Such sweeping problems as soaring inflation, poor-quality jobs, or low growth may not seem related to the management style of The Office’s Michael Scott Paper Company or pyramid schemes like Elizabeth Holmes’s Theranos. Yet there may be more to this connection than meets the eye. The recovery after the COVID-19 crisis pointed to several weak points in the economy like supply-chain disruption, but there’s also another mounting problem: companies relying on new sources of money to cover up previous debt, thus disguising the fact that they aren’t making any profits. They’re called “zombie firms” — and they’re becoming increasingly important.
Zombies are firms with negative profitability or profits so low that they can’t even pay their debt interest. These companies’ share in advanced economies has grown tremendously in recent years, reaching as much as 20 percent of all firms in several countries. In a recent study, we showed that this dynamic has also happened among listed firms in the United States. Such a large number can’t just be a matter of scams. It includes such established firms as Boeing Co., Carnival Corp., Delta Air Lines, Inc., and Macy’s, Inc., which used to be highly profitable but have been struggling recently. There are also startups like Uber that can remain unprofitable for years because it is expected that at some point they will start making profits. But many never do, and their collapse can be spectacular (as in the case of WeWork).
The overwhelming majority of zombies in the United States register negative profitability even before making interest payments. This tells us that they have serious problems at the level of production, which only are only aggravated by having to cope with their financial commitments. The share of listed companies with negative profitability before meeting their financial commitments has grown significantly over the last half-century, rising from 3 percent in 1969 to 33 percent in 2001 and remaining high ever since.
A New, Undead Face of Capitalism
It’s no accident that zombies have been on the rise since the late 1960s. A new global division of labor reordered capitalism worldwide then, relocalizing manufacturing production from the United States and Western Europe to East Asia and, subsequently, to Eastern Europe and Mexico. At the same time, the Bretton Woods international monetary system collapsed, unleashing a massive creation of credit money and triggering an era of financialization underpinned by US dollar hegemony. Finally, the massive transformations in global production and finance were politically embodied (and given ideological justification) by neoliberalism. It made its way by attacking working-class organization and imposing austerity and the deregulation of trade and finance. These combined elements characterize the current phase of capital accumulation.
Yet this phase of capitalism ran out of steam in the period that followed the great crisis of 2007–9, leading to a decade of stagnation. In most of the world economy, economic growth rates have declined, investment has slowed, and despite the promises of an era of technological revolution, productivity growth has been sluggish. Instead, technological innovations have created swathes of “techno-precarious” forms of employment for vast numbers of workers. All of this while the destruction of the planet continues apace.
The rise of zombies has been presented as one explanation for the weakness of capital accumulation that characterized the period between the crisis of 2007–9 and the pandemic crisis. These companies invest less and are less productive than their nonzombie counterparts. This era also witnessed extraordinarily loose credit conditions and an enormous growth in stock prices. These were conditions prone to zombies’ survival, particularly through easy credit and low interest rates. In this context, they could artificially expand their productive life by running down cash balances, selling assets, raising additional equity, or becoming more indebted.
Moreover, during the pandemic crisis, the share of zombies spiked as firms that were already weak faced a collapse of revenue and profits leading to difficulties in meeting financial commitments. Many companies in this condition managed to survive due to state support, debt moratoriums, temporary changes to insolvency proceedings, and by additional borrowing, often benefiting from state guarantees.
Yet as demand began to recover, zombies were likely more worried about using their meager profits to pay back debt and guarantee their immediate survival rather than investing, innovating, or creating quality employment. Therefore, the zombies’ response to increased demand was to push existing production capacity to the limit. This included resorting to low-wage, precarious, or flexible employment, increasing hiring numbers but often producing poor-quality jobs (hence why workers are increasingly quitting when they can find something better), and also increasing prices instead of investing in new productive capacity. This too has contributed to inflationary pressures.
In this context, increasing interest rates will not only be of limited help in fighting inflation but will also severely affect firms by increasing their borrowing costs. In particular, zombies could find it no longer possible to sustain their Ponzi-like survival schemes and thus be pushed toward bankruptcies. This could cause job losses and a break in the chain of payments, sparking wider financial instability. Similar consequences would arise if governments too quickly remove programs to stimulate demand, since these firms remain dependent on high demand.
Yet continuing the policies of cheap credit, without improvements in these firms’ productive performance that translate into higher profitability, can only artificially extend their life. The survival and growing importance of zombies expresses the absurdities of the current phase of capitalism, in which the disconnection between social production and consumption — and the expansion of credit that makes that divide possible — has been taken to unprecedented levels.
The problem is this latent overproduction crisis is bound to end sooner or later. Instead of letting the crisis explode, the state should intervene to manage the process, ensuring that workers do not bear the burden, and redeploy resources into socially useful activities.
Now we face the question of how to solve present macroeconomic problems like inflation. But we should also address the structural issues of this phase of capitalism, including zombification, weak capital accumulation, low wage growth, growing employment precarity, and the need to engage in a structural green transformation. A positive way out of this situation requires innovation to increase productivity, reducing unit costs and thus prices. This can be achieved both by improving the conditions of workers (increasing wages, the reconstruction of labor unions and social welfare policies, industrial democracy on a global scale) to push firms to innovate, and by bold industrial policy coupled with credit guidance policies articulated through democratic forms of planning.
Today’s macroeconomic problems express the exhaustion of the current phase of capital accumulation, at the same time as we are racing toward disastrous consequences of climate change. It’s time to turn the page on this failed model.