June 16, 2019
People may not have gotten that immediately picked this up from Ruchir Sharma’s column complaining that not enough companies are going bankrupt, but this is the gist of the argument. Sharma complains that because of continuing fiscal stimulus (large budget deficits) and low-interest rates from central banks, too many zombie companies are able to survive.
He tells us:
“The Bank for International Settlements, the global bank that serves central banks, says low rates are fueling the rise of “zombie firms,” which don’t earn enough profit to cover their interest payments and survive by repeatedly refinancing their loans.
“Zombies now account for 12 percent of the companies listed on stock exchanges in advanced economies and 16 percent in the United States, up from 2 percent in the 1980s.”
Then we get to the meat of his argument:
“Companies are surviving in the “zombie state” for longer, depleting the productivity of healthy companies by competing with them for capital, materials, and labor.”
Okay, so the argument is that healthy companies are being prevented from growing because they have to pay too much for capital, materials, and labor due to the zombie companies. Well, we can quickly dismiss the claim on capital and materials.
The cost of capital has never been lower, precisely because of low interest rates from central banks. In the United States, the interest rate on high yield bonds is just over 6.0 percent at present, compared to the rate of close to 9.0 percent in the boom years of the late 1990s.
Sharma’s story is that if the Fed and other central banks raised interest rates, the interest rate for more marginal borrowers would fall? That might pass muster in the opinion pages of the NYT, but probably not anywhere else.
The same story applies to materials. What materials does Sharma think are excessively priced? Most major commodities are not above their inflation-adjusted prices from pre-recession levels. In the case of an important one, oil, the inflation-adjusted price is considerably lower than it was in 2007.
This just leaves labor. Certainly, if Sharma’s zombies, comprising 16 percent of exchange-listed companies, went out of business we would have higher unemployment, which would in fact put downward pressure on wages. It is a bit hard to believe that this would lead to a surge of investment and productivity growth, but this is effectively Sharma’s argument. Anyhow, most workers in the United States will likely be happier if no one in a policy position decides to test Sharma’s argument.
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