Ryan Cooper Rages "Ban Share Buybacks...Immediately"

Authored by Ryan Cooper via TheWeek.com,

American corporations are simply raking in profits. Some are so bloated and cash-rich they literally can't figure out what to do with it all. Apple, for instance, is sitting on nearly a quarter of a trillion dollars — and that's down a bit from earlier this year. Microsoft and Google, meanwhile, were sitting on "only" $132 billion and $63 billion respectively (as of March this year).

However, American corporations in general are taking those profits and kicking them out to shareholders, mainly in the form of share buybacks. These are when a corporation uses profits, cash, or borrowed money to buy its own stock, thus increasing its price and the wealth of its shareholders. (Big Tech is doing this as well, just not fast enough to draw down their dragon hoards.) As a new joint report from the Roosevelt Institute and the National Employment Law Project by Katy Milani and Irene Tung shows, from 2015 to 2017 corporations spent nearly 60 percent of their net profits on buybacks.

This practice should be banned immediately, as it was before the Reagan administration.

The most immediately objectionable consequence of share buybacks is they come at the expense of wages. Milani and Tung calculate that if buybacks spending had been funneled into wage increases, McDonald's employees could get a raise of $4,000; those at Starbucks could get $8,000; and those at Lowes, Home Depot, and CVS could get an eye-popping $18,000.

Some economists are skeptical of this reasoning, arguing that wages are set according to labor market conditions. But if you set aside free market dogmatism, it is beyond obvious that this sort of behavior is coming at workers' expense. Wall Street bloodsuckers are not at all subtle about it, screaming bloody murder and tanking stocks every time a public company proposes paying workers instead of shareholders. Indeed, it provides a highly convincing explanation for something that has been puzzling analysts for months: the situation of wages continuing to stagnate or decline while unemployment is at 4 percent. The answer is that wages are low in large part because the American corporate structure has been rigged in favor of shareholders and executives.

This raises an objection: What about dividends? (These are payments made directly to shareholders, as opposed to buying stock to increase their price.) Wouldn't banning buybacks just lead to increased dividends?

It might. But buybacks are worse, for three reasons. First, selling shares is generally counted as capital gains, which are usually (though not always) taxed at a much lower rate than dividend payments. Secondly, where dividends are regular occurrences, buybacks happen at erratic intervals, making it easier for huge payments to slip by unnoticed.

More importantly, share buybacks incentivize corporate short-termism and Wall Street predation. Making a quick buck at the expense of the underlying corporate enterprise is easy: simply pressure the company into spending all its money on buybacks — or more than all; Milani and Tung find the restaurant industry spent 136 percent of profits on buybacks from 2015-17, through cash and borrowing — then sell the stock once the price pops up. Money that might have gone into badly-needed investment or debt repayment is now in your pocket, and if the enterprise collapses later, who cares? Not your problem — you're already on to the next victim.

Dividends, by contrast, are a lot more amenable to the value investor who wants the company to succeed over the long term. In general, banning buybacks will make it somewhat harder for corporations to be turned into a wealth funnel for the top 1 percent.

That said, dividends payments are also out of control — enabled by low top marginal tax rates and special loopholes, plus a powerless working class — and should be wrenched down as well. Banning buybacks should be considered the first step in reining in the outrageous abuse of the American corporate form, not a panacea.

Before about 2005, postwar corporate profits had never reached 9 percent of GDP (save for a couple quarters in the early 1950s). Immediately after the financial crisis, they bounced back up to that level, where they remain to this day.

This is a social crisis for the United States. Having an economy rigged to suck the wealth out of society and place it in the pockets of a tiny, already ultra-wealthy minority is an extremely risky situation for a democratic state. We need big, aggressive moves to club down corporate profits, and start directing that money back into the country as a whole. Banning buybacks is a simple and straightforward way to get started.

Comments

J S Bach Sun, 08/05/2018 - 18:02 Permalink

Apple buys their own stock back, but they just paid a .73¢ dividend as well. I guess when you're a trillion dollar company, you can do both.

warsev max2205 Sun, 08/05/2018 - 18:27 Permalink

I disagree with the whole premise of this article. BS. A corporation exists for the purpose of earning money and increasing its value for its investors. Whether that is through reinvestment for future gains, or through dividends and buybacks is of little consequence. A corporation is certainly NOT in business for the purpose of making its employees rich or making taxable income for the state. Any corporation so stated would not see any investment from me.

In reply to by max2205

Balance-Sheet Whoa Dammit Sun, 08/05/2018 - 19:32 Permalink

Given the negative publicity it might make sense to take a company private or companies may sell shares if the price is right or transfer shares by sale to existing shareholders.

Value of management is then shown through growing profits NOT the share price. Seriously, forget about trying to overturn modern industry when the average person is so well fed weight is a health threat.

