Defined benefit pension plans seem like a great idea — when the economy is doing well and times are good. "Everybody knows" that "the corporations" have lots of money. It is only the muscle of organized labor backed up by the coercive power of the State that forces the capitalists to unclench their greedy fists and pay workers the wages and benefits they need to live in a decent manner.
Unfortunately, when the economy goes into a downturn, the high fixed wages and benefits which labor was able to wrest from capital can force into bankruptcy the companies that are legally obligated to make good on the wage and benefits packages. The result is that the companies can no longer meet their obligations. If the qualified plan is insured by the Pension Benefits Guarantee Corporation, or "PBGC," that agency takes over the administration of the plan and guarantees the Plan Participants a minimum level of benefits.
If too many companies get into trouble, however, and are forced to turn matters over to the PBGC, the obligation is imposed on the taxpayer . . . meaning the workers who no longer have jobs and can no longer pay taxes. The stock market declines in response to the greater demands on rich taxpayers who must divert investment capital to taxes. This, in turn, means few (if any) jobs are created, consumption declines further, and more companies are forced into bankruptcy, keeping the cycle spiraling downward.
The picture is equally grim for those companies that do not go bankrupt — immediately. Saddled with declining profits and high fixed costs, many companies begin to default on the required payments to retirement trusts. This causes a serious underfunding problem. The problem is made worse by the decline in the stock market, which drives down the value of the assets held in the trust.
To make up for the decline in the value of trust assets, the sponsoring company must increase payments to the trust to meet the fixed benefit obligation — out of profits it isn't making. This drives share values down even further as the underfunding problem increases in magnitude. This increases the non-productive liabilities of the sponsoring companies at a time when they cannot meet the ordinary liabilities incurred for productive purposes. Eventually this, too, ultimately results in bankruptcies, adding downward pressure on the economy.
Government bailouts and "stimulus packages" can take some of the pressure off for a while and even create the illusion that the problem is being solved. Unfortunately, that is not the case. A diseased economy, however well the technique might work for some medical problems, is not cured by treating the symptoms. An economy is "cured" by correcting the underlying problems. Government action can even add to the problem, not the least by decreasing incentives to search for financially feasible and politically viable solutions.
Is there a way out of this seeming paradox? We will look at that tomorrow by examining the work of four great thinkers who appear to have been ignored, brushed aside with no consideration, or attacked without reason or argument. This is because, in large measure, their conclusions differ from those of the powers-that-be, hypnotized by the glamour of Keynesian economics, which promises everything, and delivers nothing but failure. I refer to Jean-Baptiste Say (1767 to 1832), Harold Glenn Moulton (1883 to 1965), Mortimer J. Adler (1902 to 2001), and Louis O. Kelso (1913 to 1991).