There is nothing wrong with stock buybacks.
Democrats would be better off focusing attention elsewhere.
I shouldn't need to say this, but this is a political blog and over half of my readers are Democrats. They hear things from Bernie Sanders and Elizabeth Warren like "obscene profits" and "profit-hungry corporations." It is easy to fall into a mindset, so let me say it: Profits are a good thing.Left-oriented Democrats have conflated a real problem--inequality of incomes--with the creation of wealth itself. Inequality is a problem. Distribution of wealth is a problem. More wealth and more profits are not. Democrats should be on the side of creating abundance. Abundance happens because the economy is working and people are profiting from enterprise.
I understand that businesses are not angels. Stifled competition and price fixing grossly distorts the price of insulin, a very visible failure of the market system. Railroads have been using monopolies to gouge shippers since before the Civil War. Out of town readers will find it hard to believe, but a direct flight from Medford to the San Francisco hub, 400 miles, is nearly as expensive as flying from Medford to San Francisco and then on to Beijing. United Airlines doesn't have competition on that direct flight to SFO. Crazy but true.
Individuals and corporations invest money in productive things because they think they will get a return from it. Democrats who have gotten accustomed to thinking of corporations as "suspect" need to think smaller for a moment. Think of individuals considering creating some affordable housing. Why would they build a rental house if they didn't think they could then rent it out and get a return?
Democrats will win more elections if they get comfortable saying the word "profit" in their speeches. It is the twin sound of "high wage jobs." They go together. Democratic candidates should practice saying it aloud. Most Americans do not take a vow of poverty. They want more and nicer things for their families.
An individual or company needs to do something with profits, probably distribute them. One way is to pay a stock dividend. It is a corporate version of a landlord getting a rent check. A corporation that pays regular dividends--perhaps one that amounts to a 5% yield on its current stock price. It sets up an expectation for investors. It is a kind of obligation for the company because it sets up an expectation that the company is equally profitable in all conditions, which it is not.
A stock buyback is another way for a corporation to distribute profits. There is nothing clandestine about it. Biden's proposed 4% tax on buybacks is rooted in the presumption that there is something wrong with profits making people richer by making stocks more valuable, as if that is different from making them richer by paying them cash. They need to get over that. Buybacks have the same net affect as a cash dividend. A company that buys up shares in the open market--say 5% of the outstanding shares--returns money to stockholders by making their outstanding shares presumably 5% more valuable. Either way the corporation distributes profits. Share buybacks allow companies to time those buybacks to times when they consider the stock price particularly low. No harm in that. Buyback plans are the right to buy shares, not the obligation to do so, which means that in tougher times they can suspend buybacks without the stigma of a dividend cut. No harm there, either. Some investors--retired people like me--prefer cash dividends. Others, who are in the "accumulate" time of life, prefer buybacks. Both serve a legitimate need.
Does a buyback create an unfair tax advantage? Possibly, if the tax rate on cash dividends is different from the tax rate on capital gains. Currently they are about the same, a bit lower than "regular income." If shares of stock are owned in a retirement account then either way, as dividends or as increased value, they are taxed as "regular income." Either way, dividends or buybacks, it eventually gets taxed at about the same rate.
This post is not a defense of "trickle down." I completely agree that our current economy is doing a poor job of distributing wealth and sustaining a broad middle class. That is causing social problems than are endangering our democracy. Civil distress and eventually revolutions happen when people think the system is irredeemably rigged against them. But the problem isn't profits or the profit motive or whether corporate profits are distributed as stock buybacks or as dividends.
Democrats should not waste time and effort fixing the wrong problem.
10 comments:
Peter said:
Out of town readers will find it hard to believe, but a direct flight from Medford to the San Francisco hub, 400 miles, is nearly as expensive as flying from Medford to San Francisco and then on to Beijing.
Makes sense. It costs more to fly across an ideological boundary, and not that much to fly within an ideological zone. 😀
Those who think of themselves as “socialists“ (and remain resolutely and obstinately ignorant of what life under Socialism was actually like everywhere it was tried) will never buy the correct and logical argument you are making.
By the end of the reign of the Union of Soviet Socialist Republics, the ruble was worthless, and a common joke among the working class was, “We pretend to work, and they pretend to pay us“.
I think Sen. Sanders is more concerned when corporations use profits to exert influence on legislators. Offshoring operations and profits, for instance, with no mechanism to tax that income. Opposition to health and safety regulation is another, as well as lax enforcement of labor laws. Yet another problem, like the recent corruption uncovered regarding the Federalist Society, is that wealthy individuals with extreme views can corrupt institutions.
Buyback schemes falsely inflate value and should be outlawed, as well as other stock manipulation tactics. This isn't just my opinion; from Harvard Business Review:
"Whether it is corporate debt or government debt that funds additional buybacks, it is the underlying problem of the corporate obsession with stock-price performance that makes U.S. households more vulnerable to the boom-and-bust economy. Debt-financed buybacks reinforce financial fragility. But it is stock buybacks, however funded, that undermine the quest for equitable and stable economic growth. Buybacks done as open-market repurchases should be banned."
