Don’t Buyback Shares, Share Profits


While most would dismiss the view that the US today is governed as a theocracy, it is not an entirely cynical viewpoint . I do not refer to the resurgence of evangelical Christianity; I suggest that the US believes in and is governed by its unshakeable faith in Capital. To borrow the language of the bible, it is all about Mammon. One proof that free-market capitalism is practiced and preached is the offerings given to share buybacks last year by corporate America: it was an obscene one trillion dollars.

When you consider that most of those shares are below their average price for last year, you could say the capital was at least grossly misallocated. Unfortunately, the incentives are perfect for them: buybacks offer high short-term benefit to the very people who propose them: corporate officers (they are compensated by shares and options), and activist shareholders (who like the buoying effect buybacks have on share price). And buybacks are easy to sell to the Board of Directors—even if they are funded by debt. Financial theory makes it easy to “sell” a debt-funded buyback to the board because today’s low-cost debt reduces the cost of capital for the firm—which increases the present value.

Imagine the effect of one trillion dollars had it been allocated instead to higher wages or profit-sharing for employees, or new investment on R&D! For working Americans, higher wages would have boosted the economy as consumption or savings. One of the best R&D paybacks the US ever received was the technology from NASA’s Moon Shot program. That trillion would have paid for a 10-year Mars Landing Mission many times over. And by the way, the level of buybacks and dividend increases (which also buoy share prices) has been over a trillion a year for several years now. The effect of those trillions would have already come back to this nation: higher GDP growth, smaller income and wealth gaps, and perhaps smaller municipal budget deficits as more income and spending generated more tax revenue.

Economists everywhere have noted that the share of national income that goes to capital (rather than labor) has been way above historical norms for a decade now. Most agree that it is not good. Some of them think the Federal Reserve Bank is to blame with extremely low (or zero) interest rates—they are. But it is time to change the incentive system that promotes this awful misallocation of Capital. My sense is that if compensation rules for corporate officers had been changed to reduce stock- and stockoption-based incentives, the buyback frenzy would not have destroyed such an enormous sum.

We argue politically about programs that cost billions, yet imagine what the impact of trillions could have been: lasting and real instead of ethereal and intangible. Corporate charters need to be changed. I hope to continue work on a book to address how these huge machines operate in our society—without our best interests in mind. And what we might do about it.


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