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Buyback this!

from David Ruccio

equity

I have been arguing, since 2016 (e.g., herehere, and here), that one of the likely outcomes of the kind of corporate tax cuts Donald Trump and his fellow Republicans have supported—and, as we saw, eventually rammed through—would be an increase in inequality. That’s because corporations would likely use a portion of their higher profits to engage in stock buybacks, leading to an increase in stock prices. And stock ownership in the United States is already grotesquely unequal. Therefore, the rise in equity prices would disproportionately benefit the small group at the top of the wealth pyramid

And that’s exactly what is happening. As CNN Money reports, U.S. corporations have showered Wall Street with $214 billion of stock buyback announcements so far this year.

buybacks

According to a recent report by U.S. Senate Democrats (pdf), that total includes enormous repurchases from a diverse array of large corporations, including Wells Fargo, Oracle, Amgen, and Alphabet (Google).

Even those who, like Tyler Cowen, defend the use of the tax cuts for stock buybacks are forced to admit that

If a major corporation engages in buybacks, that simply transfers money from one set of hands to another — from the corporate entity to the shareholders.

That’s exactly right—except, of course, Cowen forgets about the initial transfer of value, the surplus, from workers to corporate boards of directors.

Now consider my estimate of the distribution of stock ownership in the United States, illustrated in the chart at the top of the post.

Again, as with the distribution of wealth in the United States, most experts get it wrong (as I showed recently, in a post that was picked up by Market Watch). As of 2014 (the last year for which data are available) the top 1 percent of American taxpayers (the green bar) owned not two or three but almost six times the corporate equities as the bottom 90 percent (the red bar)—62.19 percent compared to only 10.8 percent.

So, who are the real beneficiaries of the corporate tax cuts? Not workers (in terms of pay, benefits, or jobs) but the tiny group at the top who already own the bulk of stocks in the United States.* They’re getting wealthier and leaving everyone else further and further behind.

Let’s see what kind of economic voodoo the tiny group at the top of the wealth pyramid and their friends in politics and the media are going to use to attempt to buyback that obscene result.

 

*While some corporations have announced one-time bonuses, the money devoted to workers pales in comparison with the buyback bonanza. So far, just 6 percent of the corporate windfall from the tax cuts has gone to workers in the form of pay hikes, bonuses, and other benefits, according to an analysis by JUST Capital.

  1. March 22, 2018 at 12:27 pm

    We have capitalism all wrong. The purpose of a firm is not to give money to shareholders. It is:

    1. To produce goods and services that people value
    2. To provide fulfilling employment to the people directly involved, and
    3. To sustain and better itself, so as to pursue the previous two goals.

    The similarity to Asimov’s “laws of robotics” is not accidental. A firm is an autonomous entity in the service of humanity, not a tool for dominating one-another.

    Shareholders may be a necessary (or optional) evil, but pleasing them is not a goal. Dividends and capital gains are equivalent to a tax on firms, except that instead of sharing it equally rich people get to subscribe and claim the tax in proportion to their holdings. There’s no social value in that.

    In Utopia firms would issue profit-sharing bonds instead of shares. Each bond outstanding would pay perpetually a fixed percentage of the firm’s profits, say 0.001% and buying them back would simply return that profit stream to the firm.

    Even in Utopia, firms would have to grapple with that surplus and they might do ghastly things with it, like give it to workers or delight customers.

  2. March 24, 2018 at 7:59 pm

    Dystopia happens under shareholder value. Labor and nature must be sacrificed to profit maximization as the future must be sacrificed to corporate rule in NAFTA, TTIP, and TTP.

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