11/04/2013

By Michael Baxter, Economics Writer


Zombies are everywhere. They dominate the TV and offerings at the cinema. They are rife across the economy too. Some say interest rates need to go up; that there are too many companies that are being artificially propped up by low interest rates. They say that if the cost of borrowing goes up the zombies will be slain, and the economy can get on with the serious business of growing again.

One of the problems with taking a look at this issue is that there is very little, if any, hard data. How many zombie companies are out there? Does anyone know? If the media repeats the same thing often enough, it may feel as though it is true — because we keep reading about zombie companies they must be out there.

Last week Capital Economics attempted to take an objective look at what it called the zombification of the UK economy. There is an oddity concerning the logic of saying the economy is being overrun by zombie companies. The evidence for this claim is partly that insolvency levels are low. Does that not strike you as a circular argument? There must be lots of zombie companies out there because the level of bankruptcies is low. Capital Economics said the low levels of liquidation could “be explained in part by the fact that corporate profitability has held up surprisingly well and by the consequences of the 2002 Enterprise Act in encouraging business rescue over liquidation.”

It also suggested, not unreasonably, that even if there are companies out there that have a kind of zombie feel about them, this may simply be a symptom of the fact that the UK is in the midst of its worse economic downturn ever recorded.

If these zombie companies were allowed to fail, is there not a danger that unemployment would surge? Maybe it would be better to purge the zombies when the economy is recovering.

But let’s say that there is something in this idea of zombie companies. This is a view typically held by those on the right-er wing of the political spectrum who see the solution as creative destruction. (You don’t have to be right wing to hold those views, but that is how it normally is.) Advocates of upping interest rates typically sign up to what’s called the Austrian school of thought. Let the markets decide, and let central banks step back and stop interfering.

But here is an alternative idea for dealing with zombie companies. Keep interest rates low, but increase the minimum wage.

Such a policy shift would have several beneficial effects. So called zombie companies with poor levels of productivity, may find they cannot survive if they have to pay their staff more money. So, such a change would destroy the zombie companies.

According to the Austrian economic theory, the companies that can afford to pay their lowest paid staff a higher wage could then move into the vacuum created by the destruction of zombie companies.