wednesdays), creating a liquidity bottleneck - or so the Keynesians argue.
Therefore, there was generally a surplus of people wanting to provide baby sitting services to earn coupons but unable to find work during regular times such as a Monday night, and shortages of people needing baby sitters during busy periods such as New Years Eve. The incentives in the market were just incorrect.
The Keynesian Solution:
Krugman and other Keynesians argue that the fundamental issue was a shortage of coupons. With limited coupons in circulation, people felt compelled to hoard them, leading to reduced overall economic activity (fewer nights out, fewer babysitting opportunities).
The solution to this liquidity problem was to issue additional coupons (analogous to injecting more money into an economy), helping to alleviate the short-term stagnation. With more coupons in circulation, people were less anxious about running out. They became more willing to spend coupons (go out more often), thus creating new babysitting opportunities for those who wanted to earn coupons. This resolved the surpluses of people wanting to baby sit and those willing to hire baby sitters on regular weekdays.
Long-Term Issue:
However, eventually too many coupons began circulating in the community, creating a new and more serious imbalance, a surplus of coupons and shortage of people willing to babysit. As people had already earned a lot of coupons they were not willing to actually provide the services for them. Krugman acknowledges this himself:
"More coupons were issued, couples became more willing to go out, opportunities to baby-sit multiplied, and everyone was happy. Eventually, of course, the co-op issued too much scrip, leading to different problems"
This can be likened to a bubble, where there were too many coupons chasing too few babysitters.
From a Keynesian viewpoint, this saga underscores the importance of managing aggregate demand. When there wasn’t enough “money” (coupons), demand fell. Injecting more coupons temporarily stabilized spending, but overshooting (printing too many coupons) led to inflationary pressures—too many coupons chasing too few babysitters.
The Austrian Perspective:
Austrians argue that the core issue wasn’t a lack of liquidity but the fixed pricing of babysitting at 1 coupon per hour. This static rate ignored natural demand fluctuations—Friday nights or holidays should have been priced higher than quiet weekdays. As a result, members hoarded coupons for high-value occasions, leaving regular transactions underutilized. Printing more coupons didn’t solve the underlying inefficiency; it only masked the problem temporarily. Ultimately, the oversupply of coupons devalued them, discouraging babysitting altogether and turning a short-term fix into a long-term crisis.
Timeline Illustration:
Lessons Learned:
Pricing must reflect supply & demand
Flexible pricing (e.g., higher rates on holidays) would have balanced supply and demand, reducing shortages and surpluses.
Short-Term Liquidity Fixes Have Limits
Injecting liquidity (printing more coupons) can alleviate immediate problems but risks long-term imbalances, such as inflation or bubbles.
Market Signals Matter
Fixed prices ignore market signals like increased demand on holidays, leading to inefficient resource allocation.
Real-World Parallels:
U.S. Stock Market in the 1990s: Federal Reserve policies and easy credit contributed to the dot-com bubble.
Housing Bubble (Mid-2000s): Low interest rates and loose lending policies fueled an overinvestment in housing, culminating in the 2008 crash.
Possible Sovereign Debt Bubble: Some warn that continued government borrowing and quantitative easing could lead to the next bubble—massive US public debt that eventually becomes unsustainable.
Conclusion
The Capitol Hill Baby-Sitting Co-op is a microcosm of macroeconomic principles. It demonstrates how inefficient markets can be solved in the short term through increased liquidity, but this leads to long-term instability. Whether through babysitting coupons or national currencies, the lesson is clear: rigid systems that ignore supply and demand distort markets and risk collapse.
By understanding these dynamics, we gain valuable insights into broader economic policies and their impact on everyday life.
Sources and Further Reading
Krugman, Paul. “Baby-Sitting the Economy,” Slate, August 14, 1998.
Sweeney, John C. “The Baby-Sitting Co-op: A Cure for Recession?” Journal of Money and Finance, n.d.
Peter Schiff: https://www.youtube.com/watch?v=lCQ_N9wj41QS
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