How Fed-Enabled Zombie Companies Crush Productivity Growth

Tyler Durden's picture

Authored by Catherine Mann and Dan Andrews, originally posted op-ed via,

When lagging firms don't go bust, they hog scarce resources and drag down productivity.

The global economy is picking up steam, but that’s deceptive. The foundations of expansion are soft, marked by weak productivity growth and inequality. The two are related.

The productivity problem confronting the world’s advanced economies predates the financial crisis more than a decade ago. When we look beyond the headline statistics, patterns emerge. Advanced economies have become less dynamic and are at risk of becoming sclerotic unless the ambition for reform is revived.

It’s essential that we understand three sources of the current productivity slump in particular, and identify the key reforms necessary to address them.

First, the productivity slowdown masks a widening performance gap between more productive and less productive firms, as the chart below shows (the picture for service sector firms is even worse). This divergence is not just driven by firms at the frontiers of their industry, pushing the technological boundaries, but also by stagnating productivity growth at what can be called laggard companies that have failed to adopt the leaders’ best practices. This is also bad news for inclusiveness, since rising wage inequality can be largely traced to the growing differentials in average wages paid across companies, with high-productivity ones paying high wages and low-productivity businesses paying low wages.



Second, in well-functioning markets we would expect strong incentives for productive companies to aggressively expand and drive out less productive ones. The opposite has happened. The propensity for high-productivity companies to expand and low-productivity companies to downsize or exit the market has declined over time. This pattern is evident in the U. S. and is particularly stark in southern Europe, where scarce capital has been increasingly misallocated to low-productivity firms.


Third, across the 35 countries in the Organization for Economic Cooperation and Development, we are seeing a drop in the dynamism of the business sector. Not only has the share of recent entrants into the market declined, but marginal companies, which would typically exit or be restructured in a competitive market, are more likely to remain. At the same time, the average productivity of these marginal businesses has fallen. In other words, it has become easier for weak companies that do not adopt the latest technologies to survive.

The survival of weak companies drags down average productivity, but the consequences for growth are even worse. Since such firms take up scarce resources, their prolonged survival (or their delayed restructuring) inflates wages relative to productivity, depresses market prices and undermines investment -- all of which deters the expansion of productive companies, particularly startups, and amplifies the mismatch of skills.

Today, the risk is that this phenomenon may contribute to a period of macroeconomic stagnation, as occurred in Japan during the 1990s. In Italy, for example, the share of the capital stock sunk in “zombie firms” -- old firms that have persistent trouble meeting their interest payments -- rose to 19 percent in 2013 from 7 percent in 2007. This growing market congestion due to zombie firms perhaps accounts for one-quarter of the post-crisis decline in business investment in Italy and is also a key factor behind the rise in capital misallocation.

Governments should focus on getting the basics right. This involves evaluating the conditions in product, labor, capital and housing markets to ensure that productive businesses can thrive, facilitate the restructuring of weak companies and enhance labor mobility so that workers can gain, too. The corollary is that governments should be modest about what selective or targeted interventions can achieve; even the most accomplished venture capitalists in Silicon Valley struggle to predict winners.

The sources of structural weakness in OECD productivity suggest that reform strategies should contain at least two mutually reinforcing elements, centered on companies and workers.

First, reforms that promote more efficient market entry and exit are vital. It’s no coincidence that laggard companies fell further behind the global productivity frontier in market services, where barriers to entry and competition remain high. And soon-to-be-released OECD research shows that scarce resources remain trapped in “zombie firms” partly because bankruptcy rules in many countries fail to facilitate restructuring or market exits in a timely fashion.


Second, policy measures to help workers adapt to technological change, and a more rapid churn of firms and jobs, are essential. Retraining and job-placement services are particularly effective at enabling a return to work for individuals displaced when their companies close. Such workers are typically older and have longer tenure at the firm compared with other displaced workers, making it harder for them to find new jobs.

Policies that accelerate creative destruction can have powerful effects on productivity, but can be politically contentious. But their political feasibility can be helped by policies which help laid-off workers find new jobs. And such labor market policies are more effective when regulatory barriers to entry and growth are low, because job opportunities are more abundant in places where innovative new firms can enter the market and grow.

