From Robert Reich Blog
Ronald Reagan, center, shown here shaking hands with a pre-politics Donald Trump, often rhapsodized about the 'magic of the market.' With them is first lady Nancy Reagan.
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Trump's promise that corporations will use his giant new tax cut to make new investments and raise workers' wages is proving to be about as truthful as his promise to release his tax returns.
The results are coming in, and guess what? Almost all the extra money is going into stock buybacks. Since the tax cut became law, buy-backs have surged to $88.6 billion. That's more than double the amount of buybacks in the same period last year, according to data provided by Birinyi Associates.
Compare this to the paltry $2.5 billion of employee bonuses corporations say they'll dispense in response to the tax law, and you see the bonuses for what they are -- a small fig leaf to disguise the big buybacks.
If anything, the current tumult in the stock market will fuel even more buybacks.
Stock buybacks are corporate purchases of their own shares of stock. Corporations do this to artificially prop up their share prices.
Buybacks are the corporate equivalent of steroids. They may make shareholders feel better than otherwise, but nothing really changes.
Money spent on buybacks isn't reinvested in new equipment, research, or factories. Buybacks don't add jobs or raise wages. They don't increase productivity. They don't grow the American economy.
Yet CEOs love buybacks because most CEO pay is now in shares of stock and stock options rather than cash. So when share prices go up, executives reap a bonanza.
At the same time, the value of CEO pay from previous years also rises, in what amounts to a retroactive (and off the books) pay increase -- on top of their already humongous compensation packages.
Big investors also love buybacks because they increase the value of their stock portfolios. Now that the richest 10 percent of Americans own 84 percent of all shares of stock (up from 77 percent at the turn of the century), this means even more wealth at the top.
Buybacks used to be illegal. The Securities and Exchange considered them unlawful means of manipulating stock prices, in violation of the Securities Acts of 1933 and 1934.
In those days, the typical corporation put about half its profits into research and development, plant and equipment, worker retraining, additional jobs, and higher wages.
But under Ronald Reagan, who rhapsodized about the "magic of the market," the SEC legalized buybacks.
After that, buybacks took off. Just in the past decade, 94 percent of corporate profits have been devoted to buybacks and dividends, according to researchers at the Academic-Industry Research Network.
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