J. Scott Applewhite/AP Photo
The American economy has reached the point where rising stock prices don’t actually reflect people themselves buying stock.
As a recent report in The Wall Street Journal documented, a Bank of America survey of its individual and institutional investor clients reveals that they have been selling off more shares than they’ve been buying since the start of the year, to the tune of $25.3 billion. The only reason stock prices have risen at all is reflected in the bank’s findings about two other groups of its clients: hedge funds, which have purchased about $4 billion more than they’ve sold, and corporations, which have bought back roughly $30 billion of their own shares.
The S&P 500’s 8 percent increase this year, then, doesn’t mean that mom and pop, or even mom and pop’s pension fund, are flocking to the market. It means that CEOs are buying back their own companies’ shares, which, by reducing the number of shares outstanding, raises the value of those shares, which benefits many of those same CEOs, who get bonuses when the companies’ share values rise, and the bulk of whose compensation comes in the form of awarded shares, too.
Nice work if you can get it.
Merely to lay out that process is to explain why it continues to grow. Last year, companies listed in the Russell 3000 announced they were buying back a cool $1.27 trillion of their own shares, which was an all-time record. The Journal reports that they’re on track to buy back at least as much this year.
Until 1982, buying back shares wasn’t actually allowed. In that year, Ronald Reagan’s appointees to the SEC passed a new rule legalizing the practice. It took some time for CEOs to realize that this method of self-enrichment had been opened to them. It wasn’t until 2014, when University of Massachusetts economist William Lazonick published a report in the Harvard Business Review documenting the practice, that it began to come to public notice. Lazonick looked at
the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.
Calculations for more recent years (including Lazonick’s in several Prospect articles) have shown those trends have only grown more so.
It took still longer for buybacks to become a political issue. During Congress’s 2021-2022 term, Democrats passed and President Biden signed a bill creating a corporate tax that came to 1 percent of the value of the shares companies had repurchased in the past year. In his State of the Union address in February, Biden called for raising that tax to 4 percent, which, given Republicans’ control of the House, has gone nowhere.
Given the sheer size of the economic rewards that buybacks deliver to major shareholders and the top executives who authorize them, however, there’s no reason to think that a tax of 1 percent or 4 percent or 10 percent would stay these greed-heads from the swift completion of their appointed self-enrichments. None of the current data shows that the 1 percent tax has deterred buybacks in the slightest.
For this reason, three House Democrats—Reps. Jesús “Chuy” García (IL), Ro Khanna (CA), and Val Hoyle (OR)—are today introducing the Reward Work Act to just plain ban stock buybacks. In an interview with the Prospect, García noted that buybacks are now common practice even among corporations whose underinvestments in business basics have become lamentably clear. “Norfolk Southern, whose train derailed in East Palestine, bought back stock,” he said. “Nike, which slashed what were already poverty-level wages of its Asian workers, bought back stock. Military arms producers that are funded by taxpayer dollars bought back stock.” He added that pharma bought back stock, with money that could have gone to more research and development of medications.
García’s bill also requires publicly traded corporations to change the composition of their boards by having one-third of the board members be elected by the company’s employees. “We need to make corporations more accountable to their workers,” he said.
In Germany, corporations are required to have half of their board members selected by their employees, though the CEO is always empowered to break tie votes. The effects of this arrangement are somewhat murky and not easily distinguished from those that German unions—which are more powerful than American unions—win through collective bargaining. When German corporations have offshored production, however, they often have kept the most highly skilled work in their production chains within Germany itself, for which the worker representation on their boards gets some of the credit. On the other hand, the German system (known as “codetermination”) is more the result of the power workers have gained through their unions than a cause of an increase in worker power.
There are no prospects, of course, that the García-Hoyle-Khanna bill will be enacted by the current Congress (nor for a counterpart bill they soon expect to be introduced in the Senate). Nonetheless, their bill lays down a marker for the next time the Democrats control both Congress and the White House, for increasing the power of labor and decreasing the outsized claims of capital. In so doing, they’re cementing its place on progressives’ list of things-we-should-have-done-long-ago-but-at-least-we’re-doing-now.
