Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

Creative Destruction: A High-Risk Idea That Nobody Wants to Test

Creative Destruction: A High-Risk Idea That Nobody Wants to Test

The U.S. is usually better than Europe at reshaping its economy after recessions, partly because it’s easier for American entrepreneurs to streamline their business by firing workers, or even start a new one by going bankrupt.

In the coronavirus crisis, that advantage isn’t immediately apparent.

The speed and severity of the downturn –- and the extraordinary uncertainty about what comes next –- raises the costs of a rapid restructuring as the pandemic passes. Governments everywhere are struggling to figure out how much leeway they should allow for what economists call creative destruction -- when outmoded companies and practices get replaced with new and more productive ones.

The argument against letting those forces loose right now is that firms with decent prospects of bouncing back, once the health emergency is over, will get swept away too.

In the U.S., historically more willing to let creative destruction take its course, there’s concern that unemployment may get stuck at the current high levels while bankruptcy courts clog up.

“We don’t want to have failures occur all at the same time because that’s catastrophic for the economy,” said former Federal Reserve Bank of New York President William Dudley, who is now a senior research scholar at Princeton University and a Bloomberg Opinion columnist. “It’s fine to have individual firms fail from time to time, but systemic failure imposes so much cost on everyone else.”

American Spirit


In Europe, with a tradition of taking less risk on this front, governments are working on programs to turn emergency aid into long-term support for companies and jobs. Yet they still have a cautious eye on the regenerative powers that benefited America in the past.

Public investment should be accompanied by “the simplification of restructuring and liquidation procedures, in the spirit of the provisions in place in the U.S.,” Bank of France Governor François Villeroy de Galhau said this month. “Reconstruction isn’t an identical restart.”

The right balance of preservation and reinvention will depend on things that are unknowable now, from the duration of the Covid-19 shock to whether changed consumer habits will prove durable. For now, policy makers are erring on the side of blanket support, even if some of the companies that get it turn out to be unviable.

“The idea that we can know with any kind of clarity who is solvent at this point, or who is going to be solvent, is really a stretch,” said Jeremy Stein, a Harvard professor and former Federal Reserve governor. That could make what Stein called America’s “bias toward indiscriminate liquidation” of smaller firms a problem, rather than a benefit for the post-virus economy.

Credit for All


During the Covid-19 crisis, policy makers have veered in the opposite direction. The U.S. has tried to mimic European programs that pay businesses to retain staff, though it’s still seen a much bigger surge in unemployment.

Meanwhile the Federal Reserve’s program of corporate-bond buying has enabled even financially shaky companies to raise yet more debt, and spurred criticism that the policy is impeding a needed revamp of the economy. U.S. corporations issued about $1.5 trillion in bonds in the first half of 2020, almost double the year-earlier figure.

At least some of the protections appear to be working. Bankruptcy filings fell 11% in the first half from a year earlier, even as those mostly lodged by big companies under Chapter 11 of the code rose, according to the American Bankruptcy Institute. But the organization’s chief, Amy Quackenboss, warned that “we anticipate filings to begin increasing” as crisis-era government supports are gradually withdrawn.

The trend is similar in Europe, where bankruptcies declined sharply during lockdown but are expected to jump in the coming months. Any increase may be smaller than in the U.S., as European governments double down on preserving both companies and jobs.

French President Emmanuel Macron, for example, has been hastily rewriting labor laws to avert lay-offs -- even if that means shifting the emphasis away from the American-style flexibility promised under his signature economic reforms of 2017. The new measures offer companies help paying their wage bills, in exchange for guarantees that workers won’t be fired.

Finance Minister Bruno Le Maire has acknowledged that the government will eventually have to be more discriminating about who it props up.

“Putting too much public money in non-viable businesses will be a big economic mistake,” he said last month. “We will get help from the banking sector so that we can select the activities that are sound.”

‘Failure Is OK’


European countries vary widely in their fiscal capacity to offer this kind of support –- and also in the red tape that insolvent companies have to negotiate. Some, like Finland and Germany, have flexible procedures similar to those in the U.S., according to World Bank and OECD indicators. Others are among the most complex in the developed world.

American entrepreneurs also benefit from easier rules governing personal bankruptcy as well as the corporate kind. That’s important because many small-business owners borrow on their own account, said Florida Atlantic University professor Douglas Cumming.