There is no single fix to the productivity problem. But, over time, a strategy centered on encouraging innovation in firms, facilitating entries and exits from the market and helping workers retool can combat the structural weaknesses afflicting advanced market economies. Clearing the path for higher productivity growth is the surest way to ensure that economic expansion helps workers and doesn’t fizzle.

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Arnold's picture

Second, policy measures to help workers adapt to technological change, and a more rapid churn of firms and jobs, are essential. ////Retraining and job-placement services are particularly effective \\\\ at enabling a return to work for individuals displaced when their companies close. Such workers are typically older and have longer tenure at the firm compared with other displaced workers, making it harder for them to find new jobs.

Not the case in my personal experience.
Exploitative leaches.

NotApplicable's picture

No single fix!??? Say's Law begs to differ.

JRobby's picture

Got REIT's?

(Laugh Track Deafening !!!)


Arnold's picture

I got sixty gross of buggy whips to move.

Gotta make room for the Southern Bell rotary dial phones.
They are made to last forever.

Gilnut's picture

Hey, hold on to those.  They may come back into style before the psychopath's at GovCo are done.  Seriously.  :)

Arnold's picture

Ma Bell raised me.
My Mother was a switch board operator before and initially through automation.
Our phone number was 3 rings.

About 15 years ago, I saw a whole system stash in Salome, Arizona.
Including a couple of switch boards.

AldousHuxley's picture

Rent is too high, Taxes are too high.

No discretionary income for spending at the mall or cars or church.


Fed needs to stop subsidizing wall street bankers and sell of 4 Trillions of MBS. Greedy boomers will see their "home equity" of sh!tty 50 year old shack cut in half, rent will go down, property taxes will go down, less government workers, more money for leisure (picture is of sports authority) and a new car.



Arnold's picture

At my age, I consider part time, minimum wage work as charity.
Serving the community for gas and beer money.

JRobby's picture

Makes a great "bash across the face" weapon to repel "intruders"

yogibear's picture

That's it Dudley and Yellen, backstop every large company.

SmackDaddy's picture

And I bet this stupid bitch has a doctorate in enconomics.  Productivity is tanking because of demographics and moral degradation (like work ethic).  The Fed is there so that New York jews can borrow money on the cheap and buy everything up, putting the little guy out of business.  And presto - welcome to the collective!

saveUSsavers's picture

yea, and any REPATRIATION$ not used vor buybacks, divs, CEO pay that's left, will be used to BUY UP THE COMPETITION, pay 10%? A FKING GIFT!

CJgipper's picture

And in the service sector, the service workers are beaten down.  Productivity has been 150% of sustainable for nearly a decade now.  

saveUSsavers's picture

Zombie corps that in any normal interest rate time would NEVER BE ABLE TO UNDERWRITE debt offerings! This is the most massive transfer of wealth from savers in history, and s/b CRIMINAL


SofaPapa's picture

Fundamental misunderstanding illustrated in this article.  The premise is that the government can "do something" to "encourage innovation".  That is proven throughout history to be a contradiction in mission.  More government involvement = less innovation.  The historical record is pretty clear on that.  Thus, to correct the article, the best the government can do to encourage innovation would be: nothing.  Eliminate each and every government intrusion into the marketplace.  Wipe the government role out completely, and watch innovation increase as competitors compete directly, without the gorilla protecting them.

The area where this is difficult is environmental effects - which is a commons / private property mismatch.  Firms will not compete to protect the environment, because there is no price mechanism their customers will be motivated to use to drive management toward environmental responsibility, which only adds cost to the product, no direct easily visible and tangible benefit, either to producer or consumer.  That said, the state is fucking up the environmental management role they legitimately have so badly, there may be even no place for them there either.

Government - increasingly with increasing scale - is crap at achieving real solutions.  Want solutions?  Get government out.  That simple.

CJgipper's picture

Yes there is.  Set regulations (e.g., emissions caps) and allow one company to sue another for environmental regulation violations.  It'll work itself out.

