Such sweeping problems as high inflation, poor quality jobs, or low growth may not seem related to a management style the deskMichael Scott Paper Company or pyramid schemes such as Theranos Elizabeth Holmes. However, there may be more to this connection than meets the eye. The recovery after the COVID-19 crisis pointed to several weaknesses in the economy such as supply chain disruption, but there is also another emerging problem: companies relying on new sources of money to cover past debt, thus masking the fact that they are not. t make any profits. They are called “zombie companies” – and they are becoming increasingly important.
Zombies are companies with profitability or passive earnings so low that they cannot even pay the interest on their debts. The share of these firms in advanced economies has grown significantly in recent years, reaching up to 20 percent of all firms in many countries. In a recent study, we showed that this dynamic also occurred among US-listed companies. This many can’t be just hoaxes. They include well-established companies such as Boeing Co. and Carnival Corp. and Delta Air Lines, Inc. and Macy’s, Inc. , which has been making high profits but has been struggling lately. There are also startups like Uber that can remain unprofitable for years because at some point they are expected to start making profits. But many never do, and their collapse can be staggering (as in the case of WeWork).
The vast majority of zombies in the United States report negative profitability even before interest payments are made. This tells us that they have serious production-level problems, which are only exacerbated by having to take on their financial obligations. The share of listed companies with passive profitability before meeting their financial obligations has grown significantly over the past half century, rising from 3 percent in 1969 to 33 percent in 2001 and has remained high since then.
It is no coincidence that the numbers of zombies have been on the rise since the late 1960s. The new global division of labor rearranged capitalism throughout the then world, shifting industrial production from the United States and Western Europe to East Asia, and thus to Eastern Europe and Mexico. At the same time, the Bretton Woods international monetary system collapsed, unleashing massive credit-money creation and ushering in an era of financialization fueled by the dominance of the US dollar. Finally, massive shifts in global production and finance were politically embodied (and given ideological justification) by neoliberalism. He made his way by attacking the organization of the working class, imposing austerity and liberalizing trade and finance. Together, these elements characterize the current stage of capital accumulation.
However, this phase of capitalism ran out of momentum in the period following the Great Crisis of 2007-2009, leading to a decade of stagnation. In most of the global economy, economic growth rates have fallen, investment has slowed, and despite the promises of the era of the technological revolution, productivity growth has been slow. Instead, technological innovations have created “technically risky” forms of employment for large numbers of workers. All this while the destruction of the planet continues apace.
The rise of zombies has been offered as one explanation for the weak capital accumulation that characterized the period between the 2007-2009 crisis and the pandemic crisis. These companies invest less and are less productive than their non-zombie counterparts. This era also saw unusually loose credit conditions and an exponential growth in stock prices. These were conditions that tended to zombie survival, particularly with easy credit and low interest rates. In this context, they can artificially extend their productive life by reducing cash balances, selling assets, increasing additional equity, or increasing indebtedness.
Moreover, during the pandemic crisis, the proportion of zombies soared as companies that were already weak faced a collapse in revenue and profits resulting in difficulties in meeting financial commitments. Many companies in this situation have been able to survive due to state support, debt deferrals, temporary changes in insolvency procedures, and additional borrowing, which often benefits from state guarantees.
However, when demand began to recover, the zombies were likely more concerned about using their meager profits to pay off debts and ensure their immediate survival rather than investing, innovating, or creating good jobs. Therefore, the response of the zombies to the increased demand was to push the current production capacity to the limit. This included resorting to low-wage, precarious or flexible labour, increasing employment numbers but often producing poor quality jobs (hence more workers quitting when they find something better), as well as raising prices rather than investing in new production capacity. This also contributed to inflationary pressures.
In this context, raising interest rates will not only be of limited utility in fighting inflation, but will also severely affect businesses by increasing borrowing costs. In particular, zombies can find that survival schemes such as Ponzi’s can no longer be sustained, and are thus driven towards bankruptcy. This could cause job losses and disruption of the payments chain, leading to broader financial instability. Similar consequences may arise if governments remove programs too quickly to stimulate demand, because these companies are still dependent on high demand.
However, continuing the policies of cheap credit, without improving the productive performance of these companies which translates into higher profitability, can only artificially lengthen their life. The survival and growing importance of zombies express the absurdity of the current phase of capitalism, in which the disconnect between social production and consumption—and the expansion of credit that makes this dichotomy possible—has been taken to unprecedented levels.
The problem is that the underlying crisis of overproduction will end sooner or later. Rather than letting the crisis erupt, the state should step in to manage the process, ensure that workers do not bear the burden, and redistribute resources into socially useful activities.
We are now faced with the question of how to solve current macroeconomic problems such as inflation. But we must also address the structural issues of this stage of capitalism, including volatility, weak capital accumulation, low wage growth, increasingly poor employment, and the need to engage in a structural green transformation. A positive way out of this situation requires innovation to increase productivity, reduce unit costs and thus prices. This can be achieved by improving workers’ conditions (wage increases, rebuilding trade union and welfare policies, industrial democracy on a global scale) to drive firms to innovate, and through bold industrial policy coupled with credit-guidance policies put in place through democratic forms of planning.
Today’s macroeconomic problems express the exhaustion of the current phase of capital accumulation, at the same time that we are racing toward the disastrous consequences of climate change. It’s time to turn the page on this failed paradigm.