Stock Buybacks Starving the Economy: A new report finds that big companies could have given their workers thousands of dollars’ worth of raises with the money they spent on their own shares.

“How much might workers have benefited if companies had devoted their financial resources to them rather than to shareholders? Lowe’s, CVS, and Home Depot could have provided each of their workers a raise of $18,000 a year, the report found. Starbucks could have given each of its employees $7,000 a year, and McDonald’s could have given $4,000 to each of its nearly 2 million employees.” Corporations are making massive profits and realizing huge stock price gains. Yet, millions of workers are still waiting for their flatlined wages to see a blip. What gives? Part of the answer is related to (once illegal) stock buyback programs. In The Atlantic, Annie Lowrey does a good job providing an overview of a problem that’s only getting worse. Stock buybacks are eating the world. (And employees are lucky if they get the scraps…)

+ This has been an issue for some time. But things are accelerating. From Politico: “Some of the biggest winners from President Donald Trump’s new tax law are corporate executives who have reaped gains as their companies buy back a record amount of stock, a practice that rewards shareholders by boosting the value of existing shares.”

Vox: One chart that shows how much worse income inequality is in America than Europe.

Further down…Tammy Baldwin proposes legislation to enable more worker ownership and overturn the 

 

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LUCAS JACKSON / REUTERS 

Stock buybacks are eating the world. The once illegal practice of companies purchasing their own shares is pulling money away from employee compensation, research and development, and other corporate priorities—with potentially sweeping effects on business dynamism, income and wealth inequality, working-class economic stagnation, and the country’s growth rate. Evidence for that conclusion comes from a new report by Irene Tung of the National Employment Law Project (NELP) and Katy Milani of the Roosevelt Institute, who looked at share buybacks in the restaurant, retail, and food industries from 2015 to 2017.

Buybacks occur when a company takes profits, cash reserves, or borrowed money to purchase its own shares on the public markets, a practice barred until the Ronald Reagan administration. (The regulatory argument against allowing the practice is that it is a way for companies to manipulate the markets; the regulatory argument for it is that companies should be able to spend money how they see fit.)

In recent years, with corporate profits high, American firms have bought their own stocks with extraordinary zeal. Federal Reserve data show that buybacks are now equivalent to 4 percent of annual economic output, up from zero percent in the 1990s. Companies spent roughly $7 trillion on their own shares from 2004 to 2014, and have spent hundreds of billions of dollars on buybacks in the past six months alone.  

The new Roosevelt Institute and NELP research examines public firms in three major but notoriously low-wage industries— food production, retail, and restaurants—weighing buybacks against worker compensation. Unsurprisingly, Tung and Milani found that companies were aggressive in purchasing their own shares. The restaurant industry spent 140 percent of its profits on buybacks from 2015 to 2017, meaning that it borrowed or dipped into its cash allowances to purchase the shares. The retail industry spent nearly 80 percent of its profits on buybacks, and food-manufacturing firms nearly 60 percent. All in all, public companies across the American economy spent roughly three-fifths of their profits on buybacks in the years studied. “The amount corporations are spending on buybacks is staggering,” Milani said. “Then, to look a little deeper and see how this could impact workers in terms of compensation, was staggering.”

How much might workers have benefited if companies had devoted their financial resources to them rather than to shareholders? Lowe’s, CVS, and Home Depot could have provided each of their workers a raise of $18,000 a year, the report found. Starbucks could have given each of its employees $7,000 a year, and McDonald’s could have given $4,000 to each of its nearly 2 million employees.

“Workers around the country have been pushing for higher wages, but the answer is always, ‘We can’t afford it. We’d have to do layoffs or raise prices,’” Tung said. “That is just not true. The money is there. It’s just getting siphoned out of the company instead of reinvested into it.”

The report examines the period just before President Donald Trump’s $1.5 trillion tax cut came into effect, leading to an even greater surge of buybacks and thus an even greater surge of new wealth for the owners of capital, as wages have continued to stagnate. The tax legislation cut both the top marginal corporate tax rate from 35 to 21 percent—dropping the estimated effective tax rate on profitable businesses to just 9 percent, well below the effective tax rate for households—and encouraged firms to bring money back from overseas.

What did publicly traded corporations do with that money? Buy back shares and issue dividends, mostly. There was strong anecdotal evidence that that would be true even before the law passed. At a Wall Street Journal CEO confab held last fall, the former Trump economic adviser Gary Cohn asked a room of executives, “If the tax-reform bill goes through, do you plan to increase your company’s capital investment? Show of hands.” Most participants sat still, prompting Cohn to ask, “Why aren’t the other hands up?” Surveys showed that corporations were planning to shunt money to shareholders, rather than putting it into research, mergers and acquisitions, equipment upgrades, training programs, or workers’ salaries.

