Kill stock buybacks to save the American economy
By Nick Hanauer
You don’t need a rich guy like me to tell you that there is something very wrong with the American economy. You feel it every day in your stagnant paychecks, your rising credit card balances, and your creeping fear that everything for which you have worked so hard could quickly slip away.
And President Trump’s massive corporate tax giveaways aren’t going to make your lives any better. To be clear, corporate profit’s take of the U.S. economy had already doubled over the past 40 years — from an average of six percent of GDP during America’s post-war economic heyday to about 12 percent today.
While corporate profits continue their steady dominance over the economy, wages remain flat, economic anxiety keeps rising, and our nation can no longer seem to afford even its most basic needs. Roads, bridges, freeways, and drinking water systems are crumbling. Our public schools and our police and fire departments are dangerously underfunded. Student debt is crushing a new generation of young people, many of whom have given up on the American dream.
Where did all this money go?
Much of the answer is as simple as it is surprising: Stock buybacks — more than $5.1 trillion worth since 2008. Over the past decade, the companies that make up the S&P 500 have spent an astounding 54 percent of profits on stock buybacks. This year, U.S. corporations are on pace to spend about $1 trillion ($100 billion by Apple alone!) — roughly five percent of GDP — simply propping-up their share prices by repurchasing their own stock.
Rather than flowing back through the broader economy in the form of higher wages or increased investments in plants and equipment (the promised “rising tide” of trickle-down economics), trillions of dollars of windfall profits are being sucked out of the real economy and into a paper asset bubble, inflating share prices while producing nothing of tangible value. Corporate managers have always felt pressure to grow earnings per share, but where once their only option was the hard work of growing earnings by actually investing in producing better products and services, they can now simply manipulate their earnings per share by reducing the number of shares outstanding by buying their own stock.
Shareholders aren’t providing capital to the corporate sector, they’re extracting it.
So what’s changed? Stock buybacks used to be illegal — back before 1982, when a former Wall Street CEO in charge of the Securities and Exchange Commission loosened the rules that define stock manipulation. That rule change, combined with a shift toward stock-based compensation for top executives, has essentially created a gigantic game of financial “keep away” — with CEOs and shareholders passing a trillion dollar ball back and forth over the heads of empty-handed American workers whose share of national income has fallen in proportion to profit’s rise.
Why do I care? Well, apart from being afflicted with empathy (a genetic trait far less common in corporate boardrooms than one might hope), stock buybacks have proven as bad for business as they have for the American middle class. Typically, almost all investment carried out by firms is financed by retained earnings, and so the diversion of cash flow to stock buybacks has inevitably resulted in lower rates of business investment. We think of the stock markets as an engine of growth, but since the 1980s, public corporations have actually bought back more stock than they’ve issued, representing a net negative equity flow. Shareholders aren’t providing capital to the corporate sector, they’re extracting it.
Meanwhile, the shift toward stock-based compensation has proven a driving force behind the rise of the one percent, boosting the ratio of CEO-to-worker compensation from 20-to-1 in 1965 to about 300-to-1 today. And as labor’s share of national income has steadily fallen, so has consumer demand, with the obvious negative impact on economic growth. In fact, a study by the Organization for Economic Co-operation and Development found that rising inequality knocked six points off U.S. GDP growth between 1990 and 2010 alone. Just imagine how many more good paying jobs our economy would have created if it were six percent larger than it is today.
To be clear: I’ve done stock buybacks too. We all do it. In this era of short-term-focused activist investors, it is nearly impossible to avoid. But at least part of the solution to the epidemic of business disinvestment must be to discourage buyback-enabled stock manipulation by going back to the pre-1982 rules.
We cannot flush away five percent of GDP inflating the portfolios of the one percent while simultaneously maintaining a modern economy with sufficient investment, growing wages, and an expanding economy. That’s why we need to reorient our policies from promoting personal enrichment to promoting broad growth — we need to limit stock buybacks and raise the marginal rate on dividends while providing real incentives to boost investment in R&D, worker training, rising wages, and business expansion.
Once America’s CEOs get back to the business of growing their companies rather than growing their share prices, shareholder value will take care of itself, and all Americans will share in the benefits of a renewed era of inclusive economic growth.
About the author:
Nick Hanauer is a Seattle-based entrepreneur, venture capitalist and civic activist. He is a co-founder of the venture capital firm Second Avenue Partners and the founder of the public-policy incubator Civic Ventures.
