How do recessions end? According to neoclassical economists the key is "creative destruction." They believe that the problem with boom times is that inefficient, pointless, and dated businesses can survive, wasting societies precious resources. Recessions bankrupt those companies, freeing up labor and capital for more productive industries, leading to faster growth in the long term. So what inefficient industries of yesteryear are being killed by this recession?
1) Clean technology: Investment in clean technology has fallen by 41%, with not a single billion dollar deal in the last year. Which is good, after all, we can solve global warming by just painting everything white.
2) High-tech startups: Angel investing is down approximately 25%, while venture capital is down 10%. Acquisitions have been halved. Which makes sense, computers are so 20th century.
3) Biotechnology: The biotech industry, with half of the nation's publicly traded companies close to bankruptcy, hangs in the balance. I've seen Gattaca, so I can only assume this is a good thing.
So if money is running away from clean technology, high-tech, and biotech where is it flowing to? It turns out into the very industries which have failed. The TARP has funneled over $300 billion into the finance industry. Additional 10s of billions have been spent on Detroit. That amount might seem small now, but a mere two years ago it would have seemed huge.
Which makes sense, because the neoclassical solution to the recession is a painful one. In the shortterm, the more investment is redirected from Detroit to Silicon Valley the more people will be left on the streets. Of course government is going to try to counter that process to some degree.
But if unprofitable companies don't die, what mechanism will end the crisis?
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