Zombies and the post-pandemic economy

By James Pethokoukis

What sort of shape is the American economy in after a year of the pandemic? Maybe better than you might guess. Even better than many economists might have guessed. As the econ team at Goldman Sachs notes:

Signs of long-term damage to the economy remain surprisingly limited so far. Two-thirds of the 25 million jobs initially lost since the onset of the pandemic have returned, and nearly half of the newly unemployed since February 2020 say they are on temporary layoff. Large-company bankruptcies declined to the middle of the pre-virus range and total commercial bankruptcies remained well below the pre-virus level in January. The number of active small businesses increased by 1.0pp to 90.5% of the pre-virus level in January (vs. a bottom of 75% in April). While still below the November level of 94.1%, some recent closures might prove temporary, as most did in April.

Now, this sure seems like good news, especially if you’re betting on strong economic growth over the next year or two. And there’s no mystery why the amount of “scarring” may have been less than expected: Washington pumped a whole lot of money into the economy over the past year. And that’s not taking into account the current relief/stimulus package being considered by Congress. Maybe tack on another $2 trillion.

But might all that government dough have already been too much of a good thing? That’s the issue analyzed in “Will Schumpeter catch COVID-19? Evidence from France” by Mathieu Cros, Anne Epaulard, and Philippe Martin. The researchers write: ”Some concerns have emerged in the public debate that these policies may create ‘zombies’ by reducing the exit of non-productive firms. If so, this may have dire consequences for productivity in the following years, as the exit of unproductive firms is a substantial contributor to aggregate productivity growth.”

Capitalism needs failure. A dynamic economy is one where capital and labor flow to where they can be used most productively. And that flow is best directed by markets rather than government. But just how efficient is that process during a period of great economic upheaval, such as one caused by a once-in-a-century pandemic? What if, for instance, companies fail because they lack normal access to credit? This where government can play a role.

That said, the early findings here, according to the researchers, “are relatively reassuring and point to hibernation rather than zombification.” At least with the French experience, it was the less productive and more indebted that were more likely to go bankrupt during the pandemic. So, in that sense, the creative destruction process in 2020 resembled that of past years. From the analysis: “Although the number of firms filing for bankruptcy was well below its normal level, the same factors that predicted firm failures in 2019 – primarily low productivity and debt – were at work in a similar way in 2020.”

Again, this is France rather than America. But it’s at least one bit of evidence that suggests we might correctly view the lack of scarring as good news, at least so far. Of course, that doesn’t mean we need to spend another $2 trillion in stimulus — even if the previous relief seems to have mostly done its job.