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November 9, 2020

Killing zombies in the time of Covid – the hidden dangers

By Paul Dennis

9 November

Antonio Fatas, an economics professor, re-tweeted about how fundamentally misguided economists’ fears were about zombie firms or money-losing firms that have managed to stay afloat either due to abundant profit or Federal Reserve and Treasury support.

He believes that weakening businesses are consequence of a weak economy and the cause of one, therefore experts should stop worrying about them draining the economy, leading to slower recovery and productivity.

In fact, he believes that policy initiative to kill or shut these firms will dismiss employees and pay off creditors, turning the risk of a recession into a depression.

According to Deutsche Bank Securities, about one in every five publicly traded US companies is a zombie firm, which is has doubled the since 2013.

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The Post and The Economist summarised the growing size of zombie firms in the US to be a rising concern to stabilise the economy.

A 1990s research on Japan reveals that the existence of zombie firms in an industry makes it difficult for other non-zombie firms to thrive and do better.

It is further argued that the gaps in financial regulation and bankruptcy procedures cause creditors and banks to delay foreclosure of nonperforming loans to zombies.

This enables them to function if they can continue to pay their employees, implying that better regulation can shut down zombies and allow efficient competitors to grow and thereby boost economic growth.

However, experts believe that the cost of killing zombie firms in an already low operating economy could be high.

For instance, killing zombie firms will wipe out the incomes of workers to spend on goods and services.

This decline in spending will further cause the GDP to decline more than 100% of what the firms could produce via a Keynesian multiplier effect where the economy does better when the government spends.

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