In the restart, let zombie-firms fail
COVID-19 has put much of Canada’s economy on life support. As we emerge from the crisis and resume more normal activity, a challenge awaits. We do not want viable businesses to disappear. But we also do not want zombie-firms to live on indefinitely.
Early in the crisis governments reasonably prioritized supporting liquidity and securities markets through central banks, credit markets through government lenders and guarantees, and household incomes through transfer payments. Going big and broad made sense to help people and businesses through the sudden stop.
We now need to navigate a different problem: letting firms go. The reality is that in an ordinary year thousands of businesses in Canada enter and exit and millions of jobs appear and disappear. In 2017, 143,000 businesses came into existence — about one for every eight that already existed. That same year, 127,000 businesses went out of existence — about one in nine. That is normal and healthy — part of the innovation and adaptation that over time give us higher incomes and better goods and services.
As we reopen the economy and begin to explore the changed domestic and international landscape, the goal is an economy full of businesses that can thrive in the post- COVID world. Some are good to go now. Some will require new, patient capital. Others may need restructuring, even complete reorganization, but with the right steps can emerge on the other side with a bright future.
The danger is that in our desire to help healthy companies survive we continue to support companies that either would have disappeared anyway or might have survived in the pre- COVID world but, unfortunately, have no future in a world in which people will live, work and shop differently. That way lies zombie- land: too many businesses that cannot make the investments in physical and human capital to produce better products and pay higher wages; too few that can. Too many businesses that depend on continuing government support to stagger along; too few that can attract and reward private lenders and investors.
On the way in, the Bank of Canada tripled its balance sheet, injecting liquidity and buying assets it normally wouldn’t in order to backstop credit markets. As borrowing and lending pick up again, it should scale its liabilities back to amounts consistent with its inflation target and wind down its unusual asset purchases. Federal Crown lenders that have extended extraordinary credit will also need to withdraw it.
The federal government has just announced the Large Employer Emergency Financing Facility — but there’s more than a hint in the conditions that will apply to this program that Ottawa plans to favour some sectors and activities over others. That would be a mistake. It should be up to private lenders to determine where — and where not — to lend so that rewards for good decisions and punishments for bad ones once again steer saving to where it can do the most good.
Among private lenders, banks and insurance companies face regulatory requirements — many spawned by the 2008- 09 crisis — that may need modifying to permit them to function in a new environment of higher debt and elevated risk. Here, too, we face a balancing act: transitioning to the new environment without encouraging lending to businesses that can do no better than stagger along.
Governments will also have to wind down their crisis transfer payments — notably the federal wage subsidy — without replacing them with sectoral supports that impede the adjustments Canadians need in order to thrive in the long run. We and our customers abroad will still eat, use telecommunication and transportation services, and consume fossil fuels. But we will consume many of these things differently. Some business models that looked viable in 2019 will not be right for 2021.
Better than propping up zombies is an assisted exit and, if firms move quickly, perhaps no exit at all, with restructured businesses emerging leaner and meaner on the other side. In normal times, bankruptcy carries a stigma: nobody goes into business to fail. In a pandemic, stigma may not be such a problem. Our bankruptcy laws are about allowing businesses to reorganize and restructure through negotiations with creditors. Canada has plenty of success stories of companies entering insolvency and coming out stronger. Time is of the essence, however. Ottawa should find ways to streamline the insolvency process, lowering its cost and complexity so surviving firms get up and running as soon as possible.
Governments have blunted the crisis, but they cannot remake the world the way it was before COVID-19. Some businesses can survive without the crisis supports. Others would have disappeared anyway or will not survive in the new world. We do not want zombies. We want dynamism and innovation. Businesses that cannot succeed need to wind down so that businesses that can will thrive. Governments should not be choosing which businesses stay upright: they will prop up too many. Private lenders and investors should make those calls.
THE GOAL IS AN ECONOMY FULL OF BUSINESSES THAT CAN THRIVE IN THE POST-COVID WORLD.