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OpEdNews Op Eds    H3'ed 4/4/19

A "Buyback" for Our Future?

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From Our Future

Corporate profits will (not) prevent recession
Corporate profits will (not) prevent recession
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People who are trying to do good -- with a Green New Deal, for instance, or Medicare for All -- regularly find themselves confronting a simple and sometimes sneering gotcha question: So where's the money coming from?

How about we start putting this same simple question to the top executives of Corporate America?

These execs are currently spending incredibly vast sums buying back their own companies' shares of stock off the open market. In 2018, researchers at Dow Jones report, 444 of America's top 500 firms spent dollars on stock buybacks. Lots of dollars: $806.4 billion in all, up 55 percent over the year before and up 37 percent over the previous all-time buyback annual record high.

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These stock buybacks have no redeeming social value. Buybacks don't make corporations more efficient or effective. They just make the rich richer. Buybacks reduce the volume of shares that trade, in the process upping earnings per share and share value. Who benefits from these upticks? Top corporate execs see an immediate boost. Over 80 percent of their pay comes from stock-based compensation.

The wealthy overall benefit, too. America's top 1 percent, researchers at Goldman Sachs observed earlier this year, now own half of all the nation's shares of stocks, with nearly 85 percent in the pockets of America's wealthiest 10 percent.

The dollars corporate execs put in buybacks could, if invested elsewhere, help significantly share the wealth the modern American economy creates. Imagine how much brighter our future would be now if the over $5 trillion that S&P 500 corporations have spent on buybacks since 2007 had gone instead to paying higher wages or training workers in new skills or making corporate operations more eco-friendly.

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And that brings us back to our original question: Where's all the money for these buybacks coming from? Corporate America "earned" a good share of that cash the old-fashioned way by exploiting workers, squeezing consumers, and shunting the cost of cleaning up corporate messes onto the rest of us. Corporate execs also raise multiple millions for buybacks by taking on new debt. But these execs have a plush new source of buyback cash as well: the Trump corporate tax-rate cut enacted in December 2017.

The White House promised that corporations would use their savings from this corporate tax cut to create jobs and promote prosperity. Corporations did create prosperity via buybacks for the people who run corporations. The rest of the economy, the latest stats seem to indicate, is sinking into a new recession.

What could we do about all this? A good starting place would be undoing the Trump corporate tax cut or keeping it in place only for corporations truly helping create prosperity for all. That would be rather simple to pull off. We could, as one example, deny corporations tax-cut dollars if they pay any of their top execs over 25 times what they pay their most typical workers.

Back in the middle of the 20th century the pay gap within most all U.S. corporate enterprises never exceeded that 25-to-1 ratio. CEOs at major corporations today now average over 350 times their worker pay. In 2017, Bloomberg reports, some 32 major companies paid their top execs over 1,000 times the pay that went to their most typical workers.

Will lawmakers in the United States ever show the spine necessary to make a serious move against corporate buybacks? Earlier this year, Senators Bernie Sanders and Chuck Schumer announced plans to introduce legislation that would let corporations buy back their own shares only if they were already investing in shared prosperity, as evidenced by "things like paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits."

Senator Tammy Baldwin has an even better idea. She's just reintroduced her landmark legislation that completely bans open-market stock buybacks.

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"Corporate profits should be shared with the workers who actually create them," the Wisconsin lawmaker notes. "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. We need to start rewarding hard work, and not just wealth."

In other words, let's buy back our future.

 

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Sam Pizzigati is an  Associate Fellow, Institute for Policy Studies

Editor,  Too Much ,  an online weekly on excess and inequality

Author, The Rich Don't Always (more...)
 

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don curry

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Your understanding of stock buybacks is a little off. The Obama administration, undertook quantitative easing, increasing the money supply to stave off inflation. This manipulating of the money supply to stimulate the economy is monetary policy. This is successful when the underlying foundation of the economy is strong.

This was not the case in the aftermath of the 2008 crash. The Fed printed money and passed it along to the banks. If there were businesses or local investments the banks had plenty of money. There was little business to invest in so the banks bought into the stock market.

Now corporations were sitting there, not actually creating anything, with piles of cash. There was no real growth, hence the stocks did not increase in value and did not pay dividends.

Shareholders demand returns on their investments in the form of dividends which is a cost of equity-- so the business is essentially paying for the privilege of accessing funds it isn't using. Buying back some or all of the outstanding shares can be a simple way to pay off investors and reduce the overall cost of capital.

So, stock buybacks do not produce real wealth but are a way to make your company leaner and keep investors on board in a holding pattern until the time wealth begins to be produced. So, your contention that corporations use buybacks as a wealth strategy is false. In fact the corporations are eating their loss to keep the shareholders' stock prices up.

If you identify the shareholders as the "wealthy", then your claim, that the buyback at least preserves their wealth, is true. But that preservation of their wealth comes at the expense of the corporation itself, not at the expense of the middle class. They corporations desperately need to produce something in order for real wealth to occur.

This zero-sum game continues until real wealth is produced, by the creative labor of humans. Like is happening right now with unemployment at historical lows in every demographic, and wages up 3.4% over last year. We've a long way to go, but it is going.

Submitted on Friday, Apr 5, 2019 at 10:25:04 PM

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don curry

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Another class of pointless statistics is evidenced in your statement, "Back in the middle of the 20th century the pay gap within most all U.S. corporate enterprises never exceeded that 25-to-1 ratio. CEOs at major corporations today now average over 350 times their worker pay."

Bottom of Form

Check this out:

Let's just choose one company, IBM.

In 1950 the profit of IBM was 266 million/year. In 2006 it was 91.4 billion/year.

In 1950 it had 30,261 employees. In 2006 it had 355,766 employees.

A dollar in 1950 is worth $9.49 today.

In constant dollars each employee's share of the profits:

In 1950, $84,451 In 2006 $256,338

The potential profit share for each employee in real dollars was 3 times higher in 2006 than in 1950.

The CEO of IBM in 1950 was at the apex of an organization with 30,000 employees.

The CEO of IBM in 2006 was at the apex of an organization with 355,000 employees.

IBM delivered, to each employee, 3 times the profit, in real dollars, in 2006 than it did in 1950.

I admit, there are so many ways to parse all this data, that I can't quite generate any moral certitude, or that I should get all huffy about the two-dimensional statistics you cite.

And that is just IBM, one of the least exuberant, plodding corporations on the board.

Submitted on Saturday, Apr 6, 2019 at 12:28:49 AM

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