LONG CONTROVERSIAL, the practice by which public corporations use spare cash to buy back their own stock has turned into a policy flash point for both Democrats and Republicans. The basic allegation is that profits devoted to stock buybacks — $583 billion by S&P 500 companies during the first three quarters of 2018 — are profits not plowed back into new plants, equipment or higher wages. This is especially galling now, the critics argue, given that last year U.S. corporations got a huge tax cut, whose Republican authors advertised it as a boon to productivity and investment.
The question is what, if anything, to do about this. Sen. Tammy Baldwin (D-Wis.) would eliminate the 1982 federal regulatory change that first enabled large-scale stock buybacks, while conditioning future ones on greater disclosure. Sens. Charles E. Schumer (D-N.Y.) and Bernie Sanders (I-Vt.) would prohibit buybacks unless firms pay workers at least $15 an hour, provide paid sick leave and offer “decent pensions and more reliable health benefits.” For his part, Sen. Marco Rubio (R-Fla.) wants to adjust what he says is an artificial incentive for buybacks in the tax code.
Undoubtedly, stock buybacks favor corporate executives lucky enough to cash out, but to the extent this increases inequality, it mainly favors the very rich (CEOs) over the somewhat rich (shareholders). Opponents of buybacks commonly cite figures showing that they swallowed up 96 percent of S&P 500 profits between 2007 and 2016; research by Harvard professors Jesse M. Fried and Charles C.Y. Wang, however, suggests that the actual figure is more like 41.5 percent after accounting for new stock issuance and expenses for research and development. Contrary to the concerns about diverting investment funds, U.S. nonresidential investment and job creation have been rising for most of the past decade. When shareholders get cash for their stocks, the money doesn’t disappear; it flows through the economy, often as productive investment elsewhere.
This suggests that government should intervene subtly, if at all, and certainly not with the regulatory sledgehammer that Mr. Schumer, Mr. Sanders and Ms. Baldwin, who wants to mandate employee membership on boards for publicly traded companies, would wield. It is true, as Mr. Rubio points out, that current tax law treats capital gains more favorably than dividends. This may incentivize stock buybacks even though, economically, they are equivalent to dividends. Perhaps a tax change would accomplish something — though companies would still have an incentive to give spare cash back to shareholders as long as there is no clearly superior investment alternative.
Critics of stock buybacks are saying, in effect, that elected officials or regulators may know better than companies themselves what should be done with extra cash. It is far from clear that this is true, given that we have just gone through a long period in which both stock buybacks and job creation grew. And there is a risk of stranding assets if companies are forced to retain cash for which they have no currently profitable use. Best for Congress to make sure there really is a serious problem before trying to legislate a solution.