KazPost

Kazakhstan News
Thursday, Mar 28, 2024

Creative Destruction: A High-Risk Idea That Nobody Wants to Test

Creative Destruction: A High-Risk Idea That Nobody Wants to Test

The U.S. is usually better than Europe at reshaping its economy after recessions, partly because it’s easier for American entrepreneurs to streamline their business by firing workers, or even start a new one by going bankrupt.

In the coronavirus crisis, that advantage isn’t immediately apparent.

The speed and severity of the downturn –- and the extraordinary uncertainty about what comes next –- raises the costs of a rapid restructuring as the pandemic passes. Governments everywhere are struggling to figure out how much leeway they should allow for what economists call creative destruction -- when outmoded companies and practices get replaced with new and more productive ones.

The argument against letting those forces loose right now is that firms with decent prospects of bouncing back, once the health emergency is over, will get swept away too.

In the U.S., historically more willing to let creative destruction take its course, there’s concern that unemployment may get stuck at the current high levels while bankruptcy courts clog up.

“We don’t want to have failures occur all at the same time because that’s catastrophic for the economy,” said former Federal Reserve Bank of New York President William Dudley, who is now a senior research scholar at Princeton University and a Bloomberg Opinion columnist. “It’s fine to have individual firms fail from time to time, but systemic failure imposes so much cost on everyone else.”

American Spirit


In Europe, with a tradition of taking less risk on this front, governments are working on programs to turn emergency aid into long-term support for companies and jobs. Yet they still have a cautious eye on the regenerative powers that benefited America in the past.

Public investment should be accompanied by “the simplification of restructuring and liquidation procedures, in the spirit of the provisions in place in the U.S.,” Bank of France Governor François Villeroy de Galhau said this month. “Reconstruction isn’t an identical restart.”

The right balance of preservation and reinvention will depend on things that are unknowable now, from the duration of the Covid-19 shock to whether changed consumer habits will prove durable. For now, policy makers are erring on the side of blanket support, even if some of the companies that get it turn out to be unviable.

“The idea that we can know with any kind of clarity who is solvent at this point, or who is going to be solvent, is really a stretch,” said Jeremy Stein, a Harvard professor and former Federal Reserve governor. That could make what Stein called America’s “bias toward indiscriminate liquidation” of smaller firms a problem, rather than a benefit for the post-virus economy.

Credit for All


During the Covid-19 crisis, policy makers have veered in the opposite direction. The U.S. has tried to mimic European programs that pay businesses to retain staff, though it’s still seen a much bigger surge in unemployment.

Meanwhile the Federal Reserve’s program of corporate-bond buying has enabled even financially shaky companies to raise yet more debt, and spurred criticism that the policy is impeding a needed revamp of the economy. U.S. corporations issued about $1.5 trillion in bonds in the first half of 2020, almost double the year-earlier figure.

At least some of the protections appear to be working. Bankruptcy filings fell 11% in the first half from a year earlier, even as those mostly lodged by big companies under Chapter 11 of the code rose, according to the American Bankruptcy Institute. But the organization’s chief, Amy Quackenboss, warned that “we anticipate filings to begin increasing” as crisis-era government supports are gradually withdrawn.

The trend is similar in Europe, where bankruptcies declined sharply during lockdown but are expected to jump in the coming months. Any increase may be smaller than in the U.S., as European governments double down on preserving both companies and jobs.

French President Emmanuel Macron, for example, has been hastily rewriting labor laws to avert lay-offs -- even if that means shifting the emphasis away from the American-style flexibility promised under his signature economic reforms of 2017. The new measures offer companies help paying their wage bills, in exchange for guarantees that workers won’t be fired.

Finance Minister Bruno Le Maire has acknowledged that the government will eventually have to be more discriminating about who it props up.

“Putting too much public money in non-viable businesses will be a big economic mistake,” he said last month. “We will get help from the banking sector so that we can select the activities that are sound.”

‘Failure Is OK’


European countries vary widely in their fiscal capacity to offer this kind of support –- and also in the red tape that insolvent companies have to negotiate. Some, like Finland and Germany, have flexible procedures similar to those in the U.S., according to World Bank and OECD indicators. Others are among the most complex in the developed world.

American entrepreneurs also benefit from easier rules governing personal bankruptcy as well as the corporate kind. That’s important because many small-business owners borrow on their own account, said Florida Atlantic University professor Douglas Cumming.

“In the U.S. there’s this culture that failure is OK,” he said. “If you want to raise money from investors and you failed a few times, they say: ‘You’re experienced, that’s good’.”

Still, such trans-Atlantic gaps may be narrowing.

The emergence of dominant companies like the tech giants has made swaths of the U.S. economy less competitive than they used to be, and “this hampers the creative destruction process,” said Ludovic Subran, chief economist at Allianz SE in Frankfurt. Meanwhile, Europe has responded more boldly and effectively than in the 2008 crisis, even if there’s a risk that governments “overstay their welcome” and end up propping up the wrong industries.

