Opinion

Ban share buybacks

Corporations should not be wealth funnels for the top 1 percent

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.

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