Some of the most left-wing things David Cameron says involve his plans for business. Take his plan, announced this morning, for a “Chapter 11” for British industry. Even Labour’s most influential voices in business like Gerald Frankel failed to have it adopted by Gordon Brown and Tony Blair. Why? Because it’s a potentially disastrous idea which throws a lifeline to badly-managed companies, and can be used by the least scrupulous to launder their balance sheet and re-enter the market with prices that well-run rivals simply can’t compete with. This December 2003 article in Harvard Business Review shows how Chapter 11 is abused by companies – like WorldCom – who use it to ditch losses and then come back in a new incarnation to unfairly drive rivals out of business. And it’s not just telecoms. Eastern Airlines in the US went for years under Chapter 11 immune from the bank interest charges applied to its rivals. TWA went into Chapter 11 three times before it was eventually taken over. America’s steel companies have used Chapter 11 to dodge much-needed consolidation. The long-term result of these short-term fixes is a less profitable industry employing fewer people.
The brutal truth is that the process of wealth creation, and job creation, requires allowing badly-run companies to fail. This creates space in the economy for better-run companies to prosper. Letting firms cheat death with state aid (legal or financial) helps no one in the long run. In the 1980s, a Conservative government reintroduced these principles to Britain. The subsequent economic realignment was bloody and costly, but bequeathed an economy which worked right up until Labour ramped it up with cheap debt – ending in the bursting of the Brown Bubble. The last thing the British economy needs is more of the “moral hazard” which Mervyn King so rightly worried about (before the Northern Rock bailout realised his worst fears). The Conservatives are supposed to be the party which understands the principles of wealth and job creation. Mr Cameron’s policy is clearly designed to say to the employees of the many firms who go bust in the next two years “ah, you’d be protected under the Tories”. So a short-term tactical gain. But this is not a policy which has Britain’s long-term economic interests at heart. Luckily for him, the Labour government is in no fit state to point this out.
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