Beyond the zombie economy

Beyond the zombie economy

The British state is propping up too many unprofitable businesses and perpetuating the economic crisis.

Phil Mullan


The reaction to last week’s Office for National Statistics (ONS) update on the dire state of British productivity was engulfed by the usual Brexit myopia. The biggest productivity fall of the past five years was unsurprisingly attributed to the default explanation for everything these days: Brexit uncertainties. This buried the much more significant point the ONS reiterated: the current slowdown in productivity growth was noticeable at least 15 years ago.

The productivity problem therefore not only long precedes the Brexit discussions. It also long precedes the 2008 financial crisis. Longer-term studies actually reveal that the decline in productivity growth, not just in Britain but across mature industrialised countries, has been pretty relentless since the 1970s.

Remember growth in productivity is crucial because for the past 250 years it is what has enabled living standards to rise. Productivity is more than a boring statistic. In indicating the amount produced by each person, it underpins how much people are paid. And although some worriers say that increasing productivity is bad for jobs, because it means fewer workers for the same output, the metric is actually indicative of the sturdiness of employment. Growing productivity enhances job security, since it is a better sign of market competitiveness for your services or products than the alternative of flat or declining productivity. All this implies that flatlining productivity is the most telling of all economic stories.

That its slowdown began so long ago means the problem is deep-seated and therefore justifies a substantial strategic response. This is usually presented as an activist industrial policy. Economists tell us, and history shows us, that increasing productivity is primarily a function of business investment in innovation and in new technologies. Whether you’re making things or delivering services, using better equipment is what makes us more productive. So the goal of industrial policy is not controversial: it is to enable businesses to invest more in innovation.

But the big paradox about industrial policies is the contrast between the extensive cross-party consensus on this issue and the lack of headway in reviving investment and productivity. All the main political parties – Labour, Tory, the Lib Dems, the Brexit Party, the Greens, and the SNP – agree there is an urgent need for a strong industrial policy to reset the economy. They mostly agree, too, on the main positive measures it should include. Even self-identified ‘free marketers’ support the idea of governments spending more on infrastructure, especially transport, on research, and on education and training. There are some differences on particular projects – HS2, Heathrow expansion – but the idea that the market alone won’t revive the overall economy and create enough decent jobs is pretty well accepted.

So if there is so much political agreement on industrial policy, why is productivity still so stuck? One instinctive answer is that since the financial crisis there hasn’t been the money to pay for these policies. While this contestable excuse has been used in the past, it is less heard today because most politicians now also agree that extra state spending on infrastructure and research justifies additional public borrowing.

A more substantial explanation for the paradox lies beyond the matter of the scale of state spending. However helpful some of these industrial policies might be in some situations, in today’s business circumstances they are simply unable to bring about the necessary step-change in business investment. That’s because our productivity malaise is located deeply within the existing business network. Ultimately, we have a problem with profitability.

For example, having faster, more frequent trains on a better rail network is something any business, as well as most people, would welcome. Upgrading rail lines will itself create some decent jobs for a time. But when it comes to businesses discussing investment proposals, directors do not focus on how long it takes a sales person to go from the office to the customers, or how easy it is to get supplies to the factory from Felixstowe docks. No, corporate investment decisions are so sparse primarily due to the perceived shortage of profitable business opportunities. The apparent insufficiency of financial return is the most important investment barrier to be resolved.

A big factor in this dearth of payback is the consolidation of the zombie economy: the business environment that is now congested by a preponderance of low-productivity, struggling businesses that do little more than tick over. As the word ‘zombie’ implies, these businesses, and the wider economy, are stuck in an undead state. This is worse than being dead, because the zombies still stagger along and clog things up for all businesses.

However much some healthier existing firms, or entrepreneurial start-ups might desire to innovate, the wider economy is too sluggish to make these investments sufficiently well paying. The zombie economy smothers creative impulses and chokes up activity. And it’s big, too. Outside the top one per cent of companies who are doing okay, most of the other 99 per cent have had very little if any productivity growth since the turn of the millennium. We can be inspired by individual business-success stories that occur in every sector and every region of the country, but we should be frustrated that these coexist with flat productivity across the economy as a whole.

