Arnold Kling  

A Fiscal Fable

Rights: A License to Kill?... Reply to Aeon Skoble...

Once upon a time, everyone worked for the MyTeaEst corporation, which produced one million loaves of bread in the year 2000. It paid its workers in bread, and they ate the one million loaves.

MyTeaEst also gave half of its workers a pension plan, promising them one million loaves of bread in 2025. It gave the other workers a 401(K) plan, where the workers deposited bonds issued by MyTeaEst that promised one million loaves of bread in 2025.

The year 2025 came. MyTeaEst still produced one million loaves of bread, with a new generation of workers. Those workers expected to be paid, in the aggregate one million loaves of bread. The older generation of workers on the pension plan expected one million loaves. And the older generation of workers with the 401(K) plan expected that their bonds would be repaid.

What do you suppose happened?

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CATEGORIES: Fiscal Policy

COMMENTS (45 to date)
anon writes:

The Fed bought out the bondholders and the Chinese paid the pensioners. Problem solved.

martin writes:

Zero real growth and expanding consumption?

2000: x workers 1m bread produced and 1m bread consumed for consumption or investment.

2025: 2x of which 1x workers 1m bread produced and 3m bread required.

Telnar writes:

We all know the answer, but let's also note a few features of the scenario which lead to those retirees not getting the income they planned for:

1) The company operated at a loss after cost of capital and future obligations for the entire period. Think of the bonds as investments in the company and the pension plan as an annual liability equal to the present value of the newly accrued future costs.

2) The company had zero growth (or, to make the analogy easier, cumulative profits which grew more slowly in dollar terms than future liabilities) over the period.

When we look at the situation for future US retirees, those who rely on unfunded plans might well experience a lesser version of your fable, but those with funded plans still have investment options which are likely to yield a positive real return, including overseas investment options. What their after tax return will end up being, on the other hand, is far less clear, as you've mentioned before.

Les writes:

In the year 2025 MyTeaEst corporation produced one million loaves of bread. It promised one million loaves of bread to current workers, plus one million loaves of bread to retired workers, plus one million loaves of bread to 401(K) bondholders.

With one million loaves of bread available, and obligations totaling three million loaves of bread, MyTeaEst corporation is hopelessly bankrupt. Will the last one to leave please turn off the lights?

Josh writes:

Kelleth Nay, managing director of MyTeaEst, was indicted for fraud and embezzlement, but died before the trial could take place.

wm. rudeen writes:

a new religion forms - loaves and fishes are multiplied!

Lord writes:

They shrink the size of the loaves producing 3x as many and everyone is 'happy', but some workers will start producing their own bread shifting the balance until each worker and retiree end up with 1/2 a loaf. If there are some free resources, some hungrier ones start their own company and some retired return to work at it. If there are no free resources, everyone goes hungry and some weaker ones die.

jc writes:


Main Street bread is taken and given to Tea Street.

John writes:

It being easter and all I suggest they all find Jesus and ask him for a spare loaf ;-)

Peter writes:

The administrators of MyTeaEst Corp skimmed the best loaves of bread out of this system for themselves. They lied to the workers throughout their rein and even after their retirement. The administrators also got rid of (somehow) any worker who pointed out problems or made suggestions for improvement. The people who dreamed this system up died fat long before it eventually collapsed. The two groups of retired workers blamed each other for their problems.

We need better ideas from better leaders.

Acad Ronin writes:

MyTeaEst filed under Chap. 11. They then wrote off both the bonds and the pension obligations, with the pension obligations being picked up by the Pension Benefits Guarantee Corp. The 401K holders got nothing. The company is still functioning but the current workers are putting their 401K money into a well-diversified portfolio that has zero weight in any securities issued by MyTeaEst.

quadrupole writes:

Putting aside the external structures we have in our society like the Pension Benefit Guarantee Company and Bankruptcy, and just sticking to the simple example:

The workers get fed
The retirees starve

Because if you starve the workers, everyone starves.

