How to End the Stock Buyback Deluge

(Photo: AP/Richard Drew)

Traders gather on the floor of the New York Stock Exchange on October 29, 2015.

This article originally appeared at The Washington PostWhile this is Harold Meyerson's final column for The Washington Post, he will continue to write a weekly column that we will post on the Prospect's website.

Follow the money,” “Deep Throat” famously tells Bob Woodward, hot on the trail of The Washington Post’s most celebrated story, in the film All the President’s Men. In more recent decades, following the money has yielded a tale quite as calamitous as Watergate: the evisceration of the American middle class at the hands of the American rich.

A Pew Research Center study released in December documents this shift. In 1970, middle-income households claimed 62 percent of all personal income, while upper-income households received 29 percent. In 2014, the share going to middle-income households had declined to 43 percent, while that going to the top had soared to 49 percent. (While many on the right insist that the poor are somehow draining the middle class’s pocketbooks, that malignant myth is completely belied by Pew’s figures.)

The shift at the very top of the income ladder is the most dramatic. In the early 1970s, as Watergate unfolded, the wealthiest 0.1 percent of U.S. households commanded 3 percent of the nation’s personal income. In recent years, their share has risen to 12 percent.

The declining fortunes of the middle class are due in part to globalization and technological change, but those phenomena can hardly account for so shattering an upward redistribution of income and wealth. To solve that riddle, we need to look to the fundamental redefinition of the corporate mission that has transformed U.S. business over the past 35 years.

Time was when corporations invested their retained earnings in expansion, research, even higher wages. Now, even the most profitable companies are left with little to no retained earnings once they pay off their shareholders and top executives, whose incomes derive more from stock than salary. As University of Massachusetts economics professor William Lazonick has documented, the 500 highest-paid U.S. corporate executives received 76 percent of their income in stock-based compensation between 2006 and 2014.

Taking one’s pay in stock has been the smart move in recent decades, because the primary purpose of corporations has shifted from growing the company to rewarding shareholders. While there are obvious exceptions to this rule (none more so than Amazon, whose chief executive, Jeffrey P. Bezos, also owns the Post), it has clearly become the norm. The 458 corporations listed on the S&P 500 index in each year from 2005 to 2014 devoted 36 percent of their profits to dividends during that time, and another 53 percent to share buybacks, a means of enriching shareholders that had been negligible before 1982. In that year, Ronald Reagan’s appointees on the Securities and Exchange Commission adopted a rule (10b-18) that effectively holds corporations harmless from allegations of stock-price ma­nipu­la­tion through share buybacks.

One elected official who’s been following this particular trail of money with justifiable concern is Democratic Senator Tammy Baldwin of Wisconsin, who has sent several letters to Securities and Exchange Commission Chair Mary Jo White asking the agency to investigate the consequences of its rule and the buyback deluge on corporate investment and the broader economy. Clearly, one consequence of the rule has been to facilitate the rise of shakedown artists (excuse me: activist investors) who buy a chunk of company stock and then threaten the executives with a shareholder revolt that could cost them their jobs unless they buy back shares.

Another consequence of 10b-18, to which White obliquely alluded in her response to Baldwin’s first letter, is that the kind of investigation the senator requested is rendered almost impossible by the rule, which forbids the data collection one would need to do to ascertain if stock prices are being manipulated.

Herewith, then, a goal for the Obama administration’s final year, or, that failing, for the administration that follows it: Repeal 10b-18. Such data as we do have—the rise of corporate rewards to shareholders at the expense of all other endeavors, the concomitant rise in wealth and political power of an investor class grown fat on extracting funds from productive enterprises rather than facilitating further investment by those enterprises—justify the rule’s repeal.

And that, I very much regret to say, is my last suggestion as a regular op-ed columnist on these pages. This is my final Post column, though I may appear here sporadically with occasional contributions, and I’ll have a weekly column on the website of my magazine, The American Prospect. It’s been a privilege to use this space to follow the money, document the Republicans’ war on empiricism, oppose the Iraq War, warn against the Supreme Court’s restrictions on the franchise and its promotion of big money in politics, chart the rise of cities as a distinctive progressive force in U.S. politics, contemplate the achievement of Irving Berlin and the rise of non-Christian Christmas songs, and much, much else. My thanks, above all, to those readers who have followed my prose through exceptionally long sentences. And through short ones, too.

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