By the way, if profit is so wonderful why are non-profits considered more virtuous?
I'm all for profit, but "big business", which benefits .01% of the population, spends an inordinate amount making sure none of it returns to the communities that provide that wealth. Most of the wealth in this society is generational, and it's nearly impossible to create those legacies now. Average citizens, possibly a majority, struggle just to stay even, with prosperity always beyond their reach. I've met a lot of rich people and none of them were self-made from poverty. In fact, it's a novelty, which explains the allure of sports and entertainment as a path for the disadvantaged.
Yes, profit, it could be argued, threatens our democracy. It already has destroyed the Republican party.
If more Democrats were actually Progressive, instead of Complicit, we might make some progress in this regard.
Peter, you say: “A stock buyback is just another way for a corporation to distribute profits. … Biden's proposed 4% tax on buybacks is rooted in the presumption that there is something wrong with profits making people richer.”
I'm no economist, so this is my limited understanding:
Having a government costs money, which it raises through taxes. Our government is spending far more that it is taking in, creating what will soon be a debt crisis – like a millstone around our children’s necks. The government needs to raise more money, preferably from those who can afford it, and spend less.
What isn't clear from your article is why this particular tax on profits is more onerous other forms of taxation.
Economic incentives for corporations in this country should be adjusted to encompass more than just the share price.
The tight focus on share price has led to many destructive outcomes (like the leveraged buyout that destroyed Toys “R” Us). Corporate incentives should lead companies to behavior that benefits all of us, not just corporate raiders and high frequency traders.
I agree with Rick Millward. Bernie and Liz are also concerned about the increasing gap between wages of ordinary workers and the corporate profit line. And yes, the example of insulin is a good one. That tax break the Republicans gave to businesses was meant to be the trickle down of profits to benefit the worker, but corporations used it for stock buy-backs instead.
Liz Warren warned businesses that while they are entitled to a profit, they also have an obligation to realize that they used public roads, and public schools for their kids, and that no one makes profits without the help of these and many agencies that safeguard the health and welfare of themselves and their employees. She reminds them that they have an obligation to pay it forward.
I managed to retire by working at least two jobs for many years, and building some rental homes. My fellow contractors ragged on me for paying high wages, and for building custom homes for renters, and never raising rents, until a renter moved elsewhere. But the technique results in fairthfull renters and productive workers, so I am happy.
Because I worked my body half to death, I feel guilty earning Money from the stock market. My wife and I have our investment guy put our rental I come into fairly green stocks, “safe” stocks, with the goal of making only enough to cover inflation. When stocks accidentally earn big returns, we donate much/most of these profits to, among other things, support a couple of schools for Maya kids in Guatemala.
If you know the history of US governments and US corporations vs Maya Indios, you’ll see why.
Good point, Dianne. And there are LOTS more items you could mention, e.g. infrastructure, police, fire department, water, sewer, power supply; the list goes on.
Much could be done if we stopped assuming corporations are people (immortal ones at that) and we had a mergers and acquisitions board similar to the UK. Predatory capitalism, buying up competition, destroys supply and demand arguments. Monopolies in essential services like energy delivery (power companies) are at present allowed a rate of return beyond the cost of service. However the government had to step in to the electric supply problems of electrifying rural America with the Rural Electrification Act (REA) that gave us the Public Power Administration. The government had the deep pockets by borrowing (increasing Federal debt) to buy poles and wire; and hire workers and build generation to serve a sparse number of small customers. In theory, power wheeling arrangements and charges for electricity delivered were to be used to pay for operation, and surplus funds to funnel into the General Fund, repaying in part the the cost. We see the effects today with our government, through the infrastructure act, to build out electric charging stations and provide high speed internet to widely distributed customers. Net net net the REA and Public Power Administration made rural America more productive and prosperous adding to the tax base. Public power is also a check and balance on what is normal and usual rates for service that regulators can see when they make their assessment of a reasonable rate of return.
Profit is necessary to remain in business. Presently we have monopolies that are not regulated like healthcare servers, technology companies, global conglomerates to name a few. The EU attempts a form of price control, regulation and taxation on these companies. Much of what is happening in the business world today is not at all what Adam Smith refers to as capitalism in this book "The Wealth of Nation".
The case with non profits looking like darlings compared to corporations is the scrutiny they are under to maintain their non profit status.
We don't need to fear profit or monopolies. We need to be concerned about the loss of authority to regulate and govern a global market. As an aside I wonder where we would be today, in our relations with China, if we had the Pan Pacific Partnership in place, up and running. Oh what could have been.
Rates of poverty in the U.S., the wealthiest nation in the world, are substantially higher and more extreme than those found in other developed nations. Poverty rates are lowest in the Scandinavian countries, which are social democracies. That’s probably why they’re also rated as the happiest countries in the world.
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