Lord writes:

Though unless the next generation appeared as fully formed adults, the dependency ratio never changed, only switched from one minor to one senior and everyone ate 1/2 a loaf before as well as after but they have to wait for the seniors to die before adding the next generation.

John Voorheis writes:

If MyTeaEst expands production at 3% per year, it produces a little more than 2 million loaves in 2025 and there isn't much of a story to tell.

Socrateshemlock writes:

After growing wealthy in the land of opportunity, the owners of MyTeaEst sold their company to a private equity firm that broke the promises to the former workers (whose deferred income never materialized through either the pension or the 401(k)s). The bondholders were able to recuperate some of their investments through the court system. The government cheered the creative elimination of liabilities and sought to duplicate the effort with its own books. In the end, broken promises led to the end of opportunity. No one wanted to risk building companies or lending money where promises were so easily broken and where a bout of flu could end in economic ruin.

Jacob Oost writes:

Paul Krugman writes a column explaining how there's more bread than you have been led to believe.

Don Levit writes:

Wm. rudeen:
My thought, too.
What this company needs is a miracle.
At least Jesus had to start with loaves and fishes, before the multiplication began.
Even Jesus couldn't create the original loaves and fishes out of thin air!
Don Levit

Yancey Ward writes:

Jacob wins the thread.

MikeDC writes:

Well, lots of good responses, but the only one that touches on the fundamental economics at play here is that if you starve the workers, everyone starves.

I'm surprised everyone is wrapped up in the politics of the fable, and that no one has suggested many of the retirees keep working. That's the only way to produce more, given the framing of the question.

There's also a technical issue worth considering. The 401(k) bond holders are probably the ones to go to work because their asset (the bonds) are subject to market pricing (and presumably trades for other assets). As it becomes increasingly obvious MyTeaEst can't repay it's future obligations, 401(k) holders sell their bonds and buy other assets. Those who don't see the value of their portfolios fall.

Bondholders are in an advantageous position by virtue of their market participation. Pensioners, on the other hand, probably can't sell their pensions and don't get market options over the course of those 25 years.

The valuation of the promises to the pensioner are entirely on paper. The valuation of the bondholder's promises, on the other hand, is generated by the market and should therefore reflect valuable information about the likelihood of redemption.

Lord writes:

"That's the only way to produce more"

Unfortunately not. More workers only lower the wage rate and equalize the distribution between them. Without more resources, no more can be produced.

The pensioners are legally in the stronger position. The bondholders have no better assets to buy and must accept whatever they can get. Their market exposure is a weakness, not a strength and their value is zero. Yet I doubt they would be treated any worse, for charitable reasons if nothing else. This is in contrast to GM in which pensioners were salvaged while bondholders were not, the difference being they have no alternatives in this case.

MikeDC writes:

True enough we don't know the marginal product of the retired worker, but if we're trying to define a useful fable (one that tells us something about the real world?) then we should go with the general real world position that another worker is an additional resource.

I'll concede we're both reading into the parable things that are not there, but I'd point out that a GM-like situation is the rare exception, and not the rule. If we're defining the fable as existing in a world where labor isn't a productive asset and portfolios must be entirely composed of only a single asset, I don't think it's going to be very instructive.

On the other hand, if one imagines a world closer to our own, the GM example becomes more telling. Bondholders were not saved, but many savvy GM bold and stock holders sold their bonds to investors seeking risk years before it went belly up, and left for greener pastures. A 401(k) owner as of the year 2000 has 25 years of freedom and information to deal with the problem.

In contrast, the GM pensioner has a legally stronger position at the point of bankruptcy, but not for the 25 years before. And having a strong legal claim to getting blood from a stone is, really, not going to be that helpful. The post-bailout GM pension plan itself, by the way, counts a significant portion of its funding level as the market price of GM stock donated to the plan.

