Zombie firms are enterprises that require government subsidies and protection to survive in the long term. Because zombie firms are inefficient and crowd out private firms, they result in sclerosis or retardation in economic growth. This is especially true when subsidies to zombie forms are financed with public debt. Zombie firms are ubiquitous in the U.S., and we will soon see more of them because of the proposed federal budget for 2027.
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President Trump has proposed a budget that calls for a 50-percent increase in the defense budget to $1.5 trillion. This sharp increase in military spending will significantly increase the military-industrial complex and create a new generation of zombie enterprises. President Eisenhower warned of the negative impact of unconstrained growth in the military-industrial complex, and that will certainly occur with the military budget proposed by President Trump.
Perhaps the best example of this negative impact is the plan to increase the number of naval vessels and the mandate to produce them in U.S. shipyards. The proposed budget calls for $66 billion in shipbuilding funds, roughly a 50-percent increase. One of the companies tasked with building the new ships is the Korean defense company Hanwha Group, which acquired a Philadelphia shipyard in 2024. Hanwha’s Korean shipyard produces about 50 ships per year. The Hanwha yard in Philadelphia produced three vessels this year, an increase over the one and a half vessels produced the prior year. Attempts to transfer technology from the Korean yard to the Philadelphia yard have had limited success.
The reality is that the U.S. does not have a comparative advantage in shipbuilding compared to Korea and several other countries. Expanding shipbuilding in the U.S. will result in zombie shipbuilding companies, requiring subsidies and protection for the foreseeable future. We should expect this expansion of U.S. shipbuilding to be accompanied by further retardation in economic growth.
In 1981, I was a visiting professor at Konan University in Kobe, Japan. I was invited by Mitsubishi to speak to their executives and was given a tour of Mitsubishi shipbuilding. At that time, most shipbuilding plants around the world were closed due to the recession. Mitsubishi shipbuilding continued producing ships, with government subsidies and financing from Mitsubishi financial institutions. I pointed out the dangers of relying on government subsidies and intrafirm financing. My talk was not well received, but I was proven right. There is now an entire literature devoted to zombification and retardation of economic growth in Japan over the past three decades.
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The U.S. does not have to follow the path chosen by Japan; zombification and retardation in economic growth are not inevitable. In the recent National Security, Science, and Technology Strategy, the White House identifies technologies in which the U.S. is on the cutting edge. The U.S. has long maintained superiority in undersea and space technology. When U.S. firms focus on these technologies, they can develop their products for military use and are competitive in selling these products in international markets. The strategy outlined calls for “clear superiority” in both undersea and outer space and a “competitive advantage” in artificial intelligence.
The U.S. should work with our allies to develop military capabilities based on comparative advantage. We should expect our allies to continue to rely on the U.S. to provide them with technologies in which the U.S. has a clear technological advantage. This is all the more reason why we should rely on them to provide technologies in which they hold a comparative advantage. The U.S. should continue to rely on South Korea to produce military vessels in that country rather than mandating that they produce ships in the U.S. But this would require the U.S. to treat South Korea as a partner rather than a competitor engaged in a zero-sum game.
When the U.S. mandates that South Korea produce military vessels in U.S. shipyards, this creates zombie enterprises and diminishes economic growth and national security. The only explanation for mandating the construction of military vessels in U.S. shipyards is rent-seeking. The labor unions and elected officials representing U.S. shipyards have a powerful influence on these budget decisions. Citizens will bear the cost of these decisions for many years to come.
Expanding enterprises based on comparative advantage can avoid the creation of zombies and a sclerotic economy. This would strengthen the industrial base and grow the economy, which is ultimately the basis for our national security.
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Image via Public Domain Pictures.