How zombie companies suck the life from an economy

One of the minor irritations of the recession is all these newspaper columns talking about how good the downturn will be for us all.

You know the ones I mean. They usually prattle on about rediscovering "what matters in life", and purging ourselves of our consumerist cravings, as if the recession was some strange new diet fad a kind of All-Bran for the soul.

Yet they're almost always written by hugely well-paid columnists who will never need to worry about losing their jobs and who already enjoy a standard of living far and above that of the average person.

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But that's not to say that there aren't some bright sides to the downturn. It seems that driving has become safer for one thing...

Why driving is now safer thanks to the recession

The recession has apparently slashed the number of cars on the road, according to Accident Exchange. The company provides rental cars for people who have been in a crash. But because people are cutting down on journeys to save petrol, and using public transport more, the company's business has suffered. "Reduced traffic volumes" mean "reduced accident volumes."

And not only is driving safer, but if you do have an accident, you'll get your car fixed more promptly. That's because of "improved efficiency in the speed of vehicle repairs arising from greater capacity within the repair industry, which itself has arisen from reduced accident volumes."

Of course, this recession silver lining is bad news for Accident Exchange shareholders. And it's not great for the already beleaguered car industry. Accident Exchange is just yet another big customer that presumably won't be replacing its fleet as rapidly as it once would have.

Meanwhile, car rental group Avis Europe says it is having to raise car rental prices to "offset falling profits", reports the Evening Standard. Again, I imagine that the downturn will mean lower fleet turnover for Avis as well.

Car manufacturers want a share of the bail out money

So demand for cars is dropping off. Sales are nosediving. Most of the time, this would mean car companies going to the wall. And certainly, it's bad news for dealerships.

But the car manufacturers aren't going down without a fight. They want their share of the money that the government has stumped up for the banks. In the US, politicians are currently wrangling over a bill to lend at least $25bn to General Motors, Chrysler and Ford.

This is the problem when you bail out one industry. You can argue that some banks were too big to fail. That's a problem that must be rectified in the future. But it makes it much harder for politicians to refuse to bail out other industries. And of course, politicians aren't thinking about the economy. They're thinking about votes. They're thinking about local special interest groups with lots of power.

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Yet there's no way that you can argue that car manufacturers are too big to fail. The retail sector in the US employs far more people is anyone going to cough up to bail out Circuit City for example, or try to portray it as vital to the US economy? Didn't think so.

The trouble is, the more money you spend on propping up companies that should go to the wall, the more you squeeze out new companies and industries that should be arising in their place. Constant bail-outs hamper the process of "creative destruction" that capitalism relies upon.

The dangers of creating zombie companies

Once a company needs state aid to remain viable, it becomes a monster. The usual justification for government backing for an industry is that it's a temporary measure, just to see it through the hard times. But income tax was also a temporary measure when it was first introduced.

State funding is addictive and debilitating. The money isn't the company's so it tends to spend it unwisely. And then it comes back for more. And eventually, you reach the point where the industry becomes so bloated that it really is "too big to fail", without causing massive unemployment and hardship.

The financial sector is the perfect example of this in action. In recent decades, the finance industry has had the implicit backing of governments and central banks on both sides of the Atlantic in fact, in most developed countries.

Backed by the faith that central banks would always cut interest rates at the slightest hint of any trouble, banks were able to send their tendrils into every nook and cranny of the global economy. They were playing with other people's money after all. It was as if risk had been abolished.

And with the focus purely on expansion, cheered on by governments and consumers who happily mistook debt for wealth, the financial sector grew and grew, sucking in resources that could have been more productively employed elsewhere.

We all know where that has left us with a bankrupt financial system that's swallowing money as fast as we can pour it in. We already have enough zombie companies consuming our resources. Let's not create any more.

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