03.07.2021 – 14:18
As Western economies emerge from the COVID-19 crisis, banks and governments are facing a new problem: how to deal with dead corporations. But an innovative, worker-centered scheme can offer a viable solution.
In both the United States and the European Union, corporate bankruptcies have fallen during the 15 months of the pandemic, despite the severe recession. This decline is the result of the governments of rich countries, in their understandable desire to mitigate the economic shock of the pandemic, extending every possible safety net to firms. Often, however, they did so without even trying to separate them with good economic prospects from those without any.
As a result, the natural selection process of the business sector has weakened precisely when COVID-19 has accelerated many existing trends, increasing the share of firms that should be considered zombies. But policymakers now need to address the broader economic impact of supporting volatile companies.
Of course, governments cannot suddenly cut off all business subsidies. During the pandemic, many otherwise healthy firms accumulated a lot of debt. The sudden submission of all of them to rigid market discipline will result in a very large number of unnecessary bankruptcies.
Moreover, the economic and financial impact of an immediate cessation of support would be politically suicidal for any elected government. The negative impact of GDP would have severe effects on both unemployment and public finances, and the losses that a wave of bankruptcies would impose on lenders would further weaken banks’ balance sheets. The almost certain result would be massive voter dissatisfaction, all but ensuring the government loses in the next election.
At the same time, policymakers cannot continue to help all zombie firms. Such assistance would have huge fiscal costs and hinder the productivity growth that many Western governments need to solve many of their fiscal and political problems. The changes produced by the pandemic require new and innovative firms. But it will be difficult for such firms to enter the market and grow if we expend so much physical, human and financial resources to keep zombie businesses alive.
Separating corporate living from corporate dead is not easy even in normal times: This is what banking art is all about. And while the distinction between healthy and volatile firms is tricky for the private sector at its best, it is especially difficult to do so now that there is still a high degree of uncertainty about the post-pandemic world to come. But the private sector can at least aggressively use incentives to capture disseminated information. This is extremely difficult for a government agency, especially one that lacks the necessary accumulated expertise.
This is a new version of an old problem mostly explored by Friedrich Hayek. As Hayek pointed out, knowledge dissemination in society is pervasive and it is difficult for any government to gather it in an impartial manner.
But there is a possible way to solve this difficulty. If you want to evaluate the quality of a student, there is no more revealing metric than asking her classmates. Those who learn day in and day out with a peer can better appreciate her talent. In the same way, no one can evaluate the quality of a firm better than its employees. To remove drugs from zombie firms, therefore, governments must begin to condition any subsidy on a company with the approval of the majority of its employees.
The problem is that, unlike classmates, employees have an incentive to lie. If the firm failed, they would lose their jobs. Since approving their company costs them nothing, most will probably overestimate its prospects in the future.
But this problem can be easily overcome with the right incentives. Under such a scheme, if the majority of workers vote to liquidate the firm immediately, its employees will receive unemployment benefits for longer. If they vote to continue, the government will inject some money to make the company sustainable. But if it then failed, workers’ unemployment coverage would be severely limited, perhaps to zero.
Workers who see no future for their company would prefer the longer period of social protection. On the other hand, those who think their firm has a future will not risk it by voting to liquidate.
If properly calibrated, such a scheme will be able to separate zombies from healthy firms, laden with pandemic effects. It would do this by making clear the cost of subsidies: More support today means governments can have less fiscal capacity to help workers tomorrow.
Last but not least, this system will empower workers. Too often, entrepreneurs and managers use the threat of mass layoffs to extract large unjustified subsidies. During this time, workers must decide whether such assistance is justified.
* Luigi Zingales is Professor of Finance at the University of Chicago and co-host of the Capitalisn’t podcast.
Translated and adapted for Konica.al by Project Syndicate
