In this new interview with John Stossel, I explained that cronyism and socialism are bad, while creative destruction is good.

The discussion focuses on Trump’s troubling desire to have partial government ownership of various companies.

I’ve already written about the government now being a shareholder in Intel (one of the unfortunate legacies of Biden’s semic0nductor handout).

But the problem has spread way beyond that company.

Trump and his team have made the federal government a shareholder in other firms as well.

Here’s a partial list generated by ChapGPT, with an explanation of how Washington is now involved.

At the risk of understatement, this is not good news.

I worry it will lead to more taxpayer bailouts.

I worry it will enable more Washington corruption.

For today’s column, however, I want to focus on how government meddling will hinder the valuable and necessary process of creative destruction. I’ve previously produced a three-part series (here, here, and here) on why it’s important to let new technologies and entrepreneurial discoveries displace existing ones.

Today, I want to specifically explore why it is bad news to prop up zombie companies.

We’ll start by looking at some research by three OECD economist for the Swiss National Bank. Here are the key passages.

This paper explores the extent to which “zombie” firms – defined as old firms that have persistent problems meeting their interest payments – are stifling labour productivity performance. This paper provides evidence that the prevalence of financially weak or “zombie” firms – that increasingly linger as opposed to exit the market – are associated with less efficient resource allocation. We apply the framework from the seminal study of zombie firms in Japan (see Caballero et al., 2008) to a broader sample of OECD countries and show that a higher share of industry capital sunk in zombie firms is associated with lower investment and employment growth of a typical non-zombie firm. Besides limiting the expansion possibilities of healthy incumbent firms, market congestion generated by zombie firms can also exacerbate productivity dispersion, create barriers to entry and constrain the post-entry growth of young firms. Finally, we find that an increase in the capital stock sunk in zombie firms is associated with less productivity-enhancing capital reallocation, measured as the decline in the ability of more productive firms to attract capital.

And here are three charts from the study, beginning with a look at how productivity is lower in zombie firms.

Next we have a chart showing that the presence of zombie firms has a negative effect on jobs and investment in the rest of the economy.

Finally, our third chart shows the potential productivity gains from allowing a reduction in zombie firms.

Let’s also look at a study by two economists for the Bank for International Settlements.

Here are some relevant excerpts.

Zombie firms, meaning firms that are unable to cover debt servicing costs from current profits over an extended period, have recently attracted increasing attention in both academic and policy circles. ..We take an international perspective that covers 14 countries and a much longer period than previous studies. …First, are increases in the incidence of zombie firms just episodic… We find a ratcheting dynamic: the share of zombie companies has trended up over time through upward shifts in the wake of economic downturns that are not fully reversed in subsequent recoveries. …Second, what are the causes of the rise of zombie firms? Previous studies have focused on the role of weak banks that roll over loans to non-viable firms rather than writing them off… A related but less explored factor is the drop in interest rates since the 1980s. The ratcheting-down in the level of interest rates after each cycle has potentially reduced the financial pressure on zombies to restructure or exit… Our results indeed suggest that lower rates tend to push up zombie shares, even after accounting for the impact of other factors. Third, what are the economic consequences of the rise of zombie companies? Previous studies have shown that zombies tend to be less productive… Therefore, the higher share of zombie companies could be weighing on aggregate productivity. Moreover, the survival of zombie firms may crowd out investment in and employment at healthy firms. Our findings confirm these effects for more countries and a longer period.

And here are two charts from the study.

This first chart shows what is driving the growth of zombie firms and this data gives me another reason to dislike artificially low interest rates.

Our next chart is another bit of evidence that zombie firms mean less productivity (and keep in mind that productivity is the key factor for improvements in living standards).

The bottom line is that zombie firms are not good for long-run economic performance.

Such firms can and will persist in the absence of government intervention.

The problem can become far bigger, however, when politicians get involved. As noted in the video, they focus on the “seen,” meaning businesses, jobs, and factories that currently exist. And they face a “public choice” pressure to protect the status quo.

But they are oblivious to the “unseen,” meaning the greater productivity, innovation (and the accompanying jobs) of new companies and new technologies.

I am very much afraid that Donald Trump now has a big incentive to bail out and prop up the companies where he has made Washington a shareholder. And I’m similarly afraid that a future Democrat president will double down on Trump’s misguided approach.