Chuck Schumer and Bernie Sanders went to the same high school in Brooklyn, but that’s about all they shared in common until an op-ed in Monday’s New York Times. The subject is stock buybacks, the increasingly common procedure whereby public companies use their prodigious cash hordes generated by record profits to purchase their own shares, rather than increase wages or invest in equipment. It’s one way to leak profits out to investors while workers get the shaft.
As Schumer and Sanders point out, between 2008 and 2017, over 80 percent of corporate profits have been dedicated to buybacks and dividends, a more direct cash transfer to corporate investors. Buybacks also enrich shareholders by artificially increasing the stock price—if there are fewer shares available for purchase, the value of each increases. This has the nice side benefit of enriching top executives, most of whom are paid with stock.
William Lazonick, America’s foremost critic of buybacks, detailed the whole sordid scheme in the Prospect’s summer 2018 issue. As he wrote then, “Corporate resource allocation has increasingly transitioned from ‘retain and reinvest’ to ‘downsize and distribute.’”
Schumer and Sanders may seem like an odd couple to condemn financial engineering, but Schumer has actually been signaling a critique of buybacks since before the Trump tax cuts were signed, warning that the large corporate tax cut would simply be funneled to investors and executives through buybacks. This blew up the entire myth of the tax cuts juicing the economy through corporate investment in workers and materials, and Schumer was right. Companies announced $70 billion in buybacks in the ten days after the Senate passed its version of the tax cuts. And in 2018, the first full year of the tax cuts, repurchases reached $1 trillion, a record for the United States.
The buyback explosion is the perfect example of how the Trump tax cuts operate as a transfer to the wealthy, and Schumer sniffed that out early. That companies like Wells Fargo have enjoyed huge profits from the tax cuts and spent billions on buybacks while laying off workers just makes it more acute. As primarily a political animal, Schumer will often throw populist elbows if it makes Republicans look bad. It’s also the case that fewer shares on the market means less opportunity for stockbrokers, Schumer’s constituents, to earn fees.
But if the critique is solid and broadly shared across the Democratic Party, the solution Schumer and Sanders advocate for here is … odd. Schumer and Sanders want to prohibit companies from buying back stock until it satisfies a checklist of “investing in workers and communities,” including paying a living wage of $15 an hour, providing paid sick leave, and offering health insurance and defined benefit pensions to workers. This is similar to a bill presidential candidate Cory Booker introduced last year.
This is a bizarre form of micromanagement, which would require regulatory judgment calls for every public company. There are already meager limitations for buybacks: Companies cannot engage in them at the beginning or end of the trading day, must use a single broker for the trades, purchase shares at the prevailing market price, and limit the volume of buybacks to 25 percent of the average daily trading volume over the previous four weeks. But in 2015, the Securities and Exchange Commission admitted to Senator Tammy Baldwin in a letter that they do not collect any of this data. Companies don’t even have to disclose how many shares they buy back on a given day.
Does anyone really believe the SEC will suddenly devote its scarce resources to determining whether companies are good corporate citizens to workers and communities?
There’s a far simpler solution for the scourge of buybacks—making them illegal, again. Buybacks were largely not a problem until 1982, when the SEC promulgated Rule 10b-18, giving companies a “safe harbor” from prosecution for market manipulation when engaging in buybacks. Lazonick calls this “a license to loot the U.S. business corporation,” and he’s correct. The stock manipulation is inherent in the practice, yet today, no corporation can be cited for it.
The answer is to just repeal the safe harbor, which can be done administratively by a willing SEC, or through legislation, like Baldwin’s Reward Work Act. We had a functioning economy before 1982, when the safe harbor was imposed. If companies want to reward shareholders by manipulating markets, they should be held accountable for it. Maybe they’ll have to reward shareholders in other ways, like making a good product and building a successful business.
Baldwin’s bill pairs a repeal of Rule 10b-18 with a straightforward way to empower workers, by guaranteeing them a percentage of corporate board seats. Known as co-determination, this model works well in Germany and across Europe to put workers and companies into a real partnership.
In other words, you improve worker conditions by building worker power, not through a weird bank shot where you hold buybacks hostage for cosmetic changes in corporate behavior. The recurring Democratic impulse to use one problem to solve another through Rube Goldberg mechanisms is a poor substitute for clean solutions. If you want to stop buybacks, just ban them.