2020 saw fewest bankruptcies in Minnesota since 2006. Is this a good thing?
The COVID-19 pandemic and government responses to it have wrought havoc with Minnesota’s economy over the last year. So, it was surprising to read in the Minneapolis/St. Paul Business Journal recently:
Business bankruptcies actually fell by 9% in Minnesota last year, according to federal court data. The state’s courts saw only 272 bankruptcies in 2020 — the lowest level since at least 2006. Individual or personal bankruptcies were also the lowest over the same timeframe, at 6,966…
When the coronavirus shut down many businesses last March, Twin Cities law firms geared up for an increase of bankruptcy filings.
“If you would’ve ask me April 1 what’s gonna happen over the next three to six months, I would have said there will be a significant increase,” said Ryan Murphy, a shareholder and bankruptcy attorney with Fredrikson & Byron. “That has not materialized.”
Why is this?
Experts cite several primary reasons for the lack of filings:
The Paycheck Protection Program loans and other government stimulus programs kept businesses alive.
In many cases, banks and other lenders have been forgiving about missed payments and are working with borrowers.
Landlords were also forgiving, in part, because if they kick a tenant out, it’s difficult to find someone else to rent the space.
“I know two businesses that were likely to go the way of Chapter 11,” said Edwin Caldie, partner with the Minneapolis office for Stinson who specializes in bankruptcy law. “When PPP came through, it bought them six months because payroll is paid [by the PPP loan]. So if you’re generating at least some revenue and someone else is taking care of payroll, you can divert resources to other issues.”
An unprecedented situation is likely to call for unprecedented steps in response. As I wrote last March:
…the government is shutting down large swathes of the economy. As a result, businesses are losing revenues, but they will still have outgoings to cover, such as rent. Workers are being laid off: Minnesota had 123,000 jobless claims last week.
Given that government is inflicting this damage upon these businesses and workers — which might be unavoidable if we are to prioritize the fight against the coronavirus — government has a responsibility to help these businesses and workers through it. In practice, this means cash for businesses affected by the shutdown, such as bars and restaurants, preferably in the form of grants rather than loans. These viable, even thriving enterprises do not deserve to be burdened with further debt for no fault of their own.
But, while policy should assist businesses in coping with the COVID-19 pandemic and government responses to it, it ought not to shield businesses which were in trouble anyway. Capitalism, after all, is a profit and loss system and both are equally important in the allocation of capital towards the uses most valued by the individuals in a society. A business which can take inputs valued at $X and produce output that sell for more than $X is creating value. A business which takes inputs valued at $X and produces an output valued at less than $X is destroying value. These businesses ought not to continue. Indeed, bankruptcies are part of a healthy economy. If they stop happening, or plunge to below trend levels, something is amiss.
At some point, these support measures will have to be withdrawn. When that happens, we will probably see a spike in deferred bankruptcies. I have little doubt that policymakers will be urged to ‘do something,’ a call they can seldom resist at the best of times. But resist it they should. This is never the most pleasant or popular thing to write, but part of the economy returning to normal is the return of market forces.
John Phelan is an economist at the Center of the American Experiment.