I first learned about stock buybacks a few years ago, when I was given the option of directly investing my 401(k) in companies of my choosing and started to educate myself about the stock market. My initial reaction, as far as I remember, was to take them for granted, just as I did most everything I learned about investing. They were widespread, they were good for stock prices, and everything I read and heard treated them as normal parts of the stock world.
At some point, though, they began to strike me as in opposition to the basic tenets of investing I’d read about: that one should invest in companies built for the long haul, and that companies invest in themselves in order to become more successful businesses. The idea that companies would spend their profits on reducing the number of their own shares in order to raise their stock price seemed like a short-cut, a sugar high boost to stock prices instead of underlying value. But the sense that all companies seemed to be doing it made me think that maybe I was missing something, that this wasn’t such a big deal, that there must be economic arguments I was missing.
Recent studies, including one by the Roosevelt Institute and National Employment Law Project highlighted in this recent Atlantic article, are making the case that stock buybacks are in fact a much more objectionable and even destructive element of the modern economy than I’d hazarded to guess. The amount of money shoveled into buybacks, particularly when expressed as a percentage of company profits, is shocking. According to the Roosevelt Institute study, retail companies spent an average of 80% of their profits on buybacks, while food-manufacturing firms spent 60%. The restaurant industry, though, spent an amazing 140% of profit on buybacks, which means they not only spent their profits but cash reserves or even borrowed money to do so.
The study looked at these three particular industries because their workers have particularly low wages, and to support a central critique of buybacks — that they essentially constitute a decision to pay workers less in order to reward shareholders more. The company by company breakdowns are frankly shocking. “Lowe’s, CVS, and Home Depot could have provided each of their workers a raise of $18,000 a year,” The Atlantic notes, “while Starbucks could have given each of its employees $7,000 a year, and McDonald’s could have given $4,000 to each of its nearly 2 million employees.” Such figures dwarf the meager payouts that have trickled down to workers under the Trump administration’s trillion dollar tax cuts for businesses and the wealthiest Americans. The money has been there all along to boost worker pay; the bosses have just chosen not to.
Critics speculate that the buybacks feed into diminished growth throughout the overall economy. The choice not to pay workers more means millions of Americans have less money to spend and thus to stimulate the economy. Every dollar on buybacks is also another dollar companies don’t spend making themselves more innovative and competitive, such as by training workers, spending on research and development, or improving equipment. This, too, results in economic drag at both the individual company and macro level.
Common to both these major critiques is evidence that those whom we’d assume are most devoted to capitalism — the managers and directors of American corporations — lack a sense of the basic elements of how capitalism actually works. If people don’t have money to spend, then how can they buy what those companies have to sell? And if companies don’t invest in themselves, how can they hope to compete in the marketplace? This seems an example of short-term greed over long-term thinking, and critics point to buybacks as a possible culprit for the depressed wages and lackluster growth of the U.S. economy in recent decades. One research paper cited in The Atlantic article uses the term “investment-less growth,” which should send a shudder down the spine of anyone who’s been led to believe that companies are worth investing in because they actually look to improve themselves, and not just grow on paper.
Buybacks also reinforce arguments that corporate taxes are too low. A common refrain against higher taxes is that corporations spend money more efficiently than the government. This is already a questionable and misleading argument, but the existence of buybacks weakens it even further. The government spending money on almost anything would be a more efficient use of resources than spending money to jack up stock prices. And when you put the opportunity cost of allowing buybacks and not raising corporate taxes in concrete terms — using higher government revenues to put people to work improving America's infrastructure or hiring more teachers — you get even more of a sense of how flimsy the pro-buyback, anti-tax argument really is.
I was unsettled to learn that stock buybacks were actually illegal until the 1980’s, with the major critique being that they constituted an illicit way for companies to boost their share price. The Atlantic notes that several Democratic senators have proposed legislation around this issue, but I would not underestimate the degree to which this issue will be a difficult one to address, even if its damage to the economy makes action necessary. Millions of middle-class Americans have money in the stock market, and the practice of stock buybacks has given them a vested interest in maintaining the status quo. More insidiously, it has effectively set their interests against those of working people, and even themselves, when the question comes down to buybacks versus wage increases. The sticky politics of the situation point to the need for a wider economic argument that fits a reversal of buybacks into a larger assertion that we will collectively benefit more when we all share economic gains more fairly.