Zombie Businesses

Anthony Randazo has an excellent piece in Reason magazine on what lessons we can learn from the Japanese by examining the steps they took when their bubble collapsed in the early 90's. Unfortunately, the US government aren't learning and falling into the same trap. (read here)

With the government propping up poor business models rather than allowing further job losses, firms wound up operating over the long-term without making a profit or adding any value to society. Their utter lack of vitality earned these perpetual money-leaching entities the moniker "zombie businesses." And unless American policymakers understand the failures of the Japanese response, we will suffer the same zombie fate.

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The length of Japan's asset deflation, recession, and liquidity struggles has been blamed largely on the lack of foresighted policies and political leadership. Politicians bent on retaining their power took action that sought to solve the present day concerns, such as infrastructure projects, without regard to their long-term effects. As a result, economic growth was not sustained.

America suffers from a similar vision problem. Intent with avoiding any semblance of economic pain, federal officials have thrown moral hazard and laissez-faire principals to the wind. Creative destruction has been rejected, despite long historical proof that it is the best way for an economy to grow.

Read the whole thing. There is a living, breathing example for us to study in Japan. It bothers me that there seems to be such a rush for government to do something. This notion that we can't waste any time or the whole economy will collapse. No, we need to think about this. There needs to be a big debate. Unfortunately, the majority of the population are just waiting for government to make it better and aren't concerned about the details, or considering the consequences. What if they don't make it better but make it worse?

Must Read Article of the Day

Marcus Gee of the Globe and Mail has a bleak assessment of Japan since her economic collapse in the early 1990's which they haven't recovered from. And how it could now be happening to us.

A second myth is that Japan suffered more than the United States and other countries will today because its bubble was so much bigger. In reality, the credit and asset bubble that built up in the United States was the biggest in history. At the peak of Japan's bubble, it needed three yen of credit to make one yen of national income. The United States needed eight dollars of credit for every dollar of income. In Japan, the bubble grew for only about five years in the high-flying late 1980s. In the United States, the credit binge has been going on for a couple of decades.

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To make matters worse, Americans entered their crisis with a savings rate of zero. In Japan, it was 16 to 17 per cent. Japanese could cope by reducing that over time to about 2 per cent. What will Americans do?

“To put it bluntly, America is much worse off, because there is no buffer,” said Mr. Koll of Tantallon Research. “America runs without a safety net.”

Like the Lloyd Bridges character says in Airplane: "Looks like I picked the wrong week to quit amphetamines."