SofaPapa's picture

It's a nice idea, but I still don't think it'll work.  Because what you've done is to put the government (i.e. the courts, which are certainly proven not to be politically neutral, but subject to the same overreach all areas of government share) in the middle of the two companies.  Who decides the merit of each suit?  It looks like price action, but at its heart it will come back to political influence, which is precisely the force which is strangling economies around the world and which has done so for millenia.

CJgipper's picture

Juries are not political.

VWAndy's picture

 No but the judges sure as shit are.

back to basics's picture

Hat tip from me. The article is pure academic drivel. 

all-priced-in's picture

Why is it that government must incentivise people to do what any normal person would want to do?


I mean really - what am I missing?


Let's have ANOTHER government  program that enchorages people to develop a skill so they can get a job!


How about - we let the people that are not smart enough to figure out they need to have some skill to make a living to starve to death.


It is like the fucking HR departmnent at the company I use to work for - they always wanted me to pay everyone a bonus if they showed up for work on time -


If someone shows up on time every day for a whole week then give them an extra $25!  


Hello - showing up for work is just something most people that are worth a shit do anyway - I would rather have the people that don't know this to not come to work so I can fire them and hire someone that isn't an idiot.


I guess we should also have a fucking government program that pays parents for taking care of their own kids.







Falling Down's picture

HR folks are worthless, these days.

Worse, a lot of companies don't have direct-hire HR peronnel to begin with, or that person is a rent-a-rep from an HR staffing agency.

Lone_Star's picture

I've known this since grad school, yet My opinion doesn't matter so the economies of the world suck right now.

Falling Down's picture

Yesterday I posted some of my own experiences in manufacturing, and damned if they don't mirror some of what this article highlights.

Low interest rates, and the low cost of commodities, have also propped up "zombie companies", although in manufacturing these would be at the medium-sized to small-sized supplier end. I've seen it, they hire warm bodies to make stuff, and then pound production, without a care for quality and efficiency. Quality is so bad among a lot of firms, that they just keep making garbage until a few parts or maybe 20% of what they make on some jobs actually fits/is made to print.

This ties in with the "we can't find people" lie/meme. It's all bullshit, and has been since the late-90's. They'll hire skilled workers for a lot less than folks with those same skills made, adjusted for inflation, 20+ years ago, and either work them to near death, while the button pushers make shit parts, or laye them off every 2-3 years or so. The last thing a company wants these days is for anyone to stick around long enough to ask for a raise, use their benefits, or (gasp) retire.

They can't find people, because they shit on their good help, and didn't train good people.  



VWAndy's picture

 Aint the fiat magic grand. Between GM and Tesla its going to be one hellofa trick to compete in the auto industry. They dont need to make a profit on a car. How is any startup going to compete with that? Pretty much all the players still in the game are backstopped in one way or another. Between that and all the regulatory hoops Id have to jump thru? Fogetaboutit.

  Ill jump in after the fiat is taken out of the picture. Until then Im going to watch from the cheap seats.

  PS still playing with my open source 3D printed rides. Now if Trump really wanted to do something good for that industry he could call me.

TheABaum's picture

Sounds like Facebook, but a real lot like Twitter. 

rphb's picture

This is how the police is going to be in Canada from now on:



The erosion of the consumer is leading to the death of the consumer,

how this is taking place is all the factors now facing the consumer,

banks are taking our interest to zero,

Oh the robots are taking not only a jobs but our pay, the central bankers are rigging our markets to take our pay

the bail ins are attacking our accounts

the government is taxing us to oblivion

we are being debt washed to default, corporations are laying us off and now we shall have GFC 2 coming out of germany creating the greatest domino finacial crises the world has ever seen, de jar vu 1929 US THEN EUROPE sounds familular,

so now that the crises has hit lets take more as we destroy their bank accounts 401k and anything else we can get our hands on 

yes then we will send inflation on them so we tax anything left, say good by to corporate profits as no consumers left to buy product or service

thier taking it all step by step!




The erosion of the consumer is leading to the death of the consumer and the death of capitalism.....