Trump’s promise
that corporations will use his giant new tax cut to make new investments and raise workers’ wages is
proving to be about as truthful as his promise to release his tax returns.
The results are
coming in, and guess what? Almost all the extra money is going into stock buybacks. Since the tax cut became law, buy-backs have surged to $88.6 billion. That’s more
than double the amount of buybacks in the same period last year, according to
data provided by Birinyi Associates.
Compare this to
the paltry $2.5 billion of employee bonuses corporations say they’ll
dispense in response to the tax law, and you see the bonuses for what they
are – a small fig leaf to disguise the big buybacks.
If anything, the
current tumult in the stock market will fuel even more buybacks.
Stock buybacks are
corporate purchases of their own shares of stock. Corporations do this to artificially prop up their
share prices.
Buybacks are the corporate equivalent of steroids.
They may make shareholders feel better than otherwise, but nothing really changes.
Money spent on buybacks isn’t reinvested
in new equipment, research, or factories. Buybacks don’t add jobs or raise
wages. They don’t increase productivity. They don’t grow the American economy.
Yet CEOs love buybacks because most CEO
pay is now in shares of stock and stock options rather than cash. So when share
prices go up, executives reap a bonanza.
At the same time, the value of CEO pay from previous years
also rises, in what amounts to a retroactive (and off the books) pay increase
– on top of their already humongous compensation packages.
Big investors also
love buybacks because they increase the value of their stock portfolios. Now
that the richest 10 percent of Americans own 84 percent of all shares of stock
(up from 77 percent at the turn of the century), this means even more wealth at
the top.
Buybacks
used to be illegal. The Securities and Exchange considered them unlawful means of
manipulating stock prices, in violation of the Securities Acts of 1933 and
1934.
In
those days, the typical corporation put about half its profits into research and
development, plant and equipment, worker retraining, additional jobs, and higher wages.
But
under Ronald Reagan, who rhapsodized about the “magic of the market,” the SEC legalized
buybacks.
After that, buybacks took off. Just in the past decade,
94 percent of corporate profits have been
devoted to buybacks and dividends, according to researchers at the
Academic-Industry Research Network.
Last year, big American corporations spent a record $780
billion buying back their shares of stock.
And that was before the new tax law.
Put another way, the new tax law is giving America’s wealthy not one but two big windfalls: They
stand to gain the most from the tax cuts for individuals, and they’re the big winners from the tax cuts for corporations.
This isn’t just unfair. It’s also bad for the economy as a
whole. Corporations don’t invest because they get tax cuts. They invest because
they expect that customers will buy more of their goods and services.
This brings us to the underlying problem. Companies haven’t been investing
– and have been using their profits to buy back their stock instead – because
they doubt their investments will pay off in additional sales.
That’s because most economic gains have been going to the wealthy, and the wealthy spend a far smaller percent of their income than the
middle class and the poor. When most gains go to the top, there’s not enough demand to justify a lot of new investment.
Which also means that as long as public policies are tilted to the benefit of those at the top – as is Trump’s tax cut, along with Reagan’s legalization of stock buybacks
– we’re not going to see much economic growth.
We’re just going to have
more buybacks and more inequality.