The sheer weight of undead businesses has held back productivity growth less by stifling innovation, than by impeding the diffusion of potentially transformative technologies across the rest of the economy. And, tellingly, the productivity gap between the frontier firms and the rest has been widening at least since the start of the century.

As a result of the congestion, not enough firms using more advanced technologies have been replacing outdated, less efficient ones, resulting in the overall productivity slowdown. Even at the top of the business tree, congestion drags down the higher-productivity elite. We can find many instances of highly automated workplaces that are continuing to invest and raise their productivity. But they are doing so more slowly than their predecessors. In fact, there is evidence that the biggest decline in the rates of productivity growth over the past couple of decades has been within the top-tier innovators

The existence of the zombie economy is not just a natural phenomenon of late capitalism. It has also been reinforced by the policy environment going back 30 years or more. Successive governments of all political stripes have devoted most of their economic efforts to trying to sustain the existing economy. The norm has been packages of public measures shoring up incumbency. Existing firms and industries – weak as well as stronger ones – have been propped up at the expense of new and growing ones. In the process, the state has become a conservator state, with many public policies working to shield and protect the anaemic condition of economic life.

Take the easier monetary policies undertaken by central banks. The near continuous loosening of monetary policies since the late 1980s has enabled politicians and business leaders to duck the difficult decision that destroying the disease is necessary for restoring economic health. These policies have underpinned the increasing indebtedness that bankrolls the zombie economy. By preventing a thorough business shakeout, government and central-bank policies have been perpetuating our productivity impasse.

Resolving it has to start not with the positive industrial policies of spending on infrastructure and research, but with policies that kill off the zombie economy. The sequencing is crucial. Without first clearing away zombification, even the most ambitious industrial policies will make little constructive impact.

This therefore needs to go hand-in-hand with measures to assist people financially during the transition into new and better jobs, not least when people are already employed in low-productivity workplaces. Help to find different employment and, if required, to move home to be near it, should complement public financial sponsorship for families during the transition. State-funded re-skilling would be offered in association with the training provided by new employers.

Radical restructuring on this scale might seem drastic. Certainly, it will be painful. But, unfortunately, there is no painless way out of our current malaise. For most people today, employment in the bottom 99 per cent of firms isn’t giving them adequate security, training or rising incomes. This extends far beyond the hundreds of thousands of people on zero-hours contracts, or the millions working in the gig economy who mostly lack basic employment rights, like sick leave or paid holiday.

It is about the millions more men and women employed not only by just-about-coping small businesses, but also by large established but debt-burdened employers. Recall that last month 9,000 Thomas Cook employees lost their jobs when their long-established 178-year-old business collapsed under an unsustainable pile of debt. It’s good news that up to 2,500 of them have enjoyed a reprieve: another agency, Hays Travel, has taken over all the high-street stores, without their debts, from the Official Receiver.

However, these people’s harrowing experience shows that working even for a household name is no guarantee of stable employment. Think of all the other indebted ones that have floundered recently: Carillion, Debenhams, HMV, Patisserie Valerie, House of Fraser, and 135-year-old Bury Football Club. Reflect, too, on the 5,000 people driving for the loss-making Addison Lee taxi group in London. This week they’ve heard that their owners are trying to sell off a business that has been going since the 1970s in anticipation of over £200million of debt falling due over the next few years.

Or consider the 14,000 staff at Pizza Express – selling the British public pizzas since the 1960s – reading that their employers are struggling under a debt burden the equivalent of £1.6million for each of its 600 outlets. The firm’s operating profits over the past two years have been insufficient to cover the debt-interest charges. Some commentators think that over a third of their stores could be unprofitable and at risk of closure. A company spokesman did not reassure people: ‘There are no plans for closures outside the normal course of business.’

These are just some of the better known entities within the half-a-million UK businesses – that’s one in seven of all active ones – that Red Flag Alert reported were in ‘extreme significant financial distress’ in the middle of this year. Average company debt has more than doubled since 2016. Zombification is a huge and expanding problem.