People may be unhappy but that is there psychology and crooked educators. NO ONE owes you or anyone else wealth and happiness or even a job.

In reply to by Whoa Dammit

t0mmyBerg Whoa Dammit Sun, 08/05/2018 - 19:38 Permalink

There is only a finite amount of stock.

For one thing they keep issuing stock in the form of options to senior management.  Then borrow or use profits to buy it back so the price rises and the options go into the money.  Rinse Repeat.  There was a time I would have said that having the government prohibit something like this would be an outrage.  But with Central Banks contriving to arrange it so that corps can borrow for nearly nothing to keep this gravy train going things have gotten out of control.  However, in addition to banning buybacks in most situations, we also need to banish central banks (nothing but 1930s style price control boards which we have eliminated in almost every other context).

In reply to by Whoa Dammit

RedBaron616 Pollygotacracker Mon, 08/06/2018 - 15:10 Permalink

"However, American corporations in general are taking those profits and kicking them out to shareholders, mainly in the form of share buybacks."

Yes, the owners of a company should not be rewarded!  Is there something this author doesn't understand about that?

"The most immediately objectionable consequence of share buybacks is they come at the expense of wages."

Ah, this sounds more Marxist by the minute. We have to stop rewarding owners and start rewarding workers. Last time I checked, workers can vote with their feet if they find a better salary offer.

In reply to by Pollygotacracker

auricle warsev Sun, 08/05/2018 - 18:38 Permalink

I disagree with the whole premise of this article. BS. A corporation exists for the purpose of earning money and increasing its value for its investors.

 

That is the cool-aid they want you to drink. Are sub c-suite employee's investors in the company? What about customers, are they investors? There are many many people who invest in the success of a company, not just passive equity investors and c-suite bonus structures. You need to expand your definition of what an 'investor' is, and so do these corporations. 

In reply to by warsev

louie1 warsev Sun, 08/05/2018 - 19:03 Permalink

Corporations are not there just to make money. They use and exist in a complex web of taxpayer subsidised services in a country owned by the people. Corporations have a moral, social and economic responsibility to the community.

Apple does not exhibit any of these responsibilities.

I think that a living wage is the main responsibility of all corporations in any decent society.

The US is rapidly turning into a rich and poor society and with full spectrum spying the elite fascists will rule for 1000 years. Enjoy the jackboot grining into your face forever.

In reply to by warsev

Gerrilea louie1 Sun, 08/05/2018 - 22:52 Permalink

Great thoughts but isn't their "solution" a yearly stipend to everyone?  Universal Basic Income?  Because they see the writing on the wall, they'd have no business without government subsidies to the poor and disenfranchised. And their "future profits" are at stake if nobody can afford their worthless crap.

 

If a company were willing to be truly competitive and have longevity, they'd build the business from the bottom up, not the top down.  If they raise up their employees as the business becomes successful, they'd always have a business and surprisingly, people with money to buy their product.

 

 

 

In reply to by louie1

Balance-Sheet Gerrilea Mon, 08/06/2018 - 18:31 Permalink

UBI is in place and evolving rapidly though it is spread out over dozens of entitlement programs and tax credit (cash grant) programs. Perhaps all these social payments will be organized into a single system at the IRS with each person in the US receiving $30. a day by direct deposit.

Money you earn above that is added to your total net income giving you an annual income for tax purposes.

It is very difficult to make money employing people and will only get more difficult as time passes so the work is passed to machines/automated systems.

In reply to by Gerrilea

SybilDefense overbet Sun, 08/05/2018 - 19:57 Permalink

The author is clearly worried about McDonalds employees not getting their fair share as in higher wages.

But... If the McDonalds employee bought shares, and the buy backs increase asset price, they would be smart.

But.... If they were smart, they wouldn't be working at McDonalds as their carreer job.

So who's to blame? The Co who has the money and should be allowed to do whatever it wants, hopefully in the best interest of the Co, or the poor line cook, who if gifted mo money fo free, would not have the incentive to ditch the bogus McD's job and educate hisself to have a real career.

The more you are gifted, the weaker you become.  Socialism exacerbates worthlessness. 

Give a kid an investment (raise vs buyback money), he may make an extra $10/week, Teach the damn kid to invest so that he may make a living.  The big guy said that, he did. (kinda)

In reply to by overbet

louie1 warsev Sun, 08/05/2018 - 19:04 Permalink

Corporations are not there just to make money. They use and exist in a complex web of taxpayer subsidised services in a country owned by the people. Corporations have a moral, social and economic responsibility to the community.

Apple does not exhibit any of these responsibilities.

I think that a living wage is the main responsibility of all corporations in any decent society.

The US is rapidly turning into a rich and poor society and with full spectrum spying the elite fascists will rule for 1000 years. Enjoy the jackboot grinding into your face forever.

In reply to by warsev