Tag Archives: economic explanation

Originally published March 24, 2009, at care2.com

Imagine a terrible snow-storm brings a community to a standstill.  There is a grocery store, with plenty of supplies to keep the town going for a few weeks, but the power is out and the owner and staff can’t reach the store.  The townspeople are enlightened enough to realize that if everyone takes what they please, the supplies wont last and the owners will be bankrupt when they return.

Sheriff Krugman advises Mayor Geithner to open the store and charge a dollar for each item. The town will have provisions, the owner will have money, and the town council can pay the owner at a later date for losses where the sale prices were too low.  “What’s important is that we are making it happen now.”

Mayor Geithner agrees to open the store.  But he’s afraid of the effect of the $1 dollar price tag on the town’s liability for the store’s losses.  He decides to try to revive the store by getting the town involved in a public/private partnership.  “First, I want some of you to invest in the store goods,” he tells onlookers.  “Then you can sell them for a profit to the public.  You set the prices to get what you can for the goods,” he explains.  “Some of the profit will go to the store owner, some to the town and some to you.  Suppliers that can reach us will make an effort to do so and will get paid for their supplies, while we are waiting for normal conditions to return.”

Sheriff Krugman warned, “This is complicated and depends on strong participation.  Meanwhile the food is perishing and may not be sold and resupplied in time,” he said.  “My plan gets the goods moving now so the supplies aren’t wasted. If your plan takes time and fails we will still have to get the food to people and we wont be able to charge much for it then. Too risky, when what we need is certainty.”

The Mayor then made his best case, “Here’s what I will do.  The town will lend you all the money to invest, since you don’t have access to the bank.  If you lose money the town will insure most of your losses, using the town’s share of profits when you succeed.”  “If you take an interest in the supply and demand of these goods, we should have prices that are as close to real prices as the conditions allow,” he said.  “Thus, no awful surprises when the owner comes back.”

Many people had stopped listening or fallen asleep.  Others were clueless. But a few were guessing the price of soap, thinking of the deals they would have to make in order to move the produce before it went bad andimagining that a run on canned sardines and the like could give them a chance to save for a new car.

No one wanted to lose money, but the terms weren’t bad.  

The people turned to the wise elder, Gergen, for his opinion on whether to follow Krugman or Geithner.  “It depends on you,” Gergen said.  “If you buy into the Mayor’s plan it may work.  If it fails, we will end up with the Sheriff’s plan whether we like it or not.”

You can stop imagining now.