Stock-ing the Deck

Bonds aren’t the only way the One Percent are screwing us over. We already looked at bonds, but stocks, too, are being manipulated by the rich to their benefit and our detriment, as Mark Blyth explains in the podcast we heard from last time:

[11:30]What’s the marginal value of a dollar to someone who’s got a hundred bucks? That dollar means something. What about 1000,000 bucks? What about a billion; a thousand million? And yet they’re the same people that refuse to pay any taxes. They’re the people that refuse to have any stake in their communities. They’re obsessed in their companies with shareholder value and returns constantly going back to the same people.

Think about Apple. Everybody’s favorite company, right? These guys have got a 250 billion dollar pile of cash they don’t know what to do with. They keep it on balance sheets abroad; they don’t use it. They then issue bonds, because their stock is so valuable because it’s in every single [exchange-traded fund] imaginable, so it’s impossible for the value of their stock to go down. So they then issue bonds, take the money from that, buy back their stock, watch it go up in value–because, of course, there’s less stock so that means it’s more valuable–and then they reward themselves more salary gains because their price went up!

Here’s a good video from Robert Reich explaining the concept:

It’s a common refrain that the fortunes of the rich make us all better off. That is, we are not made poorer by their riches. But this is patently untrue! The money that goes to stock buybacks is money NOT going to employee salaries (or R&D or productivity enhancements or…).

Stock buybacks are the product of two relatively modern economic features. One was the fact that it was illegal until the Reagan administration, where it was an early form of deregulation. Then came the idea that corporations should maximize shareholder value to the detriment of all else, and the tying of executive compensation to stock price. These factors collected to form a witch’s brew of bad incentives.

Finally, add decades of tax cuts for the wealthiest Americans, who have no productive investment options (because they have more money than they know what to do with while everyone else is broke). So what to they do? Buy back stocks to artificially raise their value, of course! And most of the wealth of rich comes from stocks and bonds (not “hard work”). What do they NOT do with the money? Raise their workers’ salaries. As for R&D, they can always count on the taxpayers to foot that bill, while forcing those same taxpayers to pay through the nose for any profitable invention that might result.

So there’s a good case to be made that the main end product of the latest round of tax cuts is a stock market bubble, along with the price inflation of assets that the rich mostly buy (like art and real estate). Meanwhile, wages remain stagnant, even in a “tight” labor market.

No one is hurt by the fortunes of the rich, eh?

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…Companies are working overtime to make their owners richer in the short term, more so than to improve their longer-term competitiveness or to invest in their workers.

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…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…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…Companies do not get better because of buybacks; it is just that shareholders get richer.

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.

Are Stock Buybacks Starving the Economy? (The Atlantic)

Despite historically high profits and trillions in cash, corporations refuse to pay workers more. Instead, they use their earnings to buyback stock or increase dividends. The Trump tax cuts are magnifying this behavior, which is what happened after the 2004 American Jobs Creation Act, another time when corporations repatriated foreign cash holdings at a lower tax rate.

These decisions are short-sighted. Workers are also consumers. If they have more money, they will spend it, and consumer spending is a boon to economic growth and job creation. Corporations can afford to invest in their people and choose not to, hindering the health of the economy overall.

By Tripling Its Stock Buybacks, Apple Robs Workers And The Economy (Forbes)


Not only are there more stock buybacks, but there are fewer publicly-traded companies overall. The stock market is shrinking, and profits are only being earned by a small fraction of them. And investing is increasingly becoming an insiders game, even more than it already was:

In the mid-1990s, there were more than 8,000 [publicly traded companies]. By 2016, there were only 3,627…Because the population of the United States has grown nearly 50 percent since 1976, the drop is even starker on a per-capita basis: There were 23 publicly listed companies for every million people in 1975, but only 11 in 2016…

■ The companies on the market today are, on average, much larger than the public corporations of decades ago. Fast-rising upstarts are harder to find.

