The Charging Bull sculpture by Arturo Di Modica, in New York's Financial District, is shown in this photo, Wednesday, Feb. 7, 2018. The current bull market is set to turn nine years old in about a month.
In the aftermath of the Trump tax cuts, Republicans have endlessly crowed about how corporations are using their newfound savings to give their employees wage hikes and bonuses. Paul Ryan even boasted on Twitter about a high school secretary who was surprised to find an extra $1.50 in her weekly paycheck, which could more than cover her annual Costco membership fee.
The tweet was quietly deleted a few hours later. But not before critics pounced on the absurdity of bragging about such meager benefits, considering that the entire tax cut came to roughly $1.5 trillion. As Vox’s Matt Yglesias tweeted:
$1.50 a week times 52 weeks in a year times 330 million people only comes out to $25 billion or so.
Where’d the rest of the money go? https://t.co/a77AyK0Ete
— Matthew Yglesias (@mattyglesias) February 4, 2018
The dribble of the tax cuts that has flowed to the average worker looks equally infinitesimal when compared with the geyser of money being pumped into stock buybacks—a tactic that allows corporations to repurchase their own stock, which juices their company’s stock prices. Corporate executives are highly incentivized to use profits (or even take on debt) to do buybacks, since it both appeases aggressive activist investors and balloons their own stock-option-based compensation.
All in all, corporate America has pledged 30 times more to buying back its own shares than to investing in its workforces. That’s according to a new analysis by William Lazonick and Emre Gomeç of the Academic-Industry Research Network, and Drucker Institute Director Rick Wartzman, who tabulated total business commitments for both buybacks and employee compensation.
Forty-four companies on the S&P 500 have promised more money to workers through either bonuses or wage increases as a consequence of the new tax law, which comes to $5.2 billion—$3.7 billion in one-time bonuses and $1.5 billion in wage bumps. (The study’s calculations are based on the assumption that these companies will reward the widest possible swath of employees, which news accounts make clear is not the case. Accordingly, these figures may actually be too generous.)
Meanwhile, 34 companies on the S&P 500 have announced $157.6 billion in stock buybacks since December, the analysis found.
That stark disparity is not surprising to Lazonick, an economics professor at the University of Massachusetts Lowell and head of the Academic-Industry Research Network. He’s been sounding the alarm about the rise of the Shareholder First economy for years, and in 2014 wrote the seminal Harvard Business Review article “Profits Without Prosperity,” which exposed how corporate obsession with buybacks has fueled the rising income inequality gap at the expense of much-needed corporate investment in research, development, and workers.
“The issue is what are they not doing when they do stock buybacks,” Lazonick tells The American Prospect. “What they’re not doing is keeping people employed longer, paying them more, and giving them more benefits. There’s a direct connection between the decline of those norms and the rise of buybacks and the legitimized ideology of ‘Shareholder First.’”
Take, for instance, the pharmaceutical conglomerate Pfizer. Just days before the tax cuts were signed into law in December, the company announced a massive $10 billion buyback in addition to a dividend hike. A few weeks later, Pfizer announced that it was halting research into drug treatments for Parkinson’s and Alzheimer’s—a move that also meant 300 layoffs.
Then there’s the example of paper-products manufacturer Kimberly-Clark, which used its tax cut savings for a $2.3 billion buyback and a dividend increase—and then used the rest to fund a corporate restructuring that translates to 5,000 lost jobs. The list goes on.
The buybacks, Lazonick says, make clear that corporations have become tools for value extraction rather than value creation. Over the past decade, companies have given 94 percent of their profits right back to shareholders through dividends or buybacks, the Academic-Industry Research Network found. Between 2005 and 2015, companies on the S&P 500 spent $4 trillion buying back their own stock (as well as $3.9 trillion on increased dividends). And at a time when the CEO-to-worker pay gap hovers near 300-to-1, stock-based compensation is powerful incentive for CEOs to use buybacks to exquisitely feather their own nests.
