Pharmaceutical stocks - Used under Creative Commons License

We have another of those most annoying outbreaks of economic illiteracy concerning the pharmaceutical companies, stock buybacks and Trump’s tax plan. OK, perhaps better to say another iteration of the usual idiocy then. For what we’ve got is the usual assumption that when a company buys back its own stock that money then disappears. A ludicrous thought and assertion of course it is, but it’s one that’s pervasive across the American press. One of those proofs of the – true – contention that journalism is, after perhaps sociology professors, the most left wing profession in the country. Certainly it tends 90% D in a manner that near nothing else does as the more regular elections show, some of them being won fair and square by Rs. Even without Russian help.

The illiteracy is as follows:

The GOP-led tax plan may have taken months of debate in Washington, but the pharmaceutical industry had already made up its mind as to what to do with its newly-reaped funds from a diminished corporate tax rate. And no, Big Pharma didn’t plan to spend their tax refund gift on, say, actual research; rather, they spent it on stock buybacks.

During the ongoing legislative debate and since the plan was officially signed by President Donald Trump in late December, a total of nine drug companies have shelled out a combined $50 billion on new share buyback programs, Axios reported.

Sigh, and here’s what Axios did report:

All of those buybacks were announced during or after the passage of the Republican tax bill. That money is enriching hedge funds, other Wall Street investors and top drug company executives, but it isn’t necessarily helping patients.

Puerile stupidity. We can even prove, and simply so, that this is wrong. Anything Robert Reich says about economics is, by definition, wrong. Robert Reich says this about what is happening:

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.

Now, this being Reich, it isn’t that the buybacks aren’t happening. Rather, it’s the implications of their doing so which are wrong where. For as you can see all are insisting that firms buying back their own stock is a waste. Instead of being spent upon either investment or consumption (which is what pay rises for the workers would go to) those corporations are just handing it to investors! A waste, quick, regulate!

But what are the investors going to do with that more money they’ve now got? Well, they’re going to do one of the only two things anyone can do with any money. They can invest it again or they can spend it. If they spend it that increases aggregate demand just like raising wages would and that makes the economy grow, Hurrah! If they invest it then some other activity gets invested in, again the economy grows and Huzzah!

Just to explain for the dim or ignorant – Professor Reich, please note – no, the rich don’t just “save.” That duck scooting down his vault of gold coins is a satire in a cartoon called Scrooge McDuck. You know, cartoon, satire, not reality?

Barring those very few indeed who stash the stuff under the mattress all savings are invested. If the investors take their buyback checks and go buy other extant stocks then that just moves the decision one iteration along. Whoever receives the money can only spend or invest it, if they buy extant stocks then…..you see how this goes? Even if it’s just stuck in a bank it gets lent out. That being what banks do, lend out deposits. And for MMT enthusiasts who will argue about that – MMT enthusiasts tend to be willing to argue about anything – banks use deposits to fund loans they’ve already made then.

It’s entirely true that a stock buyback means the money isn’t being invested in the extant company buying back its own stock. But why should that matter? A buyback, any payment to investors in fact, does not mean the money disappears, it means that someone else gets to take the decision about whether to spend or invest it , and what to spend or invest it upon or in. And that’s all it does, changes who decides, nothing more.

Oh, and, note, the more anyone bleats about how those rich people just “save” instead of spending their income then the more of the buyback is going to be reinvested. They’re the same statement – the rich don’t spend the same portion of their income as the poor is the exact same statement as the rich invest more of their income than the poorer.

You might think we’re being a bit vociferous here but sadly we’re being much too bland. This isn’t just posturing to stop these sorts of tax cuts. The above writers are so economically illiterate that they actually believe what they’re saying which is much sadder and much more dangerous. Money doesn’t get destroyed in a stock buyback, it just changes the decision maker as to whether it will be invested or spent, in what and how. That’s it, buybacks aren’t a loss to the economy nor to the capital stock of it. To argue otherwise is simply ignorant.

Subscribe to The CT Mailer!

10
Leave a Reply

Please Login to comment
10 Comment threads
0 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
4 Comment authors
SouthernerjghTommydogSpike Recent comment authors

This site uses Akismet to reduce spam. Learn how your comment data is processed.