Simply put, if you went back in time 25 years, would you prefer a 401(k) portfolio of GM bonds or an equally valued GM pension? You could have sold the bonds if you got freaked out at any point, and salvaged most of your retirement. If you hold the pension, you're currently sitting there hoping the price of "new GM" stock remains stable as both GM plans new offerings and the govt plans to sell off its sizable stake.

misanthropope writes:

let's be more accurate

there was a corporation, that produced one million loaves. it paid its workers one hundred thousand loaves, promised another hundred thousand in pension benefits, and then authorized payment to a handful of executive officers of two million loaves.

what do you think happens?

comatus writes:

In a final settlement, government offered a choice between tiny Kosher sweetbreads, and muffins baked by Catholic holy orders. Then workers finally realized that Halvah loaf was better than Nuns'.

rhhardin writes:

The retirement age got increased until enough of the would be retirees died and the surviving ones are few enough to be supported by the increased number of workers.

JohnMc writes:

You forgot to state whether the workers were unionized.

Barring that, the bondholders (401k) retirees get screwed. MyTeaEst has reduced its work force by half and filed for Chapter 7 reorganization. In the mean time the formerly current CEO has popped his golden parachute and is now lounging in BVI. The Congressional block in the state that MyTeaEst resides is attempting to get the State to forego 500,000 loaves of tax. The mayor of the town has stated that if the city has to give up a large portion of sales taxes then they will go under.

Does that sound about right for where we are right now??

James Thomas writes:

Obviously this refers to government finances and social security so this comment is relevant.

There is an even simpler answer to waking the public up than this "fiscal fable" that the blogosphere needs to catch onto. Most of the public really hasn't a clue how bad the situation with unfunded liabilities for social security, etc, are or politicians wouldn't get away with ignoring the issue. Don't assume everyone understands what we do and keep repeating what may be obvious to us until the general public wakes up:

"POLL REVEALS: Americans Are Still In Deep Denial About The Deficit" Non political junkies don't realize that Federal government will need >$1 million per household to pay its IOUs!
> $116 trillion ="official" debt plus money short for future social security, medicare, etc
Even its "official debt" of $14.2 trillion is $123,754 per household!
Details at

The only way they will learn is for *you* to help spread the word (and to recognize that this is an important comment even if its repeated occasionally elsewhere on the net since sometimes thats what it takes to wake people up). Be one of the first to join this brand new Facebook cause "Stop National Debt"
Lets find a way to get it to go viral to spread the word.

Peg writes:

Their president told them: "Let 'em eat cake."

smitty writes:

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What I Think writes:

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Stefan Stackhouse writes:

As the old saying goes, "A half a loaf (or in this case, a third of a loaf) is better than none!"

Yancey Ward writes:

The pension holders are in, by far, the worst position. They have legal title to nothing in the fable, literally nothing.

The bondholders may, or may not, have legal title to something- it depends on what was done with the principle they loaned to company (if they loaned anything- this part was unclear in the fable). If the principle no longer exists, then the bondholder, at best, can take the company and liquidate it (remember, the company makes zero profit in the fable), or fire the present workers and do the work themselves. If one assumes that the 401K workers of 2000 loaned an actual portion of their pay, then all the workers in 2000 were paid equally, and using any residual value of the bondholders' 2025 wealth sets up an unequal pay situation favoring the pensioners.

The workers of 2025 are in the strongest position as they are actually the only ones producing.

To bring this back to the real world, every worker pays into SS and Medicare. Two workers who make the same wages pay equally, but if one of them also saves 20% of his income in an individual account and the other spends every dime on consumption, how fair is it to tax the saver's wealth with, let's say a VAT, in order to equalize the retirement incomes of the two workers?

TeeJaw writes:

One of Obama’s daughters is now the President and she and her New Social Democrats pass a bailout of MyTeaEst which puts the workers (long ago unionized by the New Social Democrats) into ownership of MyTeaEst.

The government bailout money pays the workers their 1 million loaves for 2025 and pays the retired workers their One Million loaves.

Ms. President Obama has a press conference in which she chastises the bondholders for their greed and obstructionism. The bondholders are offered 5 loaves in full settlement of their claims, which they reject. After much wrangling by bondholders and condemnation of them by the media and the Obama administration, the bondholders slink away in shame and get nothing.

