Savour The Rich Ignorance Of Robert Reich On Stock Buybacks


We have it on good authority, from an eminence no less grise than Paul Krugman, that Robert Reich doesn’t know his economics. Even with that forewarning it’s possible to luxuriate in the rich ignorance on show in Reich’s current complaint about stock buybacks.

Trump and Republicans branded their huge corporate tax cut as a way to make American corporations more profitable so they’d invest in more and better jobs.

No, that’s not the argument at all. Rather, that if American corporations are more profitable then more people will invest more money in American corporations. More widely, that if investment is more profitable by the returns from investment being taxed less then there will be more investment. It absolutely isn’t true and isn’t part of the argument – whatever politicians on either side might say – that extant corporations must or should become more profitable so that extant corporations invest more.

And forget about investing in more jobs. Jobs are a cost of doing something, not a benefit of having it done. We’re interested in the output from processes, we want to increase that. We also want to decrease the inputs to any process. Starting with using 100 people to build 100 cars, getting to building 100 cars with 50 people, or 200 cars with 100, either is success. More jobs, building 100 cars with 120 people, that is economic failure, something that makes us all poorer.

But they’re buying back their stock instead. Now that the new corporate tax cut is pumping up profits, buybacks are on track to hit a record $800 billion this year.

Well, OK, so they are.

For years, corporations have spent most of their profits on buying back their own shares of stock, instead of increasing the wages of their employees, whose hard work creates these profits.

Drivel, abject nonsense. No corporation ever spends profits on increasing the wages of their workers. Profits are what’s left over after you’ve paid the workers. We simply cannot, given this linguistic fact, pay the profits in wages. They’re mutually exclusive, profits and wages.

Stock buybacks should be illegal, as they were before 1983.

They weren’t. They were more difficult, true, they were very much less common, but they weren’t illegal. And yes, the legal system did change to make them easier and more common. But they still weren’t illegal.

Stock buybacks are artificial efforts to interfere in the so-called “free market” to prop up stock prices. Because they create an artificial demand, they force stock prices above their natural level. With fewer shares in circulation, each remaining share is worth more.

It appears that simple mathematics is beyond our Professor. There’s nothing artificial about a price rising if there’s fewer of something and nothing about stock buybacks which forces prices above their natural level. Imagine a stylised company “worth” $100. There are 100 shares out there. Each one is worth $1 therefore. Now we buy in and cancel 50 of those shares. The company is still worth $100, there are only 50 shares, each share is worth $2.

Now, to do that might be wise, might not be. But there’s nothing at all artificial about that price, nor have we forced anything. Well, as long as you’re not going to get confused about nominal and real prices and of course a Professor is never going to do something that stupid.

Buybacks don’t create more or better jobs. Money spent on buybacks isn’t invested in new equipment, or research and development, or factories, or wages. It doesn’t build a company. Buybacks don’t grow the American economy.

Well, consider what does grow the American economy. More consumer demand grows the economy, we know that. More investment grows the economy, we know that also. So, the money coming out of companies in buybacks goes where? Well, there’re only two things you can do with money, spend it or invest it. Even if you just “save” it then whoever you’re saving it with is investing or spending it. So, whether the money stays inside a corporation or goes outside it, there are still only two things that can be done with it, spend or invest, either of which grows the American economy.

Buybacks were illegal until Ronald Reagan made them legal in 1982, just about the same time wages stopped rising for most Americans. Before then, a bigger percentage corporate profits went into increasing workers’ wages.

Buybacks weren’t illegal and profits never do go into workers’ wages. For by definition if they do they’re not profits.

But OK, let’s imagine that you too have been educated at Berkeley (and have managed to miss Brad Delong’s rather good classes on economic history) and so know nothing of the subject, you believe Reich’s arguments – but then I repeat myself. Why is this all being done then?

Because a bigger and bigger portion of CEO pay has been in stocks and stock options, rather than cash. So when share prices go up, executives reap a bonanza. The value of their pay from previous years also rises – in what amounts to a retroactive (and off the books) pay increase on top of their already outrageous compensation.

Cue Twilight Zone music as we ponder the evil of those capitalistic running dogs. What’s the solution?

But since corporations were already using their profits for stock buybacks, there is no reason to believe they’ll use their tax windfall on anything other than more stock buybacks.

Let’s not compound the error. Make stock buybacks illegal, as they were before 1982.

OK, let’s do it, what happens now? That free cash flow is still returned to investors just as dividends instead of stock buybacks. Prices still go up, the CEOs still get ever more money, the cash doesn’t stay in the companies to raise wages and, well – see what happens? We do exactly what Reich says we should and we manage to change bugger all. The capitalists still get their return to capital, the workers still get the return to labour and we’ve screwed the pooch of the economy a little bit more according to the misunderstandings of Robert Reich. And all of it flowing from the manner in which Reich simply doesn’t grasp the basics of the subject under discussion.

Well done there Robert, well done.