Parable of the Cupcakery

This is a story I made up and have told several people in the past about why consumer credit card debt is so terrible, and I will extrapolate it to a national level today. 

A Starbucks coffee opens up across the street from a mom-and-pop bakery.  The baker sees people paying a $5-$7 for a cup of coffee at Starbucks instead of $1 for a cup at the gas station next door.  He sees that the market for luxury snack food is growing, and decides he will open up a second business; a cupcakery.  He gets a loan from the bank to finance this venture, and sets up a small shop with all the style cues and ambiance of Starbucks.  Whereas in his primary business he sells a variety of products at a price comparable to the local grocery store, in the cupcakery he sells fancy cupcakes at the luxurious price of $5-$10 a piece.

His cupcakery proves to be a hit.  What began as a side venture expands and the baker takes on a few additional employees.  The next year he opens a second cupcakery on the other side of town and hires an additional crew to run it.  The baker has expanded from one bakery and 7 employees and now has one bakery, two cupcakeries, and 21 employees.

Things are going for the baker until the economy begins to slow.  Consumer credit card debt has been soaring for the last 10 years, and it turns out that the customers who were willing to buy $10 cupcakes were also in large part the type of customer to be slowly building credit card debt to finance their lifestyle.  The economy slows, credit cards get maxed and the banks are no longer just giving them away in the mail.  The customers, unable to afford their cupcake habit, quit coming.  The baker shutters the cupcakeries and lays of 14 of his employees.

Were the baker and the employees reckless?  Did they deserve to lose their investments and their jobs?  No, they weren’t, and no, they didn’t.  The baker chose to expand into the cupcakery business based on a real demand.  The employees were hired to fill that demand.  The problem is that the customers really couldn’t afford to buy $10 cupcakes every day; they were buying them while going into credit card debt.  If they had been using debit cards and required to have cash on hand or in their accounts at time of purchase, they would have run into the self-limiting nature of personal finance, or, as Katt said yesterday, once the alcoholic spends his $20, last call!  The demand existed, and people “paid” for their cupcakes with their credit cards, but at no point could the city’s residents afford profligate luxuries.  It wasn’t as if they all had jobs and then lost them; rather their entire lifestyles, and therefore the baker’s entire business, were built on deficit spending.  And this deficit spending hurt not only the consumers, but the businesses which responded to their demands and the employees they hired.  A government agency could perhaps be convinced into “bailing out” the cupcakery, but it would be to no avail; unless the city’s economy grows to support luxury snackfood shops, no amount of bailouts would turn these businesses profitable.

I bring up luxury cupcakes in this story because I first learned about them around the same time I had this thought.  Being from Wyoming where the scale of economy doesn’t support many specialty shops, I would have to travel to Colorado to go to specialty shops for useful things.  Of course, I wouldn’t commute 45-90 minutes to get a cupcake, which made the idea of a cupcakery strike me as absurd and served as proof that at some point, people are just looking for ways to spend money.

So, where are these cupcakeries in the real world?  The defense industry provides a great example of the proverbial cupcakery.  The defense industry is very vulnerable to shifts in it’s customer’s spending patterns, because the defense industry essentially has one customer; the US Government.  (Sales of military hardware overseas are either mediated or regulated by the government, so a governmental decision to disallow a certain export to another customer becomes essentially the same as that customer not existing.)  While weapon systems inevitably go obsolete over time, an orderly transition from obsolete to new systems allows industry to transition its workforce from one project to another.  So long as the government continues to fund programs at steady levels, jobs and local economies centered around defense spending will remain stable.

However, like the cupcake consumers, the US Government has a penchant for running deficits while in debt.  When the DoD cannot afford all its programs and has to make cuts, or when it decides to abandon a struggling acquisition, the impact to the industry is significant.  When the government cancels an order for specialized equipment, the company can’t simply turn around and offer to manufacture that equipment for another country.  That production line, which may have been projected to employ hundreds of workers for a decade or more, is shut down ahead of schedule, possibly immediately.

Such is the case of Newport News’ Mississippi facility for the Zumwalt class destroyer.  Due to the costs of the ship (and criticism of its performance not mentioned in this article), the Navy had to cut back.  It could no longer afford to maintain the demand it had led Newport News to believe would continue to exist.  The consequences include:

  • 315 of 427 employees laid off.  Newport News only has positions for 112 to transfer to.
  • Facilities custom-made for carbon fiber and balsa construction are rendered worthless (the Navy has reverted to steel construction), leading to…
  • $59 million in asset writeoffs at the Mississippi facility
  • The need to retrain workers in steel construction vs balsa and carbon fiber construction

All of which can be related back to the cupcakery:

  • Customers couldn’t afford their purchases
  • 14 of 21 employees laid off.  The 7 at the original bakery can stay on, but there is no room or need for the others to transfer
  • The furnishings, design, props, art, etc for the high-end cupcakery is worthless and can’t all be repurposed to his conventional bakery
  • The baker is stuck with the loans his took out to expand his business
  • While retail sales skills may transfer, any specialty pastry-chef brought on by the baker is obviously now out of his element in a city with no job opportunities for specialized pastry chefs.  He’ll have to move or find a different line of work.

The scales are massively different, but the concept is the same.  Industry will meet the consumer demand.  If consumers demand than they can afford via debt, either in the form of credit cards or federal government deficit spending, an unavoidable reckoning will eventually occur.  The extent to which we allow ourselves to go into debt is proportional to the extent of the pain felt when the debts are called in.  It is unfortunate that companies and employees who built honest businesses and careers suffer.  However, neither issuing more credit cards nor raising the debt ceiling will resolve the underlying problem of customers who are essentially writing bad checks by another name.  Reality is unavoidable in the long run.  Let’s stop drinking when we get to $20.

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One thought on “Parable of the Cupcakery

  1. Pingback: Political Correctness, The Matrix, and Harrison Bergeron | iParallax

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