Philip-Lowe
Reserve Bank governor Philip Lowe (Image: AAP/Joel Carrett)

Australia plagued by swarms of zombie companies? Undead beasts that roam the landscape? Not a problem, says our RBA governor. In fact, good news.

So-called zombie companies are entities whose business model is no longer working and who are no longer profitable. They would usually go broke, but in these unusual times they live on past their use by date.

Economists were worrying about zombie companies even before the latest crisis, as loose money and easy lending meant firms could easily load up on fresh debt at relaxed interest rates, keeping them alive when by rights they would have failed. The zombie horde has grown many-fold in 2020, thanks to the JobKeeper payment that means firms have their staff costs covered.

Changes to insolvency laws have also bolstered the ranks of zombies.

Companies now have six months to respond to a statutory demand for repayment, instead of just 21 days. And directors are protected from personal liability for trading while insolvent. The number of businesses entering administration plunged in April when you might have expected it to soar.

Look into the eyes of many Aussie businesses and the spark of life is gone.

Zombie companies are traditionally seen as a threat. The basic driving principle of a market economy being creative destruction, companies that can’t self-support are supposed to fade away, releasing their real estate and their workers to more productive ventures. When zombie companies survive, it means those resources are not being used optimally.

But right now, that’s not an issue for RBA governor Philip Lowe.

“I’m not worried that there are a whole bunch of zombies around in the Australia economy that are consuming financial resources and workers and scarce physical assets, preventing successful, dynamic companies from growing,” he said in a webinar hosted by the Australian National University on Monday.

“That is not the world we are in,” Lowe said, pointing out that thanks to  underemployment there is plenty of spare capacity, and successful dynamic firms are not short of resources.

The invisible hand of the market directing resources to their most effective use? No longer needed, apparently. But Lowe went further than expressing a merely neutral attitude towards these heavily indebted, loss-making firms.

“Remember, those zombie firms, if they exist, are employing people, which is good.”

This represents quite an admission for the governor of the Reserve Bank. He loves zombies! This scary movie has quite a twist.

That it might be good to prop up a lot of unviable firms to get the boost to employment is not a mainstream idea in economics. We’ve heard Lowe bemoan high unemployment and extol the benefits of fiscal stimulus before, but rarely in such unorthodox fashion.

Whatever it takes

Lowe’s ponderings on zombie companies could lead a person to wonder if Lowe is a fan of extending the JobKeeper payment beyond September, when it’s due to expire. 

Asked whether the government should commit to doing “whatever it takes to keep the world economy functioning”, Lowe answered with a direct affirmative.

I sat bolt upright.

“Warwick [McKibbin] asked whether we should be doing whatever it takes and the answer to that for me is yes,” he said.

“I’ve seen what we’ve been doing as building a bridge to when we get to the other side … once the virus has passed. Because at some point it will pass. To build that bridge we need to throw everything at it both on the fiscal and monetary front. I think that’s been an entirely appropriate thing to do.”

It would be possible to interpret this use of the terminology of bridges — terminology used by the treasurer and PM — as implicit support of their timelines, which see fiscal support expiring in September. But look closer: Lowe has said he would like to see timelines driven by the virus, and fiscal support withdrawn only once it has been dealt with.

Combined with his endorsement of zombie companies, this represents a substantial critique of early withdrawal of government support, and an endorsement of ongoing intervention to get us through the crisis. His endorsement of “whatever it takes” is very different from the status quo policy of “whatever it takes until September and thereafter … nothing.”

Nevertheless, Lowe did not provide unlimited support for governments to borrow and spend (nor did he endorse printing and spending!). His comments made it clear he would prefer microeconomic reform to juice the economy in the aftermath of the current recession. 

“I think we do face a world where there will be a shadow from the virus for quite a few years. People will be more risk averse, they won’t want to borrow, in Australia we are going to have lower population dynamics,” he said. 

“And if that’s the world we are in, we can’t resolve that problem by just continuing to borrow … but what we can do is reform.”

There’s that word again. Reform. If ever there was a dead horse in the Australian political landscape, it’s reform. One can’t expect Lowe — the mainstream’s mainstream guy — to give up his attachment to conventional policy all at once.

Peter Fray

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