Since then, analyses from investment banks and researchers have estimated that 40 to 60 percent of the savings from the tax cut are being plowed into buybacks. One analysis of companies on the Russell 1000 Index—which consists of big firms, much like the Standard & Poor’s 500 does—found that companies directed 10 times as much money to buybacks as to workers. As such, Milani and Tung said they expect the math on corporate spending on shareholders versus workers to become even more exaggerated in the coming years.

Not all economic and financial analysts see buybacks as problematic. “Far from being starved of resources, S&P 500 companies are at near-peak levels of investment and have huge stockpiles of cash available for even more,” argue Jesse M. Fried and Charles C. Y. Wang in the Harvard Business Review. “The proportion of income available for investment that went to shareholders of the 500 over the past 10 years was a modest 41.5 percent—less than half the amount claimed by critics.” Plus, if buybacks merely transferred money from businesses to investors who then reallocated that money to other, more dynamic businesses, the overall effect on the economy might be muted.

But more and more analysts disagree. Larry Fink, who runs BlackRock, a huge money-management firm, has argued that buybacks are bad for companies and even bad for democracy. “Society is demanding that companies, both public and private, serve a social purpose,” he wrote in an open letter. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” 

Analysts argue that buybacks hurt corporate America, American workers, and American growth in a few ways. For one, buybacks are a sign of short-termism among executives, the argument goes, boosting shareholder value without boosting the underlying value, profitability, or ingenuity of a given firm. Companies do not get better because of buybacks; it is just that shareholders get richer. In an exhaustive financial analysis of buybacks, the consultancy McKinsey found that companies would generally be better off issuing dividends or increasing investment instead. Buybacks also might distort earnings-per-share calculations and other measures of profitability and value.

A related issue is that buybacks draw money away from investment; a dollar spent repurchasing a share is a dollar that cannot be spent on new machinery, an acquisition, entry into a new market, or anything else. Researchers at Deloitte point out that buybacks and dividends have soared as a share of GDP, whereas investment in equipment and infrastructure has remained unchanged. And new research by Germán Gutiérrez and Thomas Philippon of New York University suggests growing business concentration, a lack of competition, and short-term thinking on the part of investors have all contributed to firms “spend[ing] a disproportionate amount of free cash flows buying back their shares,” fostering an environment of “investment-less growth.”

Both by increasing inequality and reducing corporate investment, and thus productivity gains, buybacks might be bad for the overall economy, too. A high-inequality economy is one with less consumer spending and demand across the board, thus one with a lower GDP. A low-investment economy is a more sclerotic and less innovative one, and thus one with a lower GDP.

The growth of buybacks and growing research on the perils they pose has increased interest in regulatory or legal action to bar or limit them. Tung and Milani argue that companies should be required, as they were before the 1982 rule change, to provide dividends rather than purchase shares with their cash. “Issuing cash dividends (regular or special) has a less predictable and manipulative impact on a company’s stock price—and thus is less prone to gaming by executives or activist investors for their own gain,” they write. “Dividends also do not have the same potential as buybacks to mask the market and balance sheet impacts of increasing executives’ stock-based compensation.”

Democratic Senators Elizabeth Warren of Massachusetts, Tammy Baldwin of Wisconsin, Cory Booker of New Jersey, and Chris Van Hollen of Maryland, among other legislators, have also put forward legislation targeting the practice, raising the prospect that the rules could change if and when Democrats take back power. “The surge in corporate buybacks is driving wealth inequality and wage stagnation in our country by hurting long-term economic growth and shared prosperity for workers,” Baldwin said in a release. “We need to rewrite the rules of our economy so it works better for workers and not just those at the top.”

In the meantime, corporate boards are poised to spend hundreds of billions more on their own shares, benefiting executives along with the mostly wealthy Americans who own stock. Just this week, Caterpillar, for instance, said it plans to spend $1 billion buying back shares in the latter half of this year, before kicking off a new $10 billion round on buybacks starting in January. It is also in the midst of laying off hundreds of workers.

U.S. SENATOR TAMMY BALDWIN INTRODUCES LEGISLATION TO REIN IN STOCK BUYBACKS AND GIVE WORKERS A SEAT AT THE TABLE

WASHINGTON, D.C. – U.S. Senator Tammy Baldwin introduced legislation to rein in corporate America’s addiction to stock buybacks by giving workers a say in how their company’s profits are spent. The Reward Work Act improves disclosure of repurchases and requires public companies to give workers the right to directly elect one-third of their company’s board of directors.

