Governments around the globe 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, according to a Bloomberg commentary. 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, according to the commentary. “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.” 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.
