Stock buybacks aren't destroying the economy
The Democrats' accusation illustrates a basic misunderstanding of why worker wages rise over the long term
Here's an option for Democrats who dislike being called "socialist": Stop working with socialists to push policies that radiate both deep skepticism of market capitalism and undeserved confidence in government planning. Oh, and make sure your solution addresses an actual problem.
Sens. Bernie Sanders, a self-described "democratic socialist" independent from Vermont, and Chuck Schumer, a New York Democrat and Senate minority leader, want Washington to tell Corporate America how exactly to spend its money. In a jointly written New York Times op-ed, Sanders and Schumer tout their new bill that would prohibit corporations from buying back stock — there were some $1 trillion in repurchases last year — unless they "invest in workers and communities first." And by "invest," they mean higher pay, including a $15 minimum wage and more health and retirement benefits.
It's a proposal of breathtaking audacity. The two senators are charging that Corporate America is badly broken — and has been so for decades — and politicians need to fix it. Indeed, only they can fix what has "become an enormous problem for workers and for the long-term strength of the economy."
Subscribe to The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.
Sign up for The Week's Free Newsletters
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
But such strong rhetoric isn't matched by equally strong evidence. For starters, it's not a bad thing when shareholders receive cash for their shares. Most of that dough gets put back to work in the financial system to help finance all manner of entrepreneurs and companies, both big and small.
Nor do buybacks somehow starve workers and hurt the long-term strength of their companies. Indeed, the accusation illustrates a basic misunderstanding of why worker wages rise over the long term. Business investment helps make workers more productive and therefore more valuable to employers. So for the Sanders-Schumer theory to make sense, businesses must have been chronically underinvesting for decades in order to reward shareholders. Yet U.S. corporate research-and-development spending is at historically high levels as a share of GDP and exceeds that of EU firms. And while the so-so recovery after the Great Recession has seen weak business investment, the same is true across rich-country economies.Then there's the reality that the most valuable companies in the world are mostly American. But maybe Wall Street is getting it wrong and has been for 40 years.
Particularly persuasive proof that Wall Street has not been getting it wrong is a 2018 Federal Reserve study that compared public company investment behavior to that of private firms. If Sanders and Schumer are correct, the results should have shown that private firms invest more since they don't face shareholder pressure to forgo profitable, long-term investment opportunities in favor of short-term financial engineering. But the study found just the opposite. Public stock markets actually "facilitate greater investment" overall.
Now maybe companies should be investing more. But you can't argue that point, as Sanders and Schumer are doing, and also theorize the economy is suffering "secular stagnation" as some economists on the left suggest. One aspect of that theory is that weak business investment is caused by a lack of profitable things to invest in. So are the Democrats and democratic socialists arguing companies make poor investments? That for sure sounds like a bad move for the long-term health of American companies and their workers.
It's also odd that many folks on the left are pushing for more business investment and higher wages while attacking the companies that are doing just that, such as Big Tech. In its most recent earnings report, Google's parent company Alphabet announced that capital spending has nearly doubled to $25 billion over the past year as its employment count increased to nearly 100,000 from 80,000 a year earlier.
Of course one reason Democrats are so focused on buybacks is because it's a way of smearing the Trump tax cuts. See, all those tax savings, including trillions in profits held overseas, are going to shareholders rather than workers as Republicans promised! But while the GOP may have ill-advisedly sold the tax cuts like that, economists never thought that's the way they would work. Economists knew those repatriated profits would mostly be used for buybacks, just as they were during a 2004 repatriation "holiday." The truly valuable part of the tax cuts was the lowering of the corporate tax rate to make potential U.S. investments more profitable. And it's going to take a while for that to work — if it isn't swamped by higher interest rates and the Trump trade war.
Sure the U.S. economy has problems, but buybacks aren't one of them.
Sign up for Today's Best Articles in your inbox
A free daily email with the biggest news stories of the day – and the best features from TheWeek.com
James Pethokoukis is the DeWitt Wallace Fellow at the American Enterprise Institute where he runs the AEIdeas blog. He has also written for The New York Times, National Review, Commentary, The Weekly Standard, and other places.
-
What the chancellor's pension megafund plans mean for your money
Rachel Reeves wants pension schemes to merge and back UK infrastructure – but is it putting your money at risk?
By Marc Shoffman, The Week UK Published
-
Why Māori are protesting in New Zealand
A controversial bill has ignited a 'flashpoint in race relations' as opponents claim it will undermine the rights of Indigenous people
By Richard Windsor, The Week UK Published
-
Crossword: November 21, 2024
The Week's daily crossword
By The Week Staff Published
-
US election: who the billionaires are backing
The Explainer More have endorsed Kamala Harris than Donald Trump, but among the 'ultra-rich' the split is more even
By Harriet Marsden, The Week UK Published
-
US election: where things stand with one week to go
The Explainer Harris' lead in the polls has been narrowing in Trump's favour, but her campaign remains 'cautiously optimistic'
By Harriet Marsden, The Week UK Published
-
Is Trump okay?
Today's Big Question Former president's mental fitness and alleged cognitive decline firmly back in the spotlight after 'bizarre' town hall event
By Harriet Marsden, The Week UK Published
-
The life and times of Kamala Harris
The Explainer The vice-president is narrowly leading the race to become the next US president. How did she get to where she is now?
By The Week UK Published
-
Will 'weirdly civil' VP debate move dial in US election?
Today's Big Question 'Diametrically opposed' candidates showed 'a lot of commonality' on some issues, but offered competing visions for America's future and democracy
By Harriet Marsden, The Week UK Published
-
1 of 6 'Trump Train' drivers liable in Biden bus blockade
Speed Read Only one of the accused was found liable in the case concerning the deliberate slowing of a 2020 Biden campaign bus
By Peter Weber, The Week US Published
-
How could J.D. Vance impact the special relationship?
Today's Big Question Trump's hawkish pick for VP said UK is the first 'truly Islamist country' with a nuclear weapon
By Harriet Marsden, The Week UK Published
-
Biden, Trump urge calm after assassination attempt
Speed Reads A 20-year-old gunman grazed Trump's ear and fatally shot a rally attendee on Saturday
By Peter Weber, The Week US Published