The members of Congress who fought for a ban on stock buybacks in the $2.2 trillion coronavirus relief package did the right thing for Americans. But the ban should be considered a mere starting point in limiting corporations’ purchases of their own stock, a practice that has badly hurt the American middle class and helped drive income inequality to an excessive level.
The problem traces to the late 1990s, when changes in federal financial policy and in Securities Exchange Commission rules increased incentives for companies to use profits to buy back stock. Companies took advantage at an explosive rate, with buybacks rising from less than $200 billion in 1999 to $806 billion in 2018, a year when the Trump tax cuts left corporations flush with cash.
Over the past three years, companies in the S&P 500 stock index spent a staggering $2 trillion-plus purchasing their own stocks. Combined with dividends, the expenditures made up the vast majority of corporations’ profits.
This is money that could have been reinvested in companies — new equipment, expanded facilities, higher wages, research and development, setting aside assets for a rainy day, etc. — but instead was plowed into benefiting investors by pushing up the value of the corporations’ stock prices. (Buybacks reduce the number of shares in the open market, and the reduced supply tends to send prices upward.)
Executives also benefited, as their bonuses often are tied to stock prices.
With the massive buybacks, companies basically mortgaged the future for gains that benefited a privileged few. It was a shift in strategy from the post-World War II era that made this nation the economic powerhouse of the world, when companies tended to reinvest profits into workforces, production and their communities.
As economics expert William Lazonick explained in a 2015 study for the Brookings Institution, corporate America went from a “retain-and-invest” approach to a “downsize-and-distribute” approach beginning in the late 1970s and continuing today. Stock buybacks were a big part of the new mentality.
Wage growth stagnated, good jobs increasingly gave way to positions that tended to be insecure and underpaid, and the top 1% raked in billions. The middle class steadily evaporated, and the economy grew fragile.
Now, the damage is being exposed by COVID-19, and millions of Americans are feeling the pain. The speed of the layoffs that have swept the nation in recent weeks is densely tied to the failure of companies to reinvest profits into making themselves and their workforces more stable.
The good news is that in crafting the coronavirus relief package, lawmakers from both parties recognized that tax dollars shouldn’t be spent on buybacks. Even President Donald Trump understood that.
“I don’t want to give a bailout to a company and then have somebody go out and use that money to buy back stock in the company and raise the price and then get a bonus, OK?” he said Sunday.
Neither do taxpayers.
But putting the brakes on this runaway behavior will take far more than the ban in the stimulus legislation.
To fix the system, lawmakers need to prohibit corporations from buying back their own stock unless they’ve first invested money back into their workforces and communities. Examples of those investments would include adding positions, raising workers’ pay, offering better medical benefits and longer family leave, etc. SEC rules also should be revised to rein in stock-based compensation for executives.
We know from the Trump tax break of 2017 that merely handing companies more money won’t strengthen the economy up and down the scale. Contrary to the GOP’s long-debunked “trickle down” theory, companies didn’t use their newfound largesse from the tax cuts to build new factories, uplift their workforces and revitalize communities to any significant scale. Instead, they dumped it mostly into making their investors and execs that much richer.
Enough. If invested responsibly, the hundreds of billions going to buybacks and dividends could put the economy on stable footing, rebuild the middle class and help bring America back to the prominence it enjoyed in decades past.
There was a time when corporations felt a duty not only to their shareholders, but to the people who powered the companies’ success — the workers, their communities and the country itself. That’s given way to a focus only on serving the needs of investors, an approach that lawmakers need to stop.
Making the stimulus funding off-limits for buybacks was a step in the right direction. But a lot more work will be needed to fully turn the tide.