The Cause and Consequences of the Retail Apocalypse

This story is at odds with the broader narrative about business in America: The economy is growing, unemployment is low, and consumer confidence is at a decade-long high. This would typically signal a retail boom, yet the pain rivals the height of the Great Recession.

This is a robbery in progress. Private equity firms borrow massively to buy companies, and use corporate cash reserves to pay themselves back. Workers who supply the value to the business see nothing; in fact, to service the debt, companies usually cut staff. When the retailer collapses under the borrowing weight, all workers lose their jobs. And even when sales go up, like they have by 5 percent annually in the toy sector over the past five years, dominant toy sellers like Toys“R”Us cannot compete because of the debt burden. The company’s profitability was increasing when it filed for bankruptcy.

The Republican tax plan actually recognizes this. The House bill proposed a cap on the deductibility of interest payments over 30 percent of a company’s earnings; the Senate bill defines earnings in such a way to reduce that cap even further. This would discourage some debt-fueled buyouts, and private equity firms are screaming about it.

However, the GOP left a gaping loophole: Real estate companies are exempt from this cap. This would benefit President Donald Trump’s family business, but it could also help private equity firms that split the operating side of the businesses they buy from the property side, as Sears did. They could put all the borrowing onto the property side and continue to deduct the interest.

https://newrepublic.com/article/145813/cause-consequences-retail-apocalypse

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