Chuck’s Gambit: Spend Your Tax Windfall Like We Tell You To!

On Monday, senate minority leader Chuck Schumer and senator Bernie Sanders wrote a New York Times Opinion piece that, quite frankly, left me a bit puzzled. I understand why the piece, titled “Limit Corporate Buybacks”, was written, but it can’t be considered real policy. The opening paragraphs constitute a bit of anti-Randian fantasy:

“From the mid-20th century until the 1970s, American corporations shared a belief that they had a duty not only to their shareholders but to their workers, their communities and the country that created the economic conditions and legal protections for them to thrive. It created an extremely prosperous America for working people and the broad middle of the country.

But over the past several decades, corporate boardrooms have become obsessed with maximizing only shareholder earnings to the detriment of workers and the long-term strength of their companies, helping to create the worst level of income inequality in decades.”

I had to read this a few times to believe it. It seems as though the magnanimous corporations of the 40’s, 50’s and 60’s were displaced by a new and greedier corporation of the 1970’s. And these corporations are what helped to create income inequality. Maybe the corporations of the early 1900’s were also greedy, because we had worse income inequality in the late early part of the 20th century than we do today. So out of the last 120 years, we have had 30 years of generous corporations that held the best interests of their employees and society as a primary concern.

Anyway, on to the rest of the article. There are 2 main points:

  1. The majority of Americans are not beneficiaries of stock buybacks
    1. Wealthy people are the primary beneficiaries
    2. Corporate Executives (who are also wealthy people) also benefit
  2. Buybacks prevent companies on directing resources back to useful reinvestment

The point that stock buybacks do not benefit Americans in general is absolutely true. Buybacks exclusively benefit the shareholders of that corporation. I guess we could give everyone shares of every company so that buybacks benefit everyone? But alas, that suggestion is even too ridiculous for this article. Other large beneficiaries of buybacks include pensions and any 401k plans that hold stock, ETFs, or mutual funds. Well, I guess that is a lot of Americans, but not the majority for sure. These buybacks also disproportionally benefit the wealth and corporate executives. But for a long time, people wanted executive pay tied to long term corporate performance as opposed to short term metrics. But I guess not now.

The second point is the more troubling in my opinion. Do the senators really believe this? That companies are buying back stock instead of making sound investments in the future? Can you imagine the earnings call?

CFO: Good news shareholders, we’ll be buying back a lot of stock in the coming months

Analyst: Great news, thank you Mr. CFO. How else are you reinvesting earnings to bolster the company’s growth prospects?

CFO: We aren’t. We don’t have any ideas on how to spend this money to grow the revenues and future earnings, so we are buying back shares to bolster our EPS.

Companies will spend their profits in a way that maximizes shareholder value, that is true. If the best a company can do is to buy shares, then that says something about the prospects of the company. Companies will spend money on R&D, employees, capital expenditure or anything else that will give an attractive return on investment. Some companies can do both – Apple has been sitting on a hoard of cash for a long time such that it is impossible to spend it all. Buybacks or dividends probably make sense.

But senators Schumer and Sanders offer some solutions to reduce buybacks:

“That is why we are planning to introduce bold legislation to address this crisis. Our bill will prohibit a corporation from buying back its own stock unless it invests in workers and communities first, including things like paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits.

In other words, our legislation would set minimum requirements for corporate investment in workers and the long-term strength of the company as a precondition for a corporation entering into a share buyback plan. The goal is to curtail the over  reliance on buybacks while also incentivizing the productive investment of corporate capital.”

If only these senators had the power to raise the minimum wage and make a law that all workers get seven days of paid sick leave. I guess only workers who work for large public corporations deserve a $15 wage, health care and sick leave? I am not sure why this would be part of a buyback bill, let alone how it would be monitored. But I do know they can’t get the minimum wage laws and worker benefits passed through congress, so I am not sure how they would get this legislation passed.

And then they say this:

“Why should a company whose pension program is underfunded be able to buy back stock before shoring up the pension fund?”

Well, ok, that’s absolutely fair. I am not sure what the enforcement mechanism is, but a company should be required to fund the promises to their workers before it pays out dividends or buys back shares. If the company with the large pension goes under, there is something called the PBGC – the Pension Benefit Guaranty Corporation, that assumes all pension liabilities for companies that go under. In fact, a capture from their website:

The PBGC is a government entity but is run like an insurance company and not funded by taxpayers. But, the benefits may be less than the worker was promised. From the PBGC website:

“… we will continue paying you without interruption during our review. These payments, an estimate of the benefits that PBGC can pay under the insurance program, may be less than you were receiving from your plan but will be paid in the annuity form you chose at retirement.”

This would be devastating for workers. Since the PBGC brought up Sears…since Eddie Lampert took over Sears there have been about $6.5bn in stock buybacks. At the time of the last buyback in 2011, the Sears pension was underfunded by $1.6bn. At one time Lampert and his ESL holdings held 31% and 18% respectively, meaning about half of those buybacks benefited Lampert. So yes, there are abuses here.

Back to the opinion piece. At the end of the article, we get to what the authors are really upset about:

“The past two years have been extremely disappointing for millions of workers. President Trump promised the typical American household a $4,000 pay raise as he pushed for his tax giveaway to the rich.”

Ahh, that makes more sense. Of course, you could campaign on reversing that….

There is a problem with income inequality in this country, but the solutions in this article would do little to nothing to alleviate that. This article may provide good campaign slogans and talking points by railing against faceless evil corporations. But as policy?



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1 Response

  1. Pingback : Capital Expenditures vs Share Buybacks: How Do Investors Want Companies to Spend?

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