Tag Archives: Gilligan’s Island Economics

Gilligan’s Island Economics — Inflation

Inflating the Money Supply

In Gilligans Island Economics — Auto Bailout, I described what’s wrong with simply throwing money at an economic problem. Now let’s talk about where that money comes from. Remember, the Skipper and Gilligan have been making a tidy living building huts for everyone, but now the market for huts is slowing down (everyone has one) and the Skipper is worried about where Gilligan will find the money to buy coconut cream pies.

Thurston Howell III proposes a bailout. He’ll take an extra $100 out of his trunk of money and give it to the Skipper and Gilligan, and that way they have extra time. Suppose that the Skipper is “generous” and Gilligan gets $30. Gilligan immediately runs to Mary Ann and offers her $10 for every pie she makes for the next week (Gilligan is skinny, but he can really eat). The Professor also likes coconut cream pies, so where he normally gives Mary Ann $2 for pies during the week, he ups his offer to $4. Mary Ann ends up making more during the week, and she’s able to offer more money to Lovey Howell for the shell necklaces she makes, forcing Ginger to pay more as well.

You can see where this ends up. The castaways started their economic system fairly: Mr. Howell gave $100 to each castaway, so the total economy on the island was $700. Now with the bailout there is an extra $100, for a total of $800, floating around. Prices will go up as people find they have more money to pay with.

The Ripple Effect

So who benefits and who suffers? Gilligan and the Skipper obviously benefit — they get an extra $100 of free money to split between them. Everyone on the island suffers to the extent that they are holding dollars. If the Professor happens to have $200, because he gets paid infrequently and needs to have cash reserves, while Mary Ann keeps only $20 on hand because she makes money on pies every day, then the Professor suffers ten times the damage that Mary Ann does.

The Real World

The situation is the same in the real world economy. Banks create money the way Mr. Howell did every time they issue a loan: the borrower has the money to buy a house (for example) while the person who deposited the money in the first place still has access to their account. The amount of money is tracked in terms of the actual money floating around and the money that is available in one way or another. A better description is in the wikipedia article on money supply.

The money supply can increase (somewhat) harmlessly as the economy increases — if an extra hundred castaways washed up in the lagoon the island economy would experience a significant decline in prices as the 700 circulating dollars distributed themselves among 107 people. In a circumstance like that it makes sense for Mr. Howell to pull more money out of his trunk.

Last week the Fed increased the money supply by over 1 trillion dollars. To misquote Everett Dirksen (who apparently never actually said it), “a trillion here, a trillion there, and pretty soon you’re talking about serious money.” Actually, a trillion is serious money by itself. It’s about the same as the above scenario on the island. We should expect to see prices increase significantly as that extra money hits.

The Fed has the ability to increase the money supply arbitrarily. There is no one beneficiary, but a range of them, in the form of banks and financial institutions. Certainly not you or me. The Fed have been going to the trunk and pulling out extra money for nearly one hundred years, and often spending it on nothing more useful than coconut cream pies.

Advertisements

Gilligan’s Island Economics — Auto Bailout

On the Island

Suppose we look at the economics of Gilligan’s Island. Thurston Howell III is of course the banker — he brought a trunkful of cash with him on the three hour tour, and uses it to start a simple economy on the island, allowing everyone to work based on market norms rather than social norms.

The Skipper and Gilligan join together to start a company: SkipGan Huts. They build huts for the others and sell them for $100 each. The Skipper as President does all the design and surveying work and takes $80 per hut, while Gilligan does most of the actual assembly work and takes $20 per hut.

For a time they make a very nice living, but there’s a problem: after they’ve built a hut for themselves, for the Professor, for Ginger and Mary Ann, and for the Howells, the market for huts pretty much dries up. Sure, the Professor needs a lab hut, Ginger needs a closet addition for all those dresses, and the Howells are thinking about adding a second bedroom, but the handwriting is on the wall.

The Skipper goes to Mr. Howell and says, “This situation is bad for me, but it’s especially hard for Gilligan. I saved most of my money, but Gilligan didn’t make as much, and he couldn’t stay away from Mary Ann’s coconut cream pies. If we don’t do something, and soon, Gilligan will be out of work and won’t be able to eat at all. What do you suggest?”

Now Thurston Howell III, known as the Wolf of Wall Street, would know better, but he’s playing the part of a metaphor here, so he says, “I know: we’ll have the Island Reserve — that’s me, you know! — release some more money from the community trunk and use it to tide SkipGan over until you recover. Try to come up with a plan that will allow you to become profitable again.”

The Skipper knows that there just isn’t going to be any more money to be made in hut building, but Mr. Howell is basically offering to give him money, so why should he turn it down? The problem is that now SkipGan has money, but still no market. If they keep building huts, they’ll be producing something no one on the island wants or needs. The sooner Gilligan and the Skipper stop building huts and start doing something else — anything else — of value to the others, the better. If Gilligan has no marketable skills other than hut-building, he should starting learning something else. Mr. Howell should give Gilligan and the Skipper incentive to change careers instead of incentive to keep doing the same non-productive thing. Or he should just leave them alone — Gilligan has incentive enough (his love of coconut cream pies) to encourage him to change professions.

In Real Life

The situation with auto manufacturing is very similar — demand is down, so the government is giving the Big Three auto manufacturers loans to help them make more cars. This makes no sense. Nothing about giving them money (my tax money or my inflation money — more about that later) makes me more likely to buy their cars. When the government helped Chrysler in 1979, Chrysler survived not because they just needed some time but because the K-cars didn’t suck and they invented the modern minivan. If the big three can point to something like that now, fine, but they’d better be prepared to pay back the people as Chrysler did. If the government does anything, it should help the workers train for other jobs.