In 1975, 61.5 percent of publicly traded firms had assets worth less than $100 million, using inflation-adjusted 2015 dollars. But by 2015, that proportion had dropped to only 22.6 percent.

■ Profits are increasingly concentrated in the cluster of giants — with Apple at the forefront — that dominate the market. For a far larger assortment of smaller companies, though, profit is often out of reach. In 2015, for example, the top 200 companies by earnings accounted for all of the profits in the stock market… In aggregate, the remaining 3,281 publicly listed companies lost money.

In theory, as a shareholder, you are entitled to a piece of a company’s future earnings. That’s one of the main arguments for buying stock in the first place. But the reality is that you often are buying a piece of a money-losing proposition. Aside from the top 200 companies, the rest of the market, as a whole, is burning, not earning, money.

■ A quirk of accounting is at the root of some of that profit deficit, especially for smaller and younger companies. Increasingly, value resides in intellectual property — “intangibles” like software and data and biological design — rather than in the production of physical objects like cars.

But under generally accepted accounting principles, or GAAP, which American companies must follow, research and development must be deducted from corporate income — and those charges can reduce or eliminate profits. (Capital expenditures — in physical things like factories — appear on corporate balance sheets, not income statements, and don’t reduce profits.)

Without deep knowledge of a company’s critical research — which businesses may be reluctant to share, for competitive reasons — it’s difficult for outsiders to evaluate a start-up’s worth. That makes it harder to obtain funding, and it may be partly responsible for certain trends: why there are fewer initial public offerings these days, why smaller companies are being swallowed by the giants, and why so many companies remain private for longer.

The Stock Market Is Shrinking. That’s a Problem for Everyone (New York Times)

2 thoughts on “Stock-ing the Deck

  1. Basically the economy now operates to transfer money from poor to rich. Render unto Caesar? All the money is going home, like a kind of Rapture for dollars. Times like these, I’d like to shrink the economy so I could drown it in a bathtub.

  2. I’ve never had a problem with stock buyback; stocks were issued, after all, to fund expansion. When a company contracts due to [reasons], it should buy back the debt markers it issued. (I do strongly agree it shouldn’t incur further debt to buy these back.)

    As to the compensation issue, according to Hacker & Pierson in Winner-Take-All Politics, business interests got coordinated (thanks largely to the Business Roundtable and others motivated by Powell Memorandum) and staged an assault on Washington in the form of “…its new capacity for grassroots mobilization, flooding Congress with calls, letters, and visits from influential constituents.” (p. 127.)

    By 1978, they went beyond merely shooting down future regulation, and went on the attack.

    Carter had campaigned on tax reform, calling the current code “a disgrace to the human race.” His initial proposals were a combination of standard Democratic calls for more progressivity (a hike in the capital gains tax; the elimination of some high-end deductions like the “three-martini lunch”) and a reformist dose of greater simplicity.

    By the time administration officials were ready to present a plan to Congress in January 1978, they had already scaled back their ambitions. The bill was far less progressive than had been anticipated…. Charls Walker and his allies were pleasantly surprised. In the account of a Washington insider: “They were braced for an attack; when the attack never came, they decided to invade!”….

    Quickly realizing that the perfect vehicle was now moving through an increasingly cooperative Congress, Walker’s coalition, and a more select group that came to be called the Carlton Group (after its regular meeting locale in the Ritz-Carlton), seized the wheel. Working with sympathetic members in both parties and both chambers of Congress, they successfully placed an amendment in the House bill that cut the capital gains tax in half…. Before the year was out, a Democratic Congress overwhelmingly passed, and a Democratic president signed, a tax bill whose centerpiece was a reduction of the top rate of capital gains taxes from 48 to 28 percent.

    (pp. 133-134, emphasis in the original.)

    After a later reduction in 1981, executives preferred taking compensation less in income and more in stock options, which were taxed at the newer, lesser rates. Which, as you note, opened the door to opportunistic stock manipulations.

    Which, yes, sucks balls.

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