The one million loaves produced that year and in future years have the consistency of cat hair and taste like sawdust. The public refuses to buy “government bread” necessitating additional government bailouts of MyTeaEst.

jb writes:

I'm not sure what this fable is supposed to say, other than promises based on expectation of growth, are violated if the growth does not

zolicles writes:

Modern automation was installed in the factory 10 million loaves of bread were produced without human intervention and all the workers retired or found othere employment, with a guaranteed supply of bread.

Yancey Ward writes:


True, but "expectation of growth" does not equal "funding for growth". Too many pension promises have unfunded expectations.

PaulW writes:

I'm not an economist, but I have to think that the bread company was being mismanaged because it didn't look like they planned for growth or for their bread obligations to pensioners 25 years later. This didn't just sneak up on the bread company overnight: whoever set up the pension and 401(k) provisions ought to have also offered a bread-growth plan to expand the amount of bread being produced to equal or excel the amount of bread being consumed so that the company could meet the needs that had to be there 25 years down the road.

Whatever happened to long-term planning?

pashley1411 writes:

This is not a production problem, its an ethics problem. 1m loaves = 1m loaves. Does someone "starve"? Crying about it won't make one more slice of bread. Passing a law redistributing bread doesn't make one more slice of bread, either. Punishing the business leaders won't make one more slice of bread, but provides employment for prosecutors and circus for the hungry masses.

The ethics problem is at the beginning. The business leader provides a promise of future compensation that he cant' meet. Same with politicians today. And its why people scream for higher taxes on the rich and the approval rating of Congress is right there with sex offenders; because each group has no intention of matching words with deeds.

Santa writes:

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Jakeoclubs writes:

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Lord writes:

Zero growth indicates this is a stationary Malthusian society with a zero real return and interest rates dependent only on credit risk and inflation risk. The economy is the bread factory and everyone works there so there are no other assets to invest in or to provide a return and no other resources to provide growth or their would be growth. There may be a crisis of promises and expectations, but no substantive crisis since the dependency ratio never changes, 1/2 a loaf now and forever. The company exists before and will exist after for there is no other and bread must still be produced and consumed. The excess claims are void but the base claims are both valid and supportable. Some may owe a portion of their half loaf to others who previously lent to them but such claims would be limited by bankruptcy and the average will still be half a loaf. If half a loaf is subsistence all those claims would be excess. The alternative for those wishing a better future is to limit the number of children to permit more resources for each one. Those who don't drive the system to subsistence level.

Cheesehusker writes:

Comatus absolutely nailed it.

Mr. Wonderful writes:

They went out of business immediately, having violated the cardinal rule that every coke dealer knows and ignores at his peril: Don't get high on your own supply. After the workers ate the first million loaves, there was nothing to raise capital with to make the next million. End of story.

Matt writes:

I can imagine several scenarios, but if I were running the company I would simply reduce the size of a loaf by two-thirds--thus meeting my stated obligation.

My next move would be to the parking lot and into the back of an unmarked car--never to be heard from again.

The bigger question is whether any of the workers would show up to work the next day, or simply move to somewhere else where they can get a fair deal?

Thus, we now understand why the industrial base of Zimbabwe is as it is.

Fear not, it will never happen!

The CBO (Central Breadmaking Office) has decreed that breadmaking productivity shall grow at 4% a year for the next 20 years--thus leaving us with a vast surplus of bread!


Though, I debate whether I would want the 401K or the Pension.

The reality is that the Pension will be minimally backstopped by the Federal Pension Benefit Guaranty Corp.

However, with a 401K, I would have hopefully diversified into a bunch of other bonds and equities so as to avoid that much exposure to the world of breadmaking.

In that case, perhaps I sold off my Bread Bonds while the marginal idiot still believe the prognostications of the aforementioned CBO.

Let the music play!

...just pick your chair well in advance.

TG Randini writes:

There are many students of economics posting here, but few students of history.

If everyone in the conuntry works for MyTeaEst, and they cannot grow their export markets...

They will simply try to take them by force.


ian writes:

This is preposterous. In this analogy we begin with a ridiculous business model, one which must fail, then tack on a pension plan and somehow it becomes the pension plan's fault that the business failed.

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