Tom Papworth is a policy consultant and Senior Fellow of the Adam Smith Institute. He has worked for some of Europe’s leading policy studies institutes, as well as in government and the private sector. He holds degrees from the Universities of London and Kent.
In popular literature, zombies are faintly laughable and clearly fictitious. One is also left with the sense that the hero could escape their fate by simply walking away. In economics, however, zombies are very serious and all too real, and policy makers can no longer just walk away from the problem they have made.
Zombie firms are companies that are barely able to meet the interest on their debts and with no prospect of repaying the principal or ever turning a profit. Their survival prevents workers and capital finding more productive uses and stops new, leaner, smarter firms entering the market. And there are over 100,000 zombie firms plaguing our economy.
These are the findings of The Trading Dead: The zombie firms plaguing Britain’s economy, and what to do about them, a new report published by the Adam Smith Institute and funded by OpCapita.
Zombie firms are both brought about and sustained by low interest rate policies, and that their existence helps explain the sluggish growth and declining productivity that has characterised this recession.
Low interest rates are an indiscriminate piece of corporate welfare, benefiting every company at great expense. It would be substantially cheaper for government, and much more profitable for investors and workers alike, if government allowed zombie firms to go into liquidation and instead funded the support and retraining of redundant workers.
Low interest rates are exacerbated by government-mandated capital asset requirements that dictate how much capital banks have against the size of their loan books. This forces banks to show ‘forbearance’, rolling over bad loans so as not to admit to losses that would reduce their capital. At the same time these requirements discourage banks from making new, good loans, as this would expand their loan books and so force them to find new capital. Capital asset requirements such as the Basel Accords, while well-intentioned, may be forcing banks to do exactly the opposite of what we want them to do: stop supporting failing firms and start lending to viable ones.
If government is the problem, what is the solution?
The answer to this problem lies with entrepreneurs, for both economic and moral reasons. Economically, only entrepreneurs have access to the granular, tacit and subjective knowledge that is needed to judge whether a zombie firm has the potential to be restructured or whether it is beyond saving and best put down. Morally, entrepreneurs risk their own money – and that of willing investors – rather than taxpayers’ money. At the risk of making an unsubstantiated guess, I reckon taxpayers have had enough of seeing their hard-earned money used to bail-out bust companies.