“Corporate profits should be shared with the workers who actually create value. It’s just wrong for big corporations to pocket massive, permanent tax breaks and reward the wealth of top executives with more stock buybacks, while closing facilities and laying off workers,” said Senator Baldwin. “The surge in corporate buybacks is driving wealth inequality and wage stagnation in our country by hurting long-term economic growth and shared prosperity for workers. We need to rewrite the rules of our economy so it works better for workers and not just those at the top. This legislation makes it clear that empowering the voices of our workers and investing in our workforce is more important than using tax breaks and corporate profits to reward shareholders with more stock buybacks.”

The Reward Work Act repeals the Securities and Exchange Commission (SEC) 10b-18 rule that makes it easier for corporations to buy back their stocks. It also ends corporations’ ability to buy back their stock on the open market, though repurchases through tender offers—which are subject to greater disclosure—will still be allowed. Finally, the legislation requires one-third of corporate boards to be directly elected by the company’s employees.

The legislation repeals the infamous SEC 10b-18 rule. Finalized in 1982, the rule shields companies from manipulation charges when buying back their stock on the open market. In 1981, the S&P 500 spent approximately two percent of its profits on buybacks. Last year, those same companies spent 59 percent on buybacks. Now that executives are largely paid in stock, they have a direct incentive to boost prices.

“The explosion of stock buybacks since the Trump tax cut has made clear that the real beneficiaries of the tax cuts are Wall Street and corporate CEOs, not working people. Workers get ahead when we increase their bargaining power and limit Wall Street’s ability to suck wealth out of productive businesses. That’s why the AFL-CIO supports Senator Baldwin’s legislation – because it will give workers a seat at the table to ensure that our economy once again rewards work instead of just wealth,” said Heather Slavkin Corzo, Director of Office of Investment, AFL-CIO.

“For over three decades, I have studied the financialization of the business corporation. I can only describe what I have seen as “the looting of the American corporation.” Aggressive shareholders and many executives only have an interest in taking money out of a corporation, instead of investing in it. Workers and taxpayers are at the back of the line when it comes to deciding how to spend a company’s profits. Top priority has gone to stock buybacks that give manipulative boosts to the company’s stock price. These unwarranted distributions to shareholders stifle investment in innovation, and they drive inequality by keeping wages low and work unstable while enriching the wealthiest,” said William Lazonick, professor of economics at the University of Massachusetts Lowell, president of the Academic Industry Research Network and author of Profits without Prosperity. “Senator Baldwin has consistently led on this issue in the Senate. Her new legislation will be the first to attempt to reverse the harms of corporate America’s buyback obsession. This legislation will realign incentives in our productive enterprises to ensure that those who truly create value—workers in particular—get to share in the profits they have created.”

“Trump and his partners in Congress made sure the big banks, in particular Wells Fargo, were the biggest beneficiaries of the tax plan,” said Porter McConnell, Take On Wall Street Campaign Manager. “Then Wells and the other banks used tax windfalls to juice share prices so they could pay it to themselves in stock buybacks. Meanwhile, Wells Fargo’s scandals continue to mount, revealing the extent of its efforts to cheat and discriminate against its customers and workers. We need to rewrite the rules to put families, not big banks, first. The Reward Work Act, introduced by Senator Baldwin is a bold step in this direction.”

“By ending wasteful buybacks and empowering boards with worker-elected directors, Senator Baldwin’s welcome, bold proposal will refocus America’s corporate leaders on promoting good sustainable jobs,” said Bartlett Naylor, financial policy advocate for Public Citizen.

Senator Baldwin has been sounding the alarm on buybacks for years. She wrote to the SEC on several occasions urging them to monitor buybacks and improve their buyback disclosure regime. Her attempt to require the SEC to study buybacks was blocked by Republicans. Late last year, Senator Baldwin held two SEC nominees in order to ensure they answered her questions on the dangers of stock buybacks.

Across the country, there is a growing trend of big corporations using massive, permanent tax breaks for stock buybacks – choosing to reward wealthy CEOs instead of the workers who create profit and grow the company. In 2017, Wisconsin workers helped create $3.3 billion in operating profit at Kimberly-Clark. The company spent $911 million on stock buybacks last year and in December, Congress passed and President Trump signed a permanent, corporate tax cut for companies like Kimberly-Clark. Now, Kimberly-Clark announced that it will spend even more on stock buybacks this year. At the same time, the company announced that it would close two Wisconsin manufacturing facilities in the Fox Valley that employ 610 workers. Walmart pocketed a massive tax break, gave executives $20 billion in stock buybacks in 2017, and then in January they closed Sam’s Club stores across the country, including in Madison and in West Allis. Nearly 300 jobs were eliminated and workers were laid off.

The legislation is cosponsored by Senators Elizabeth Warren (D-MA) and Brian Schatz (D-HI), and has the support of the AFL-CIO, Americans for Financial Reform, Take on Wall Street and Public Citizen. More information about the Reward Work Act is available here.  The full text of the legislation is available here.

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