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!
I don’t think that zombie companies keep wages down:
If a zombie company can offer only 100 as a wage, a performing one will offer 110 to snatch good employees from it. But if the zombie company goes down, it will actually offer 0 as wages, so the performing company will offer only 90 as wages to get the best employees, and leave the rest unemployed.
More generally, stagnation and low demand are caused by low wages vs. productivity, not by low productivity, so the idea that zombie companies are the cause of stagnation seems stupit do me.
It seems the kind of the idea that comes from this sillogism:
1) Free market are awesome, they cause high productivity;
2) Since they are awesome, they will also keep high employment and high wages;
3) But employment is low and wages are low!!!
4) Therefore something must be preventing the market to do its magic.
But the premise in (2) is false, free market never kept employment high and high wages (meaning an high wage share), this only happened in the postwar period because of continuous government deficits+strong unions, and partially in the grat moderation due to continually increasing debt.
There is no reason to explain why the market isn’t working well today, it’s the performance of yesterday that was weird.
EL sees Zombies everywhere – and he seems to be afraid of them. He would prefer to see a global recession where tens of millions of people lose their jobs and income, where trillions of output is lost, where global debts skyrocket. EL wants a repeat of 2008/09.
EL wants the world to suffer this pain to get rid of these dreaded Zombies.
OK EL – I’ll bite, please give us the name of ONE Zombie in the US and ONE Zombie in Japan. If you’re so sure the Zombies are out there, then you should have no trouble naming 2 of them.
Nice straw man argument Bkrasting. Good post Mr. Lambert. Take care.
We have an economy without ctive destruction. It is like a tropical rain forest where trees do not fall to maintain the thin top soil. The smaller plants Of the new generation suffer for lack of good soil.
Is it possible that medicine is keeping too many people alive beyond the capacity of the earth to support such a growing human consumption?
Bailouts and other policies reduce creative destruction. lives and jobs are saved but the new lives and jobs that are meant to naturally replace them suffer. Which jobs are you defending, jobs that reached their diminishing returns or jobs that will bring greater returns?
EL You say:
Is it possible that medicine is keeping too many people alive beyond the capacity of the earth to support such a growing human consumption? –
Would you advocate a policy that denies people with medicines so the sick and the old die off? Death panels on a global scale? Yes there are pressing problems, but those problems don’t justify deliberately killing off people. What kind of world do you want to live in? Hitler tried this – you want to do that again?
Anyway, you did not answer my question. Name a Zombie. I want to know who you want to kill off.
I do not want a world where people have to die in misery. Medicine is good. But at the same time, the human population has not proceeded wisely with the new population dynamics. The natural systems of the world are being stressed.
Wisdom is the key. I do not want people to lose their jobs unless society can generate better ones in aggregate. Do you understand? That is the beauty of creative destruction.
And Noah pointed to Sharp as a zombie. Do you see the other companies cutting back labor force and closing stores? Walmart is closing stores. Some banks are cutting labor force. Then look to the oil industry.
Would you have the oil producers bailed out? It is possible that their debt payments will be pushed out a couple years. Is that good? What other resources and entrepreneurship is sacrificed by doing that?
I would think zombie companies are allowed to exist because we don’t make money via production of goods and services, we make money from money.
We have not seen large companies have to truly compete for decades. The rules changed via government policy and consolidation (buy your competitor) became the game to growth. And there was rules that allowed companies to shift a good portion of expenses related to having employees onto the employee (recall the reclassification of management and OT).
Bidding for the customer and their dollar via innovation in meeting needs became unnecessary. It was and is all about the “brand” and milking it by slapping it’s label on everything until you have destroyed it. On to the next one.
You want the zombies to go away? Then lets make them have to do the real work that their precious capital system requires to function in a healthy way. Compete! Only not just for profit but for the consumer.
Restore the rules that force companies to have to sweat because they have to think about more than just changing the rules at the level of government resulting in them simply having to manipulate numbers on their ledger.
I second your views…
Zombie companies. Lack of antitrust enforcement resulting in price-fixing cartels and the absence of competitive pressures that drive innovation. Zero-sum money changers capturing large shares of surplus , starving other , more productive enterprises.
These are all part and parcel of what ails us. Everyone would probably agree that a gradual and continuous cleansing process is preferred , but in the absence of that , a sizable crash-and-burn event may not be such a bad idea. The trick is to limit the burn to the bad stuff.
The extend-and-pretend evergreening of finance for questionable firms may have made sense in the immediate aftermath of the crisis , when the possibility of a v-shaped recovery gave some hope that many of these firms could ultimately recover and be successful. At this point , however , we’re just throwing good money after bad. Pay now , or pay lots more later.
Yep… I second your views.
“We have an economy without [active] destruction.”
What do you call this:
EL So you and Noah point to shark as a Zombie. Then how do you explain this?
Foxconn offers $5.3 billion for Sharp, plans to keep management: WSJ
TOKYO Taiwan’s Hon Hai Precision Industry Co has offered 625 billion yen ($5.3 billion) to buy Sharp Corp and has no plans to replace top management, a gesture aimed at reassuring Japanese authorities worried about an overseas takeover, the Wall Street Journal reported.
That was YESTERDAY! So what you think is a Zombie is worth $5.3B to a company that is the largest electronics manufacturer in the world.
Walmart is closing 154 small stores for strategic reasons. It still has 4,177 large stores. You think Walmart is a Zombie?
Banks are cutting back because of Dodd Frank. GE sold its entire finance division to Japan Inc. because of DF. DF cuts back on risk taking by banks/finance, Cos. so less bankers.
So look at oil. What is happening today is the same that has happened a dozen times in history. A boom bust cycle for oil. Many smaller companies are on the ropes. A good number will go bust in the coming months. This is happening globally. Some countries are going bust.
But all that is an example of a system that is working. In a very short period of time there has been a dramatic repricing of energy related assets. Global consumers are the huge beneficiaries of the excess investment in oil. There will be no bailouts in the US.
The destruction that may have been necessary happens by its own weight. It does not need the divine hand of EL (or government policy/Fed) to induce these corrections.
If you are looking for zombies, look at our entire financial sector. We should have let the too big to fail banks fail. It would have been cheaper to make all the small depositors whole and reset all of the mortgages than keeping such dead weight alive.
I think our other big problem is cancers, companies that keep growing by acquiring other companies. The lack of anti-trust enforcement means that our economy is weighted down by a huge monopolist tax that replaces size and incumbency for innovation and competition.
That’s the problem with Big Government, Kaleberg — Big Business buys it!