Out of the destruction of the old zombies, the populace, assisted by the collective resources of the state, can start to build a new economy. Productivity can be shaken out of its current doldrums. And men and women will have the opportunity to take higher paid, more secure jobs that offer on-the-job training, instead of the lousy ones they have today.

Phil Mullan’s latest book, Creative Destruction: How to Start an Economic Renaissance, is published by Policy Press.

Pictures by: Getty Images

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Kevin Neil

23rd October 2019 at 8:41 am

There are two major issues that the article ignores.
The first is that numerous studies have shown that rate of productivity growth declines as an economy’s labour force matures. The data from these studies reveal that as the average age of workers increases and goes over the late 30’s, productivity growth is harder to come by as older employees take longer to develop and implement new skills and retrain.
The second is that service economies find productivity gains harder to come by. By and large, a hairdresser, beautician, optician, dentist, can only serve a set number of people each shift and there is very little that can be done to improve their productivity by say 50%, in the same way that a new robot or process can in manufacturing.
If you then add in the recent trends within the UK whereby we have vastly increased internet and home delivery, that requires more people to service a similar level of economic output then productivity suffers again.

michael savell

21st October 2019 at 5:31 pm

All the zombie companies will keep going with your money,they won’t be the ones to leave blighty before brexit.If people like Max Keiser are to be heeded they will also have dipped into pension funds so deeply that they will be almost impossible to shift without a total wipeout of the economy.No doubt,if the same as the USA the only ones escaping without loss will be the senior staff and larger shareholders,and,of course the unpaid debts will be left to the taxpayers.We would appear to be on the brink of meltdown where money is worth nothing as we will only be owing ourselves.

David Brown

21st October 2019 at 1:04 pm

This andalysis as all analysis, misses the overwelming reason for lower productivity. It is Regulation, taken that productivity is value of output over cost (or time) of labour. Busenesses in todays society has been an increase in non productive staff, which as he rightly points out, started in the 70’s. Regulation takes many forms here are some:
Health & Safety
Fire Safety
Safety Data Sheets
Employment Law
Local Authority/Planning

All these take a lot of manpower to comply with, In my company we now employ 5 fultime people to control and maintain our records, this is nearly 8% of our workforce. This is dead costs and it reduces our productivity year on year. Most of these regulations were made with a genuine need however when you take all the complience work together it now overides the main purpose of the company.
The author mentioned busness investment reducing over the years, in all companies, when considering investment the first thing that is discussed is how the project will be affected by the myriad regulation and complyance issues, it may not stop the project but it usually doubles the time taken and has significant cost implications.
The real downside is that it not only hurts the business ecconomy, this affects all public boddies including the NHS. It makes things more difficult to do and makes them more expensive.
Until goverments realise this and start restricting it, there will be no improvment in national productivity in any of the western economies. DB

Kevin Neil

23rd October 2019 at 8:34 am

David Brown – too true!
I work in Financial Services. I was at a seminar yesterday from an Investment Platform. A question was asked about the apparent slow development of additional tools and enhancements to the functionality of the platform. The CEO replied that the main problem was that out of 75 IT developers, 60 had spent all of their time over the last two years on three big regulatory projects – MIFID II, GDPR, and PROD regulations! Only now are those developers being assigned to projects that actually improve the platform and can lead to increases in productivity.

Jim Lawrie

21st October 2019 at 10:51 am

Much of Britain is a low wage economy, but the cost of that labour is inflated by middlemen, agencies and management. A lot of labour does nothing, but that still earns commission for agencies and their cronies who award them the contracts. The building trade is rife with this. It is not unusual for a labourer to be paid £9.50 an hour but charged out to the end user/householder at £25 plus VAT. Cheap credit and high property prices are hiding what is happening. Debt, both public and private, is soaring. All fuelled and stoked by mass immigration.
In real terms cars produced now by East European and 3rd world labour cost the same as those produced 25yrs ago in Germany and Japan. Car manufacturers shift productivity gains into higher finance charges while still maintaining prices, and the profit from all of this into lower tax regimes. If it were simply about productivity, then the most productive car plant on the planet would not be under threat.
Mass immigration ensures the second car market will prop up the inflated price of new cars. But the increased longevity of vehicles means that they have to be scrapped by artificial measures not related to the market so as to “create demand”.
The aim of capitalism is to make a profit. Productivity is just one factor in that equation.

