The Washington PostDemocracy Dies in Darkness

The economy has real problems. Stopping stock buybacks wouldn’t fix them.

Trader Peter Tuchman works on the floor of the New York Stock Exchange on Jan. 29. (Richard Drew/AP)
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Something has gone wrong with the economy in the past 40 years.

Inequality has increased, median wages, adjusted for inflation, have not, and, at least in the past two decades, corporate profits have grown to be a bigger part of the economy than at any other time in the postwar period. It sure seems like all these things are related — more money going to shareholders, after all, means less going to workers — especially when, largely as a result of the Trump tax cuts, companies have bought back a record $1.1 trillion of their own stock in the past year even as some of them have been cutting jobs. Which is why Sens. Charles E. Schumer (D-N.Y.) and Bernie Sanders (I-Vt.) want to make it harder for businesses to do this by forcing them to put more money into their workers before they do so into buybacks.

The only problem is there’s no reason to think that this would actually help.

Why not? Well, the most immediate issue is that there are two ways for a company to return money to its shareholders. The first, as we just mentioned, is using its profits to buy back some of its existing stock. The idea being that the business will still be worth the same, but, because there isn’t as much stock publicly available, each individual share will be worth more. The second way, though, is no less effective at putting money into the pockets of wealthy investors. That’s using profits to pay shareholders a dividend. That not only gives them money directly, but, by increasing the income that they get from the stock, should also make share prices go up as well. The problem is that trying to stop companies from giving so much money to shareholders by limiting buybacks would just make them give more money to shareholders in the form of dividends. Nothing would change. And so you’d get the worst of both worlds: a politically contentious fight for an economically useless policy.

Now, to their credit, Schumer and Sanders acknowledge that this could be a problem. And their solution is about what you’d expect: using the tax code to try to dissuade companies from just paying out more dividends instead. But that brings us to the more fundamental critique of their plan. Say that they really did manage to stop companies from either buying back so much of their stock or paying out so many dividends. Would that actually help workers? It’s not clear. It’d be one thing if executives were forgoing needed long-term investments so that they could make short-term payouts that were good for the health of their bonuses, but not their businesses. But while that might be true in some cases — greed is a constant of the human condition — it’s not across the board. In fact, the Federal Reserve found that publicly traded companies are more likely to invest overall, and in R&D in particular, than their privately held counterparts.

The reason, in other words, that companies are giving so much money back to shareholders isn’t that they don’t want to invest, but rather that they can’t find things to invest in. Trying to put a brake on buybacks is mistaking the symptom for the cause.

So what is it that originally went wrong? It’s hard to say for sure, but there is one big thing to keep in mind. That’s the fact that business investment isn’t that high right now even though, on the one hand, unemployment isn’t either, and, on the other hand, profits are. Neither part of this really makes sense. That’s because a booming economy should be an especially good time for companies to invest in themselves, and booming profits would seem to confirm this.

There are two reasons that might not be the case, though. The first is the idea that investment might permanently be depressed because of the combination of the fact that we don’t need as many new things now that our population isn’t growing as much, and the new things we do need, like computers, are relatively cheap. This is what’s known as “secular stagnation,” and if it really is happening, then we’re going to need the government to pick up the slack by investing in things like infrastructure even when the economy seems to be doing pretty well. The second, meanwhile, is that corporate behemoths might have gotten so big that their profits no longer reflect how much opportunity there is in their businesses, but rather how much power they have over them. Which is to say they’re monopolies. Indeed, researchers have found that, after staying the same for most of the postwar period, corporate markups exploded from an average of 18 percent in 1980 to 67 percent by 2014.

The point is that trying to get rid of buybacks won’t change our trickle-down economy if we don’t change the things that led to it in the first place. That means the government needs to put people to work by making smart investments, and break up monopolies that are standing in the way of the private sector doing so. And if all of that still isn’t enough to put a dent in our buyback craze, well, we can always tax them more.

But in any case, we need real solutions to our very real problems. Limiting buybacks isn’t one.