Susan Walsh/AP Photo
President Joe Biden arrives to speak at Auburn Manufacturing, Inc., in Auburn, Maine, July 28, 2023.
Nine years ago, in an article in the Harvard Business Review, economist William Lazonick reported on a previously undocumented trend in American capitalism. Rather than invest in new or better facilities or technology, the nation’s corporations were directing their profits almost entirely to their shareholders, through dividends and stock buybacks. It was the buybacks that had gone largely unnoticed. But ever since 1982, when Ronald Reagan’s Securities and Exchange Commission had ruled that corporate executives could authorize their corporations to buy back their own stock, that practice had taken off.
Happily for corporate executives—and probably not a coincidence—the rise of buybacks occurred just at the time of the rise of a new mode of payment, where CEOs and top officers were increasingly compensated with shares of the company’s stock. And since buying back shares reduced the number of shares in circulation even as the company’s overall value stayed the same, it boosted the value of the remaining shares, including those that C-suite executives possessed. Not to put too fine a point on it, but when CEOs authorized buybacks, they were effectively making themselves richer.
Back in 2014, Lazonick looked at the buybacks of all 500 companies on Standard and Poor’s list of the largest publicly traded corporations, and found that the value of buybacks, when added to dividends, roughly amounted to the total profits of the great majority of those companies. In the nine years since his article appeared, the amount of funds corporations spent on buybacks has steadily increased, setting a new record in almost every successive year.
Until now. According to a new report from Bloomberg Daily, the amount that companies in the S&P 500 that have reported second-quarter earnings have spent on buybacks is actually down by 36 percent from this time last year.
And where are those corporations redirecting the funds they’ve previously been shoveling into buybacks? To investments in plants and technology, which, for those same companies, have increased by an average of 15 percent.
This puts an end to a conundrum that was never really conundrum-ous, to coin a term. Ever since the HBR article ran in 2014, a number of writers on the economy (present company very much included) have argued that the rise of buybacks came at the expense of productive investment. It epitomized the financialization of the economy, by changing the corporate mission from making things or delivering services to rewarding shareholders. As it coincided with widespread offshoring of production and the pervasive suppression of unions, it was one of the three legs of the platform that privileged investors (who didn’t actually create corporations’ value) over workers (who did).
The long-held and widespread popular opposition to offshoring American manufacturing has finally permeated a slice of the American elite.
Not surprisingly, this was an argument that many Wall Street apologists vehemently opposed. Their standard counter was that by rewarding investors, America’s leading companies were enabling those investors to re-invest their winnings into other companies. But as domestic investment lagged and buybacks continued to soar, it became clear that those other companies whose stock those investors purchased had been targeted by those investors chiefly because they awarded them with generous dividends and buybacks. Moreover, when investors purchased shares, their funds went to the sellers of the stock, not to the companies. The lion’s share of companies’ investments in plants and technology invariably comes from retained earnings, as well as debt incurred for those projects. When the retained earnings went disproportionately to shareholders, productive corporate investment disproportionately lagged.
So, the relationship between buybacks and productive investment should never have been a conundrum. It was clearly inverse.
The Bloomberg report makes clear just how inverse it really has been. Since the 2008 financial crisis, it notes, “for every dollar generated through operation or borrowed, companies spent only 38 cents on capex [capital expenditures], down from 54 cents prior to the financial crisis. At the same time, the money allotted to buybacks increased to 24 cents from 13 cents, according to BofA [Bank of America] data.”
Now, Bloomberg reports, Goldman Sachs strategists are predicting that the amount corporations will devote to capital expenditures will actually exceed that devoted to buybacks for this year and next. “Corporate America is reinvesting,” BofA analysts announced last week. This reinvestment, they said, “will be the main driver of earnings growth going forward, vs. the last decade’s financially-engineered growth.”
What accounts for this about-face from American corporations? Clearly, there are several factors, including the advent of new technology like AI, a theoretical pot of gold that many firms are chasing. But the largest of those factors, I’d argue, is Bidenomics.
Already, its three landmark pieces of legislation—the Infrastructure Investment and Jobs Act, the CHIPS Act, and the Inflation Reduction Act—have spurred companies to return to productive investment, lured by tax credits and grants. As I noted in an On TAP last week, the tax credits and subsidies the government is now offering have increased the funds that companies are spending on factory construction by 76 percent over last year, while corporate investment on plants and technology generally has increased by 56 percent.
More broadly, the long-held and widespread popular opposition to offshoring American manufacturing has finally permeated a slice of the American elite—most particularly, the Biden administration and many members of Congress. The pandemic’s crushing of supply chains no doubt accelerated this shift.
I don’t credit just the Biden investment stimulus. The Biden consumption stimulus—mostly from the American Rescue Plan, which the then-Democratic Congress enacted shortly after Biden’s inauguration—produced a record-fast recovery from the pandemic recession and a level of purchasing power that expanded the market for the corporations’ products. And there were tax changes, specifically the Inflation Reduction Act’s 1 percent excise tax on stock buybacks, which may have played a minor role.
I don’t mean to overstate this. The forces that elevated finance over production, and shareholders over workers, still remain dominant, to the ongoing detriment of the common good. But in a way that’s largely unappreciated, Bidenomics has tilted American capitalism more toward production and workers than it’s been, at least since Ronald Reagan became president. That’s no small thing.