How can a writer about political economy expect to be taken seriously if he shies away from the immigration question from fear of political correctness?

Winston Stanley

21st October 2019 at 1:53 pm

Mass immigration is one policy among others that sustains the zombie economy. The political problem is a lack of will to tackle zombification is all of its causes. The lack of that political will is the underlying problem rather than mass immigration which may be thought of here as a symptom of that lack of will. The state may take a policy of high immigration whether productivity growth is high or low but it is given a special impetus to do so to sustain zombification.

The falling rate of profitability in late capitalism is compounded by state policies that prop up zombie firms. That causes a congestion and sluggishness in the economy and it discourages investment in the implementation of R&D. That leaves us with low productivity growth (PG). Mass immigration of labour is one zombie policy factor among others, like easy money, that produces low PG.

The state may take a policy of high immigration whether productivity growth is high or low but it is given impetus to do so when PG is flattish. Mass immigration allows GDP to grow without investment in the implementation of R&D and thus without PG or an increase in wages and living standards. There is a pre-existent lack of motive to invest, sustained by government policy, and that encourages a policy of immigration, which in turn reinforces the tendency.

Zombification needs to be tackled in all of its aspects and it is the lack of will to do that, to allow business to fail en masse, that is the underlying political problem. So immigration policy is influenced by a pre-existing tendency to zombification. But immigration could be high regardless of that. Immigration could benefit a high PG economy. Likely it would need to be lowered during de-zombification, and that in turn would give additional impetus to the process.

It is not a left/ right problem so much as an inability of any party or government to attempt to sell a manifesto platform of creative economic destruction. The need for that has not entered public consciousness. Politics tends to go along the lines of “oh, they spent too much, or oh those evil tight b sds.” The falling rate of profitability and low PG has put us into new terrain but there seems to be little chance of political discourse changing to reflect that. Parties likely do not fancy trying to sell slogans like “shut that business down”, “sack those workers” lol.

Jim Lawrie

21st October 2019 at 8:53 pm

Mass immigration has been accompanied by a huge expansion of in-work benefits to prop up profits. The minimum wage was just a measure to limit this. I’d phase out both and leave housing to the market.

Jim Lawrie

21st October 2019 at 9:28 pm

“Immigration could benefit a high productivity growth economy.” ?

Winston Stanley

21st October 2019 at 9:54 pm

Of course, more workers with more productivity means more GDP growth. It would be a fundamental error of bias to assume that capitalist economic principles always, or even tend, to go against immigration, they do not. The need to de-zombify the economy is a particular situation but that is unlikely to happen anyway. Workers means profits, plus investment means more profits.

Migrants and natives have similar employment rates. EU have higher rates than UK and non-EU have lower, and the two average out to about the same as UK. Non-EU includes women who choose not to work and to pursue a traditional lifestyle, which is up to them.

> UK and non-UK people in the labour market: May 2018

The employment rate (the proportion of people aged from 16 to 64 years who were in work) was 81.9% for EU nationals, higher than that for UK nationals (75.6%) and higher than that for non-EU nationals (63.0%).

All people employment rate
16 to 64

UK nationals employment rate
16 to 64

Non UK nationals employment rate
16 to 64

UK born employment rate
16 to 64

Non UK born employment rate
16 to 64

Philip Humphrey

21st October 2019 at 8:48 am

One factor you possibly forgot to mention is high immigration. There’s little point in investing in greater productivity while you have plenty of cheap labour available. Perhaps one of the reasons why the Roman empire never industrialised was that despite their many inventions and advances in technology, they always had plenty of cheap slave labour available from all over their empire. So it simply wasn’t profitable to make things more efficient.

Jim Lawrie

21st October 2019 at 11:12 am

Automation means ever increasing production. Pointing out that cheap immigrant labour halts that progress gives rise to questions that would require the left to jettison their cherished ideological baggage and admit that economically and socially their theories have been proved wrong.

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