Buybacks are the corporate equivalent of steroids. They may make shareholders feel better than they would otherwise, but nothing really changes.
Money spent on buybacks isn’t reinvested in new equipment, research or factories. Buybacks don’t add jobs or raise wages. They don’t increase productivity. They don’t grow the American economy.
Yet CEOs love buybacks because most CEO pay is now in shares of stock and stock options rather than cash. So when share prices go up, executives reap a bonanza.
At the same time, the value of CEO pay from previous years also rises in what amounts to a retroactive (and off the books) pay increase — on top of their already humongous compensation packages.
Big investors also love buybacks because they increase the value of their stock portfolios. Now that the richest 10 percent of Americans own 84 percent of all shares of stock (up from 77 percent at the turn of the century), this means even more wealth at the top.
Buybacks used to be illegal. The Securities and Exchange Commission considered them unlawful means of manipulating stock prices, in violation of the Securities Acts of 1933 and 1934.
In those days, the typical corporation put about half its profits into research and development, plant and equipment, worker retraining, additional jobs and higher wages. But under Ronald Reagan, who rhapsodized about the “magic of the market,” the SEC legalized buybacks.
After that, buybacks took off. Just in the past decade, 94 percent of corporate profits have been devoted to buybacks and dividends, according to researchers at the Academic-Industry Research Network.
Put another way, the new tax law is giving America’s wealthy not one but two big windfalls: They stand to gain the most from the tax cuts for individuals, and they’re the big winners from the tax cuts for corporations.
This isn’t just unfair. It’s also bad for the economy as a whole. Corporations don’t invest because they get tax cuts. They invest because they expect that customers will buy more of their goods and services.
This brings us to the underlying problem. Companies haven’t been investing — and have been using their profits to buy back their stock instead — because they doubt their investments will pay off in additional sales.
That’s because most economic gains have been going to the wealthy, and the wealthy spend a far smaller percentage of their income than the middle class and the poor. When most gains go to the top, there’s not enough demand to justify a lot of new investment. Which also means that as long as public policies are tilted to the benefit of those at the top — as is Trump’s tax cut, along with the legalization of stock buybacks under Reagan — we’re not going to see much economic growth.
We’re just going to have more buybacks and more inequality.