Business is thriving … for bankruptcy lawyers.
Last week we noted the dismal employment report. The commercial bankruptcy statistics are yet another sign that all is not well with the U.S. economy, in spite of the continuous cheerleading from the media and President Obama’s economic propaganda tour.
Commercial bankruptcy filings have increased each month year-over-year for the past seven months. Total U.S. commercial bankruptcy filings in May increased 32% from the previous year to 3,358, according to the American Bankruptcy Institute and Epiq Systems. 
Standard & Poor’s reported 12 defaults in May from among the companies it rates, pushing its speculative-grade corporate default rate up to 4.1%, the highest since December 2010 when the U.S. economy was recovering from the financial crisis—and up from 2.8% just five months ago.
Zerohedge noted that, “Even during the early phase of the Financial Crisis, in September 2008, when Lehman Brothers filed for bankruptcy, and when all heck was breaking lose, the default rate was ‘only’ 2.96%, before skyrocketing and eventually peaking at 12% in November 2009.”
But Standard & Poor’s rates only the largest companies. It’s the smaller companies that are really hurting and that account for that 32% increase. About 99% of the 19 million or so businesses in the US are small, generating less than $10 million a year in revenues, according to Dun & Bradstreet.
Why Businesses Are Failing
We’ve previously pointed out that far fewer companies are launching today and even fewer are going public than used to as recently as the 1990s. There are not only fewer startups—there are also more business failures.
Business failures have, of course, happened as long as businesses have existed. Typically, though, they followed a path of what Joseph Schumpeter called “creative destruction.” Businesses failed because of inefficiency and a lack of demand for their outdated products, but their failure freed up resources that could be allocated to more efficient, more productive new businesses.
In today’s economy the emphasis is more on the “destruction” than on the “creative.”
Quoting a study by the Economic Innovation Group, The Wall Street Journal noted that “the 1990 recovery registered a net increase of over 420,000 business establishments, or a 6.7% increase. The numbers for the 2000 recovery were 400,000 and 5.6%. Since 2010, the number of new business establishments has grown by only 166,000 or 2.3%.”
The Journal commentary, from Marie Josee Kravis of the Hudson Institute, largely blames the increasing regulation that businesses are confronted with.
“It is not clear to what degree these laws affect business formation,” she writes, “but in a 2010 report for the Office of Advocacy of the U.S. Small Business Administration, researchers at Lafayette University found that the per employee cost of federal regulatory compliance was $10,585 for businesses with 19 or fewer employees, compared with $7,755 for companies of 500 employees or more. Large and established businesses navigate through rules and compliance requirements. Small and new businesses often find them prohibitive.”
State and local regulations have also added to the cost of doing business. For example, an increasing number of businesses must go through a licensing process to operate. In some cases, licensing may protect consumers, but more often it protects larger, more established businesses from increased competition.
In 1950, 5% of workers required a license or certificate. Today the number is approaching 30%.
“Fortunetellers, party planners, florists, shampoo assistants, cosmetologists, manicurists, beekeepers, librarians and many others have joined the ranks of licensed workers,” Kravis wrote. “As the rate of private-sector unionization has fallen, occupational licensing has become a new barrier to entry into the workplace and a tool to protect incumbents from competition.”
You may think that political change provides balance, but it really doesn’t. Pro-regulatory administrations, like the Obama administration, sometimes are followed by administrations that create fewer regulations, but regulations are cumulative.
It is rare for even an obviously flawed regulation (e.g., the Affordable Care Act) to be overturned. Whoever is elected president, whoever serves in Congress, whoever serves in the state legislature and whoever serves on your local government boards inherits the regulations created by their predecessors.
That’s why today, we’re swimming in a sea of ever-expanding regulations. And far too many businesses are drowning in it.