“There’s an old economic belief that the more flexible you are, the faster you recover from crises,” he said. That usually translates into a U.S. edge, but maybe not this time. “The jury is still out.”

Newsletter

Related Articles

KazPost
0:00
0:00
Close
It's always the people with the dirty hands pointing their fingers
Paper straws found to contain long-lasting and potentially toxic chemicals - study
FTX's Bankman-Fried headed for jail after judge revokes bail
Blackrock gets half a trillion dollar deal to rebuild Ukraine
America's First New Nuclear Reactor in Nearly Seven Years Begins Operations
Southeast Asia moves closer to economic unity with new regional payments system
Today Hunter Biden’s best friend and business associate, Devon Archer, testified that Joe Biden met in Georgetown with Russian Moscow Mayor's Wife Yelena Baturina who later paid Hunter Biden $3.5 million in so called “consulting fees”
Singapore Carries Out First Execution of a Woman in Two Decades Amid Capital Punishment Debate
Google testing journalism AI. We are doing it already 2 years, and without Google biased propoganda and manipulated censorship
Unlike illegal imigrants coming by boats - US Citizens Will Need Visa To Travel To Europe in 2024
Musk announces Twitter name and logo change to X.com
The future of sports
Unveiling the Black Hole: The Mysterious Fate of EU's Aid to Ukraine
Farewell to a Music Titan: Tony Bennett, Renowned Jazz and Pop Vocalist, Passes Away at 96
Alarming Behavior Among Florida's Sharks Raises Concerns Over Possible Cocaine Exposure
Transgender Exclusion in Miss Italy Stirs Controversy Amidst Changing Global Beauty Pageant Landscape
TikTok Takes On Spotify And Apple, Launches Own Music Service
Global Trend: Using Anti-Fake News Laws as Censorship Tools - A Deep Dive into Tunisia's Scenario
Arresting Putin During South African Visit Would Equate to War Declaration, Asserts President Ramaphosa
Hacktivist Collective Anonymous Launches 'Project Disclosure' to Unearth Information on UFOs and ETIs
Typo sends millions of US military emails to Russian ally Mali
Server Arrested For Theft After Refusing To Pay A Table's $100 Restaurant Bill When They Dined & Dashed
The Changing Face of Europe: How Mass Migration is Reshaping the Political Landscape
China Urges EU to Clarify Strategic Partnership Amid Trade Tensions
Europe is boiling: Extreme Weather Conditions Prevail Across the Continent
The Last Pour: Anchor Brewing, America's Pioneer Craft Brewer, Closes After 127 Years
Democracy not: EU's Digital Commissioner Considers Shutting Down Social Media Platforms Amid Social Unrest
Sarah Silverman and Renowned Authors Lodge Copyright Infringement Case Against OpenAI and Meta
Why Do Tech Executives Support Kennedy Jr.?
The New York Times Announces Closure of its Sports Section in Favor of The Athletic
BBC Anchor Huw Edwards Hospitalized Amid Child Sex Abuse Allegations, Family Confirms
Florida Attorney General requests Meta CEO's testimony on company's platforms' alleged facilitation of illicit activities
The Distorted Mirror of actual approval ratings: Examining the True Threat to Democracy Beyond the Persona of Putin
40,000 child slaves in Congo are forced to work in cobalt mines so we can drive electric cars.
Historic Moment: Edgars Rinkevics, EU's First Openly Gay Head of State, Takes Office as Latvia's President
An Ominous Shift in Warfare: Western Powers Risk War Crimes and Violate International Norms with Cluster Bomb Supply to Ukraine
Bye bye democracy, human rights, freedom: French Cops Can Now Secretly Activate Phone Cameras, Microphones And GPS To Spy On Citizens
The Poor Man With Money, Mark Zuckerberg, Unveils Twitter Replica with Heavy-Handed Censorship: A New Low in Innovation?
The Double-Edged Sword of AI: AI is linked to layoffs in industry that created it
US Sanctions on China's Chip Industry Backfire, Prompting Self-Inflicted Blowback
Meta Copy Twitter with New App, Threads
The New French Revolution
BlackRock Bitcoin ETF Application Refiled, Naming Coinbase as ‘Surveillance-Sharing’ Partner
Corruption in the European Parliament - Business as usual
UK Crypto and Stablecoin Regulations Become Law as Royal Assent is Granted
Paris Suburb Grapples with Violence as Curfew Imposed: Saint-Denis Residents Express Dismay and Anger
A Delaware city wants to let businesses vote in its elections
Alef Aeronautics Achieves Historic Milestone with Flight Certification for World's First Flying Car
Google Blocked Access to Canadian News in Response to New Legislation
French Politicians Advocate for Pan-European Regulation on Social Media Influencers
×