LIKE MANY OTHER TROUBLING TRENDS in today’s economy, the rise of share buybacks can be traced back to the Reagan administration. In 1982, Securities and Exchange Commission chief John Shad, the first Wall Street executive to take up the post, and his fellow Reagan appointees to the SEC instituted a rule, formally known as 10b-18, that allows corporate executives to buy back shares and grants them immunity from stock-price manipulation regulations so long as they follow certain restraints. In 2015, 77 percent of compensation for S&P 500 CEOs came from stock-based options and bonuses.
Proponents of stock buybacks defend them as a tool for efficiently jettisoning unused profits after all other avenues for value creation have been exhausted, or as an effective form of “shark repellant” to fend off hostile takeovers from activist investors. Lazonick argues, however, that over the past few decades, under the guise of “maximizing shareholder value,” the stock buyback has clearly morphed into a malevolent force used to extract wealth from companies at the expense of all else.
“All of those trillions of dollars flowing out of companies are being used to build the war chests of hedge-fund activists for further buybacks or [giving them more] money to play around with on derivatives,” Lazonick says. “When you connect the dots, it’s part of bigger process. This is really a long-run problem that helps to explain concentration of income at top because it’s getting made off the stock market.
Also known as the “safe harbor” rule, 10b-18 technically says that companies must follow daily limits on much stock they can buy back. But the SEC does not even have the authority to collect the data necessary to police buybacks. “That means firms are protected from any liability that the SEC could bring for manipulative practices,” Lenore Palladino, senior economist and policy counsel at the Roosevelt Institute, tells the Prospect.
Palladino argues in a new report entitled “Corporate Financialization and Worker Prosperity: a Broken Link” that companies are acting more and more like banks—holding assets and earning interest—and less like businesses that make money through the sale of goods and services or invest their profits in their workforce and other productive ventures. As she notes, the amount of financial holdings held by companies in the “non-financial corporate sector” (i.e., not banks) topped $2 trillion in 2015. Just 30 companies hold financial portfolios worth more than $1.2 trillion.
The money that those companies make through their financial manipulations is driving record-level profits. Companies then direct those profits to shareholders through buybacks, which Palladino says are simply the most egregious example of broader corporate financialization trends.
So what can be done to rein in this buyback mania?
Lazonick thinks it’s time to ban the practice outright and fully repeal the safe harbor rule. “Buybacks are not beneficial or necessary to household savers with diversified investments,” he explains. “The only ones who benefit are those who dump shares and are strictly in the business of timing.”
Wisconsin Senator Tammy Baldwin has been leading the charge to bring greater scrutiny to buybacks. Last December, she went as far as putting a hold on the confirmation of two SEC commissioner nominees—Democratic pick Robert Jackson and Republican pick Hester Peirce—until they provided her with “their views on whether regulators should rein in activist investors, stock buybacks and executive pay.”
However, don’t count on the SEC to do anything substantial on buybacks. The SEC has long embraced a light-or-no-touch approach to enforcement and regulatory matters. That likely won’t change under Trump’s SEC chief, Jay Clayton, who was previously a powerful Wall Street lawyer.
Apart from an outright repeal of safe harbor, there are other potential routes to harness buybacks. Palladino points to possible legislative solutions that could limit a company from doing buybacks if that cash has a preexisting claim on it, such as unfunded pension liabilities. Or Congress could change the tax code to more strongly incentivize companies to invest in the workforce and capital. Beyond that, there are innovative ways to solve the problem through corporate governance, such as giving workers a place in the corporate boardroom.
If Democrats want to advance a proactive policy agenda that exposes the real consequences of the Trump tax cuts, they would do well to plaster the disparity between buybacks and worker bonuses on campaign ads and jack up the pressure on Trump and his financial regulators to enact stronger oversight or outright repeal of the safe harbor rule.