  Subscribe  
newest oldest most voted
Notify of
Tommydog
Member
Tommydog

Reich wants the right people in charge of all that money, preferably government politicians and bureaucrats either spending it themselves or directing the companies as to how to spend it. If it’s distributed to shareholders it will indeed be spent, but it might be spent on something of which he does not approve. Why, someone might start another Uber or something and disrupt an industry he thinks is just fine as it is. He could, of course, try publishing a list of approved expenditures for the shareholders.

Spike
Member

Kudlow is sure that most of corporations’ tax savings will flow to improve the terms of the employment contracts but, given all the ingredients a corporation combines, I can’t tell that labor wasn’t already priced at a market rate. No, buybacks and special dividends don’t extinguish money, they distribute it to stockholders to reinvest as the individual sees fit. However, corporations only dissipate their capital when they believe they cannot get a better rate of return putting it to work themselves (such as by expanding or diversifying). This was the case during Jimmy Carter, when many businesses observed that their… Read more »

jgh
Member
jgh

If a corporation buys some of its own shares, doesn’t that mean that it has fewer people to pay dividends to (or that some of its dividends it actually pays to itself), so the corporation does end up with more money to spend on things like research and wages.

Tommydog
Member
Tommydog

It would take years for a corporation to accumulate in saved dividend payments what it paid out in buying the shares. However, one should not blindly assume that a corporation will spend its surplus cash more effectively than might the shareholders. Examples of corporate investments gone bad are legion. I’ve seen arguments to the effect that shareholders should demand that excess corporate cash accumulations should be paid out to them. If the managers have investment ideas, let them get bank financing. That’ll do more to force them to think their plans through.

Tommydog
Member
Tommydog

Reich wants the right people in charge of all that money, preferably government politicians and bureaucrats either spending it themselves or directing the companies as to how to spend it. If it’s distributed to shareholders it will indeed be spent, but it might be spent on something of which he does not approve. Why, someone might start another Uber or something and disrupt an industry he thinks is just fine as it is. He could, of course, try publishing a list of approved expenditures for the shareholders.

Spike
Member

Kudlow is sure that most of corporations’ tax savings will flow to improve the terms of the employment contracts but, given all the ingredients a corporation combines, I can’t tell that labor wasn’t already priced at a market rate. No, buybacks and special dividends don’t extinguish money, they distribute it to stockholders to reinvest as the individual sees fit. However, corporations only dissipate their capital when they believe they cannot get a better rate of return putting it to work themselves (such as by expanding or diversifying). This was the case during Jimmy Carter, when many businesses observed that their… Read more »

Southerner
Member

A company with spare cash can invest it in ventures that produce a target rate of return, or if it can’t find any such, a stock buy-back might achieve that desired rate of return on capital. This is Buffetology 101. Employing capital in the most productive way makes us all richer than we would have been otherwise. Paying higher wages for the same output, heart-warming though it may be, makes us all poorer. Your higher wages buy less and you will probably find yourself worse off. Reich is a profound embarrassment to us socialists. His ten-point plan to end inequality… Read more »

jgh
Member
jgh

If a corporation buys some of its own shares, doesn’t that mean that it has fewer people to pay dividends to (or that some of its dividends it actually pays to itself), so the corporation does end up with more money to spend on things like research and wages.

Tommydog
Member
Tommydog

It would take years for a corporation to accumulate in saved dividend payments what it paid out in buying the shares. However, one should not blindly assume that a corporation will spend its surplus cash more effectively than might the shareholders. Examples of corporate investments gone bad are legion. I’ve seen arguments to the effect that shareholders should demand that excess corporate cash accumulations should be paid out to them. If the managers have investment ideas, let them get bank financing. That’ll do more to force them to think their plans through.

Southerner
Member

A company with spare cash can invest it in ventures that produce a target rate of return, or if it can’t find any such, a stock buy-back might achieve that desired rate of return on capital. This is Buffetology 101. Employing capital in the most productive way makes us all richer than we would have been otherwise. Paying higher wages for the same output, heart-warming though it may be, makes us all poorer. Your higher wages buy less and you will probably find yourself worse off. Reich is a profound embarrassment to us socialists. His ten-point plan to end inequality… Read more »