“In the U.S. there’s this culture that failure is OK,” he said. “If you want to raise money from investors and you failed a few times, they say: ‘You’re experienced, that’s good’.”

Still, such trans-Atlantic gaps may be narrowing.

The emergence of dominant companies like the tech giants has made swaths of the U.S. economy less competitive than they used to be, and “this hampers the creative destruction process,” said Ludovic Subran, chief economist at Allianz SE in Frankfurt. Meanwhile, Europe has responded more boldly and effectively than in the 2008 crisis, even if there’s a risk that governments “overstay their welcome” and end up propping up the wrong industries.

“There’s an old economic belief that the more flexible you are, the faster you recover from crises,” he said. That usually translates into a U.S. edge, but maybe not this time. “The jury is still out.”

AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
Satirical Sketch Sparks Political Spouse Feud in South Korea
Indonesia Quarry Collapse Leaves Multiple Dead and Missing
South Korean Election Video Pulled Amid Misogyny Outcry
Asian Economies Shift Away from US Dollar Amid Trade Tensions
Netflix Investigates Allegations of On-Set Mistreatment in K-Drama Production
US Defence Chief Reaffirms Strong Ties with Singapore Amid Regional Tensions
Vietnam Faces Strategic Dilemma Over China's Mekong River Projects
Malaysia's First AI Preacher Sparks Debate on Islamic Principles
Meta and Anduril Collaborate on AI-Driven Military Augmented Reality Systems
Russia's Fossil Fuel Revenues Approach €900 Billion Since Ukraine Invasion
Alcohol Industry Faces Increased Scrutiny Amid Health Concerns
U.S. Goods Imports Plunge Nearly 20% Amid Tariff Disruptions
Italy Faces Population Decline Amid Youth Emigration
Trump Accuses China of Violating Trade Agreement
OpenAI Faces Competition from Cheaper AI Rivals
Foreign Tax Provision in U.S. Budget Bill Alarms Investors
Russia Accuses Serbia of Supplying Arms to Ukraine
Gerry Adams Wins Libel Case Against BBC
EU Central Bank Pushes to Replace US Dollar with Euro as World’s Main Currency
U.S. Health Secretary Ends Select COVID-19 Vaccine Recommendations
Trump Warns Putin Is 'Playing with Fire' Amid Escalating Ukraine Conflict
India and Pakistan Engage Trump-Linked Lobbyists to Influence U.S. Policy
U.S. Halts New Student Visa Interviews Amid Enhanced Security Measures
Trump Administration Cancels $100 Million in Federal Contracts with Harvard
SpaceX Starship Test Flight Ends in Failure, Mars Mission Timeline Uncertain
King Charles Affirms Canadian Sovereignty Amid U.S. Statehood Pressure
EU Majority Demands Hungary Reverse Anti-LGBTQ+ Laws
Top Hotel Picks for 2025 Stays in Budapest Revealed
Iron Maiden Unveils 2025 Tour Setlist in Budapest
Chinese Film Week Opens in Budapest to Promote Cultural Exchange
Budapest Airport Launches Direct Flights to Shymkent
Von der Leyen Denies Urging EU Officials to Skip Budapest Pride
Alcaraz and Sinner Advance with Convincing Wins at Roland Garros
EU Ministers Lack Consensus on Sanctioning Hungary Over Rule of Law
EU Nations Urge Action Against Hungary's Pride Parade Ban
Putin's Helicopter Reportedly Targeted by Ukrainian Drones
U.S. Considers Withdrawing Troops from Europe
Russia Deploys Motorbike Squads in Ukraine Conflict
Critics Accuse European Court of Human Rights of Overreach
Spain Proposes 100% Tax on Non-EU Holiday Home Purchases
German Intelligence Labels AfD as Far-Right Extremist
Geert Wilders Threatens Dutch Coalition Over Migration Policy
Hungary Faces Multiple Challenges Amid EU Tensions and Political Shifts
Denmark Increases Retirement Age to 70, Setting a European Precedent
Any trade deal with US must be based on respect not threats', says EU commissioner
UK Leads in Remote Work Adoption, Averaging 1.8 Days a Week
Thirteen Killed in Russian Attacks Across Ukraine
High-Profile Incidents and Political Developments Dominate Global News
Netanyahu Accuses Western Leaders of 'Emboldening Hamas'
Ukraine and Russia Conduct Largest Prisoner Exchange of the War
×