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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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January 14, 2008 12:01 AM ET
Not so fast, and not just because it’s possible that it would be a recession that makes matters worse. New research suggests that the assumption that recessions lead to economic renewal is mistaken. Yes, says the research, there is such a thing as creative destruction, and it does lead to more efficient allocation of capital, so that failing businesses do not get capital that is better invested in more promising ones. The research, however, finds that creative destruction occurs no more frequently during recessions than during periods of economic expansion. The findings, published on the voxEU.org website last Monday by Yoonsoo Lee, an economist at the Cleveland Federal Reserve Bank, and Toshihiko Mukoyama, an assistant professor of economics at the University of Virginia, are based on plant openings and closings recorded by the U.S. Census Bureau’s manufacturing survey from 1972 to 1997. Not surprisingly, Messrs. Lee and Mukoyama found that the percentage of plants that opened during a given year was much higher during booms than busts. But the researchers also found that plant closings occurred at roughly the same pace in either environment. “Recessions do not appear to be times of massive cleansing of less-efficient incumbents,” they wrote. “Less productive plants are indeed driven out of the market, but not only in recessions. Rather, cleansing at the exit margin occurs all the time, in a similar manner, regardless of business cycle phase.” So much for recessions as economic purification rituals. The reason for higher plant openings during booms seems rather obvious. Barriers to entry are much higher during a recession as a result of a lack of capital. Yet the findings of Messrs. Lee and Mukoyama also suggest that such barriers may hurt long-term economic performance. That’s because their data show that plants opened during recessions are larger and more productive than those opened during expansions. “New plants often embody innovations,” the authors noted, “and re-searchers find that entry is an important source of aggregate productivity growth.” With business “creation” indeed a product of the business cycle but “destruction” not, they recommend that policy makers create incentives for business start-ups during recessions. This is clearly not what the anti-interventionists want to hear. While they may be right to insist that the Federal Reserve Board cannot do much to stave off a coming downturn, that ought not mean—in light of the latest research into the business cycle—that policy makers then proceed to sit on their hands. Bring it on? Quite the contrary. FW
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