After we’ve decided how many people get to live or die through our quarantines, ventilator supplies, and pharmaceutical experiments, we’ve then got to ponder how many businesses get to come out on the other side of the coronavirus’s economic fallout intact. That is, who should the government subsidize or bailout? Which companies are worthy of societal support to get through this, and which are not?
We need some method of filtering through the options. This is how we can figure out which companies were about to go under anyway, which businesses are we entirely happy to see vanish, and which ones we simply cannot do without. Yet as economist John Cochrane points out, we already have a system to do this.
It’s called bankruptcy.
It’s easy to see this system’s logic — in bankruptcy, it’s the economic environment that determines those fit to survive. Our economy, as we can see out the window, has just changed, therefore which businesses should be surviving has too. What we need is a method of sorting through which companies should and should not be allowed to fail. It turns out bankruptcy will do the trick.
The important underlying point here is that bankruptcy doesn’t destroy economically productive assets — it just removes them from the legal wrapper and management where they’re not well used.
A bankruptcy, whether Chapter 7 or 11, doesn’t destroy land, or labor, knowledge, nor machinery. A Chapter 7 liquidation simply says this is just never going to work and sends those assets off to be used by someone else where they might be put to better use. Chapter 11 starts from the same place, it isn’t working, but it might if there’s more capital, less borrowing, different management, and so on.
The bankruptcy process is the one we should be using, as we have been for a couple of centuries now.
There is a moral point to consider, too. Either bankruptcy process wipes out the capitalists in those organizations and makes heavy demands upon those who lent to them as well, which is, in the grander scheme of things, just fine. For they get all the benefits in the good times, so the pain is theirs to endure during the bad times. The destruction of their shareholdings is not the same thing as laying waste to the productive capacity of the nation. It’s just moving that ownership around a bit.
It is possible, of course, to think of another way of doing this. We could have subsidies, bailouts, and political favors. But who gets what in such a system will depend upon the position in the political alimentary canal of the supplicant. This is not a known manner of reaching useful outcomes.
Just let them all go bust. We’ve already got a good system for picking the useful bits out of the resultant mess — let’s simply make use of the bankruptcy courts.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
