Now Noah Smith raises the Zombies to put them down

Noah Smith posted an article about Zombie companies in Japan. He recognizes that creative destruction must take place. Zombies must die. So bail outs of inefficient businesses must stop.

“Japan’s cycle of bailouts must end.” Noah Smith, January 20, 2016

I agree and have written in the past about the Zombie companies weighing down advanced economies. They hold down wages, productivity and growth.

“These zombie companies are less productive, less marginally profitable, thus less able to raise wages at a time when wages need to be raised. Zombie companies justify lower wages for all companies. Keeping these zombie companies alive is a weight dragging down the demand side of most advanced countries.” Edward Lambert, August 5, 2013

“As the upward trend in profit rates reverses, zombie companies will be brought into the light. These zombie companies fed off of the business expansion, as profit rates were rising after the crisis. They generate a profit which is less than the market average for profit rates. When profit rates revert back to the mean, these zombie companies start losing money. As they struggle, they drag down other companies.

“Monetary policy is protecting these less profitable companies from being replaced by more efficient operations. When the eventual recession hits, it will be deeper as more zombie companies will be cleaned out… unless monetary policy and fiscal policy comes to their rescue.” Edward Lambert, August 6, 2013

“So there must be pressure within the banking system to keep the central bank rates low for a “considerable” time in order for society and banks to avoid suffering the hardships of killing zombies off.  Yet we will eventually have to kill them off in order to improve productivity and real wages. Sooner but for sure later the world will have to take its medicine by central banks tightening their rates…” Edward Lambert, September 19, 2014

Will the Fed loosen monetary policy back up with another QE? Will they try to save the zombies again and again as Japan has done?

It is great to see Noah Smith bringing this issue up, because the downturn we are seeing is related to vulnerable zombie companies out there in the economy. If the Fed and other policy makers would just let the market open up for entrepreneurs to creatively destroy the zombies, eventually the world economy would move forward with vigor.

But, as Noah points out, when Sharp has 50,000 employees on the line, and small start-ups much less, jobs must be saved. But the cost is lower wages which eventually drag down the demand side of the economy. General Motors in the US was bailed out and their wages dropped.

So I give a big cheer for Noah’s article… YEAH!