Should governments stop bailing out 'zombie companies' and let recession happen?

Read time: 5 mins

In brief...

• Ruchir Sharma explains, in his book What Went Wrong With Capitalism, how the meaning of words such as capitalism has skewed to favour only rich people, when it should have benefits for us all.
• He says governments need to stop offering bailouts to “zombie companies”, and let some businesses fail so new ones can take their places.
• In the UK, Sharma says, the most important thing the Labour government can do is to focus on lowering house prices.

Two words we have been taught to fear: Capitalism and recession.

But, as journalist and author Ruchir Sharma tells The News Agents, this is only because the meaning of capitalism and the benefits of recession are no longer understood in today's society.

"I completely agree with the critique that capitalism in its current form is not helping the average person," Sharma tells Lewis Goodall.

Sharma’s book, What Went Wrong With Capitalism, was released in 2024.

"The main point I'm making is that the system we have today is not really capitalism.

"It's very far from what the founders had in mind. It's essentially socialism for the rich and for the poor."

He says one of the best examples of this is the "bailout culture" that exists between government and big business, in that if a major company is in trouble, the government will simply step in with a huge amount of cash to take its problems away.

"The people who benefit the most from the current system are the established rich people who have access to it," Sharma says.

He adds this has led to a political culture where businesses are not allowed to fail, resulting in a modern version of trickle-down economics.

"The rich and the powerful at the top have to be protected because they are the ones creating the jobs, they are the ones who are providing employment and other benefits, so they can't be allowed to fail, or they can't get in trouble, because if they do, it'll hurt the entire society."

Should we reconsider how we think about recession?

When it comes to recession, Sharma says this was once a way of "clearing out the dead wood".

Bailout culture, he says, is especially common in the UK and US and has left our systems full of this dead wood, with a large number of businesses operating as "zombie companies".

These, he explains, are companies which do not earn enough to "meet their debt servicing burden for three years in a row", and are now being propped up by bailouts. He adds that nearly 20% of businesses in both the UK and the US can be classified as zombie companies under these parameters.

The results of this are that huge amounts of money are poured into these "deadwood" companies, which results in newer businesses being able to get a foothold.

"For the average person, and the average business, that system is rigged against us, because you're keeping alive or so many of these old, established players and at the expense of new ones' entry," he says.

Sharma believes economies would grow faster if this bailout culture was ended – along with withdrawing out-of-date business regulations as new ones are introduced every year, which he also identifies as a major "barrier" for small businesses.

In the US, where Sharma is now based, he says the bailout culture is due to a long-lasting fear of a return to the Great Depression era of the 1930s.

And from 20 January 2025 this is all for President Donald Trump to worry about. During his election campaign in 2024, he promised huge tax cuts for US people.

Sharma believes Trump will "pay a price" for believing that there is "no apparent consequence" to throwing money around, and spending other people's money.

"I think that we are reaching the limits now to how much the government can keep spending and what the government's role in the economy can be without there being a backlash from both voters and from the financial markets," he says.

This, he adds, is reflected in the lack of faith in governments seen in both America and the UK, and the extreme difficulty leaders everywhere are finding in winning a second term with voters. He says 85% of governments in the developed world are now losing reelection bids.

"If they're going to keep doing more of what they've done over the last 20 years, they're going to keep losing more elections, you know, and I'm not sure that's the result they want."

So, is there a solution?

Sharma says governments everywhere need to end "easy money policies", such as tax cuts without the corresponding spending cuts, leading to inflation which then disproportionately affects the poor and the middle class.

That's a problem facing the UK, and specifically chancellor of the exchequer Rachel Reeves, right now, as the pound continues to fall following her first budget under the Labour government.

Sharma says the UK should look to places such as Switzerland (which is less strict on business regulations) and Taiwan (which has been "tech savvy" in building and delivering services to its people).

"It now needs to cut back on the regulatory state, and bailout culture, as well as housing prices – saying not enough attention is paid to the "unaffordable" state of homes in the UK," he says.

"So many young people are now living at home, the basic dream of doing better than their parents has been shattered.

"Housing has just become unaffordable, and is the single biggest issue that needs to be addressed by any Western government, including in the UK. And what can you do to increase housing supply, you know, rather than have it choked by regulation.

"That, for me, should be top of the agenda."

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