Too many economic trends in our times somehow evade the headlines. One of them these days is the sheer number of business bankruptcies.
These numbers are not tracked by the Federal Reserve and do not appear in routine releases from the Department of Commerce or Census Bureau. For that reason, they do not appear on the journalistic map.
New data from court filings indicates a serious breakout from trend, as many corporations have been unable to survive inflation, high interest rates, and recessionary conditions.
This year is on pace to set new records in both personal and business bankruptcy. Already this year, we’ve seen a tsunami of bankruptcy filings in the United States, the highest since lockdowns. The number is up 9.1 percent in the latest quarter over the previous.
Market capitalism is a sink-or-swim system and that is fine. The freedom to try and to fail is part of what makes it all work. Bankruptcy can be a healthy sign that the wheat and chaff are being separated. An economic structure designed to minimize bankruptcy is a stagnant one headed to poverty. Failure is a sign of success in a free economy in which you can try and fail and try again.
So there is nothing we can say a priori about bankruptcy trends in general. They could mean a dynamic, growing, and progressing society. No one cares if the buggy whip company goes under. Nor should a badly managed company survive a better managed one making the same good or service. Leverage too will kill companies that cannot service the debt.
The details matter. It is not a healthy sign if fine businesses get slaughtered by exogenous shocks like regulation, inflation, supply-chain breakage, and recession. A flood of bankruptcy can indicate not health but fundamental sickness. That appears to be what is happening based on what we are seeing.
This looks less like market dynamism and more like a once-mighty economy in dramatic decline, complete with a hollowing out of the commercial sector.
A short list of major bankruptcy filings over these last several years: Big Lots, Bed Bath & Beyond, Red Lobster, Rite Aid, Vice Media, Envision Healthcare, Proterra Inc., Comcar Industries, SmileDirect Club, JCPenney, SVB Financial Group, First Republic Bank, Signature Bank, BurgerFi International, Inc, Tijuana Flats, Oberweis Dairy, Rubio’s Coastal Grill, Kuma’s Corner, SPB Hospitality, Buca di Beppo, Roti Modern Mediterranean, CraftWorks Restaurants and Breweries, Anthony’s Coal Fired Pizza & Wings, Tupperware, World of Beer, and thousands more besides.
We can find out the details by looking at each case. Yes, mismanagement and overleverage are always major factors. Many are stuck with enormous labor costs and cannot seem to figure out a way to unravel them without facing the terrible legal risk of lawsuits and class-action claims. The costs of litigation have become outrageous.
Instead of facing that mess, they simply decide to pull the plug. Better to get out while the getting is good while flicking your debt fleas back on the creditors.
But we might ask why the labor costs in the past seemed fine but now are not. The reason is inflation, which has increased marginal costs in every single aspect of business operations. This is what tipped the balance. Labor costs are not only wages and salaries but egregious mandates relating to unemployment, Social Security collection, and medical benefits above all else.
We’ve seen at least a 315 percent increase in health insurance premium prices in the 21st century, which is triple the CPI and doesn’t even come close to calculating the price increases correctly. This is killing the bottom line for businesses that are forced to provide medical insurance for employees, even if they don’t want it or need it.
Under the employer mandate, companies with 50 or more full-time employees must provide health insurance to at least 95 percent of their full-time employees and their dependents up to the age of 26. Absorbing these costs is a requirement of doing business in the United States. Meanwhile, the mandated of “essential health benefits” drives up costs far higher than they need to be.
Obviously, Obamacare corporatism has not worked out as planned. It has vastly increased costs and reduced service, while sticking policy holders with huge deductibles and consolidating the medical industry to the point that individual service from a caring professional is ever more rare.
The costs of having to provide this to employees is seriously harming free enterprise and business vibrancy. There is no particular reason why business should be tasked with doing this in any case. It was a pure accident of history, a way of getting around wartime price control 75 years ago. Now we are stuck with it, and it is truly irrational and outrageous.
The costs of labor litigation have become terrifying in the age of woke when employees can sue for whatever reason and law firms are glad to pick up the case because most everyone settles rather than fights. For this reason, businesses would rather close their doors than deal with the legal implications of mass layoffs.
What Elon Musk did at Twitter was brilliant but not many business owners have the brass to fire 4 out of 5 employees in the interest of better operations. They should, of course, but those kinds of decisions are extremely risky.
There is another factor at work here. There is growing evidence that the consumer is tapped out, fed up with exorbitant prices in all areas that constitute discretionary spending budgets. No longer is it a no-brainer to throw down the credit card for the meal out. At-home cooking seems ever more like the only responsible answer.
Credit card debt is extremely high and interest rates on revolving accounts are soaring at around 22 percent. That’s enough to make any indebted consumer rethink the extra trip to see the family on holidays. This is why restaurants, bars, hotels, and other hospitality-based enterprises are under special pressure.
It’s not surprising that consumer confidence is hitting 2008 and even 1978 levels. After peaking at 21st century highs in 2019, they never recovered from lockdowns and are tanking yet again.
Next up could be media companies, which are hurting for advertisers, viewers, and subscribers. We might celebrate the demise of many but it truly is a bad sign of the economic times.
No question that a massive shaking out of the corporate sector in general is desperately needed to set the United States back on a path to vibrant economic growth. But with that comes a tremendous amount of pain, as millions in low-work jobs have to shift to real-work jobs in a market that isn’t much interested in hiring right now.
As for starting new businesses, nothing can prepare you for the bureaucracy, paperwork, endless costs, legal frustrations, and barriers to entry. It’s a miracle even one new business opens its doors in this environment.
No article on bankruptcy is complete without mentioning the $35 trillion in U.S. public debt, a 52 percent increase in just four years. This is unsustainable. There is only one place on which the U.S. government will flick this horde of fleas: you and me. The only other alternative is default. This is what happens when either individuals or businesses live beyond their sustainable means. Everyone must eventually face accounting realities.
