Even readers with Memento-like short-term memory problems (no judgment!) will recall The Hot Screen going googly-eyed a few days ago over a recent report by the Roosevelt Institute that zeroes in on the economic harm inflicted by the widespread practice of stock buybacks. We’re not the only ones flabbergasted by this research: at The New Republic, Alex Shephard ties the practice to Apple’s much-publicized crossing of the $1 trillion market capitalization threshold last week. Shephard states that, “Apple’s recent success on Wall Street isn’t due to its technological innovations or its sleek products. Instead, its stock has been juiced by a record-breaking number of buybacks.” Zeroing in on Apple is instructive, as the numbers are mind-boggling: it plans $100 billion in buybacks in 2018, and its $285 billion in cash means it can potentially buy back even more.
However, Shephard’s critique stumbles when he asserts that the situation is as straightforward as Apple’s buybacks being used to compensate for declining profit margins, and leading to a lack of investment in the company. While for most companies this critique of buybacks is on solid ground, Apple presents a rarer case: a company that, whether or not it is suffering from declining profit margins, is nonetheless churning out massive and increasing levels of profit based on its current business practices, including what it views as adequate and acceptable levels of investment. Apple thus also highlights a central pro-buyback argument: that as a successful business that has more money than it knows what to do with, Apple is at least rewarding its shareholders using money that it has earned, money moreover earned based on those shareholders' existing investments in the company.
If the case against buybacks is to take hold, it needs to account for companies like Apple that can plausibly say that because they are investing in themselves sufficiently, they are entitled to spend their remaining profits as they see fit. After all, it is extremely difficult to see Congress passing any laws mandating that companies spend a certain percentage of their profits on investment, hiring, or pay increases. As I noted before, the question of limiting or eliminating buybacks is closely linked to the question of raising taxes on corporations: if they are making so much money that they don’t know what to do with it, then they are making a strong case that their taxes are too low, particularly in the context of starved public services, crumbling infrastructure, and ballooning deficits due to the Trump tax cuts.
However, Apple raises a central assertion that opponents of ending buybacks, and supporters of increased taxes on corporations, need to be able to make: that by taxing a company’s profits, the government will make efficient use of the revenues it brings in. Apple and other corporations with massive profits provide an opportunity to revisit and renew a fundamental argument for taxes and government spending: that we as a nation need to spend money on collective goals not provided by the market. Defenders of buybacks would argue that only individual companies can be relied on to most efficiently spend their own money, even if that’s for stock buybacks; but buybacks push this argument to the point of least persuasiveness when placed against the very real public good that buyback money would do in a variety of public contexts, from health care to education. Buybacks can even make conservative arguments against the inefficiency of government spending versus the private sector look laughable: what’s more inefficient, after all, than simply pumping up your share price?
Two final, semi-related points about buybacks. First, proponents say that they’re a fair reward for stockholders, but stockholders are already rewarded when their investment is successful and the stock price goes up; there is a subtle but pernicious suggestion that they wouldn’t be making money if not for buybacks, which is just silly. Second, investors who don't worry about a company not maximizing its money on internal investment and development are investors who have lost sight of the idea that a company needs to build long-term value. There is little doubt that buybacks now means less returns in the future, making them effectively a short-sighted investment that drags down overall economic performance in the bargain.
Focusing on Apple is illuminating not only in what it says about buybacks, but about the probable difficulties in rolling them back. Many people will feel like they’re losing money if buybacks go away, and the arguments that the overall economic health of the country will be helped need to be air-tight and persuasive.