How American corporations squandered $538 billion in 2018

Here's a story about how U.S. corporations completely wasted $538 billion in 2018.

You've probably heard of stock buybacks by now: These are where companies repurchase their own stock from shareholders. The practice was actually forbidden by federal regulations until a rule change in 1982, and it's taken off like a rocket since. Between 2010 and 2017, U.S. companies dumped hundreds of billions into stock buybacks each year.

But 2018 will probably be top of the heap. In just the first nine months of this year, companies on the S&P 500 spent $538 billion on stock buybacks, the Wall Street Journal reported. That's a 52 percent increase over the same period in 2017, and according to the Journal it's on track for a full-year record.

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That avalanche of money was helped along by the tax cut package President Trump and the Republicans passed back in December 2017, which was a massive windfall for corporate coffers. In fact, stock buyback announcements — as opposed to stock buybacks actually carried out — topped $1 trillion this year, an all-time record.

Here's the gag: By dropping at least $538 billion to buy back their own shares, U.S. companies overpaid by billions of dollars.

Remember, those are the purchases up through September of this year. And as you may have noticed, the stock markets completely tanked since then.

Share prices across the economy are now considerably lower than what companies paid for them. Apple, for example, forked over $62.9 billion to investors to buy back stock that's now only worth $53.8 billion — overpaying by $9.1 billion in the process.

"If they made an acquisition that decreased in value this much, people would be up in arms," Nell Minow, vice chairwoman at the consulting firm ValueEdge Advisors, told the Journal. "They have one job, and that is to make good use of capital."

That's true enough. But at the same time, it's weird to talk about share buybacks as just another acquisition, equivalent to buying a tractor or computers or factory machines. Share buybacks give money to investors and drain resources from the companies doing the purchasing. A rising stock price doesn't add one cent to a business' coffers. From the company's perspective, share buybacks are a self-sacrificial act, not a self-interested one. Treating buybacks as just another use of capital only makes sense if you're operating on the unspoken assumption that shareholders are the company and the company is the shareholders.

But companies are a lot more than that. They're also workers and infrastructure. Share buybacks are controversial precisely because they deplete resources that could have been spent on other priorities.

The Econ 101 justification for stock buybacks is that they're financial capital the companies don't need. By returning the money, they give investors the opportunity to channel it into other, more productive projects.

Of course, that begs the question, "don't need" according to whom? The CEOs and upper management making these decisions are almost always stock owners in the companies they run. And one thing stock buybacks definitely do is reduce the supply of shares while juicing demand — which raises the stock price.

We also have plenty of hard data that the Econ 101 story isn't how it plays out in practice.

Money sent to shareholders does not necessarily get recycled into new economic activity by other companies. The money can also just churn endlessly in the financial markets, as investors swap assets back and forth. In 2014, for example, companies spat out $1.2 trillion to shareholders via buybacks and dividends and other payouts, but the financial markets only pumped $200 billion into real-world investments.

In fact, if you add up all the ways companies hand out money to shareholders — buybacks and dividends, but also mergers and acquisitions — America's corporate sector increasingly loses money to Wall Street on net. To top it off, there's a growing statistical link between corporate borrowing and shareholder payouts: Companies are literally going into debt to get even more money to send to Wall Street.

Seen through that lens, there's something perversely appropriate about U.S. businesses "overpaying" for their stock buybacks in 2018. It puts the lie to the notion that this is all about efficient uses of capital. The reality is much more craven: The shareholder class is literally bleeding money out of companies to enrich themselves — and suppressing jobs, wages, and investment in the process.

And if that's the real point, why not overpay?