by Andrew White | November 17, 2017 | Comments Off on Economics Corner: Walking in the Company of the Dead
It’s not often that one has the opportunity to refer to a popular (and one of my favorite) TV shows and a business-related news article in the blog. But today is the day. On the front page of yesterday’s US print edition of the Wall Street Journal there is an article on Zombie firms and the use of the term dead and zombie, of course, harks to the popularity of The Walking Dead, an AMC hit still running. It turns out that zombie firms are a drag on our economic progress in many ways. The article is titled, “Zombie Companies Haunt Europe’s Economic Recovery“.
Specifically the article looks at country’s like Italy where so called zombie firms represent a sizable chunk of employment, economic activity, debt and capital. In fact, as the article explores, such firms are a drag on growth, productivity, and progress overall. If you were a free marketer, you would argue that creative destruction has been stayed, and thus inefficient practices continue unabated.
The article highlights how Quantitative Easing (QE), the easy money policies preferred by central bankers the world over, coupled with low interest rates, have allowed investors to Hoover up cheep money and inject it into zombie firms in the hope that at some point good things mi get happen. What that good thing is, is anyone’s guess. The article has several articles of firms that keep losing money year after year.
The insidious thing about these zombie firms is that they are creating a blight on the free market system. Yes, we might be preserving short-term employment levels but if the large sums of capital were set free, they would find new productive uses and so more productive employment would follow leading to higher sustainable wages. But the invisible hand is held in check; capital is locked up in the wrong places and wages are stagnant. My main concern is the capital misallocation aspect of this story. There is growing evidence that misallocation of capital is one of the key causes for our productivity paradox we face today. Here are a few items I have tracked recently:
- Crawford School of Public Policy – Center for Applied Macroeconomic Analysts: Weakness in Investment Growth: Causes, Implications and Policy Responses, March 2017
- Bright spot in business spending research, Wall Street Journal, October 28, 2016
- Capital Slowdown – Investment growth in emerging markets and developing economies has been sluggish since 2010, Finance and Development, IMF, June 2017
Key public and financial policies that were set to “save us” some years ago have unintended consequences. These policies have distorted the market and economy in many ways. Capital investment has been whacked in several directions. QE has created cheap cash and loans that crowd out private sector investment. Investment firms could afford to keep zombie firms afloat. Both of these results magnify the issue: capital is being deployed inefficiently. As a result we are all worse off. And we are not out of the woods. In today’s Wall Street Journal there is an article explaining how money is as cheap as ever: Financial Climate is Loosest Since ’94. Capital misallocation and zombie firms will be with us for a while yet.
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