Wednesday May 25

EXCERPT: Institute for New Economic Thinking

Editor’s Note:  Here’s a quick step that could be taken to push corporate wealth and tax advantage towards equity.

Ban buybacks to Build Back Better

With the election of Joseph R. Biden Jr. as president of the United States, Americans got a leader whose stated objective as a candidate was to put the nation back on a path to stable and equitable growth. Quite apart from the devastation wrought by the Covid-19 pandemic, that is a very tall order after four decades of income inequality and employment instability. But as vice president, Biden understood that a big part of the problem was “buybacks.” Look at how he concluded a Wall Street Journal op-ed on the subject in September 2016:

The federal government can help foster private enterprise by providing worker training, building world-class infrastructure, and supporting research and innovation. But government should also take a look at regulations that promote share buybacks, tax laws that discourage long-term investment and corporate reporting standards that fail to account for long-run growth. The future of the economy depends on it.

In an interview with the Las Vegas Sun on January 11, 2020, Biden, as a candidate for the Democratic nomination for president, criticized buybacks because they shortchange R&D investment and workers’ wages. As a remedy, he said: “I’m going to reinstate [the policy] that changed under the Reagan administration, when the SEC suggested there’s not a limitation on buybacks.” With the pandemic upon us, on March 20, 2020, candidate Biden tweeted: “I am calling on every CEO in America to publicly commit now to not buying back their company’s stock over the course of the next year. As workers face the physical and economic consequences of the coronavirus, our corporate leaders cannot cede responsibility for their employees.”

During the second quarter of 2020, buybacks by companies in the S&P 500 Index fell to about $90 billion from over $200 billion in the previous quarter. But by the second quarter of 2021, with President Biden in office, they bounced right back up to $200 million. By the third quarter of 2021 buybacks reached an all-time quarterly record of $235 billion, surpassing the previous peak of $220 billion in the fourth quarter of 2018, when share repurchases had been fueled by the Republican tax cuts. For all of 2021, at close to $850 billion, S&P 500 buybacks easily outstripped the previous annual record of $806 billion in 2018.

Yet, in the White House, President Biden has been silent on stock buybacks. In his first State of the Union Address, on March 1, 2022, there was absolutely no mention of them. Last September, there was a proposal from Sen. Sherrod Brown (D-OH) and Sen. Ron Wyden (D-OR) for buybacks to be taxed at two percent. In October, the White House’s Build Back Better Framework proposed a buybacks surcharge of one percent. There was the predictable business blowback about how even a small tax on buybacks would mean the end of the stock-market boom. Despite good intentions, however, whether at two or one percent, these surcharge proposals would only serve to legitimize buybacks, and the tax revenue raised from them would come nowhere near to offsetting the immense damage to the U.S. economy and U.S. households that buybacks cause.

A growing body of research, much of it carried out by the Academic-Industry Research Network, in collaboration with the Institute for New Economic Thinking, shows why, in a range of industries, stock buybacks are toxic. They are a prime cause of extreme income inequality, the disappearance of stable employment opportunity, and sagging U.S. industrial productivity. If the Biden administration insists on taxing rather than banning buybacks, then it should set the surcharge at, say, 40 percent, with a mandatory warning banner on the corporate repurchaser’s website that reads: STOCK BUYBACKS DESTROY THE MIDDLE CLASS.

In a world without buybacks, corporations could instead use their profits to reward workers with higher pay and more employment security while increasing investment in their productive capabilities. The U.S. labor force would then be better positioned to contribute its skills and efforts to generating America’s next round of innovative products. Banning buybacks as open-market repurchases (as the vast majority of them are) would be a crucial step along a path toward stable and equitable growth in the United States, characterized by upward socioeconomic mobility rather than the downward slide that has afflicted a growing proportion of U.S. households since the 1980s.

One proposal that the Biden administration would do well to get behind is the Reward Work Act, introduced by Sen. Tammy Baldwin (D-WI) in March 2019. It would rescind Rule 10b-18, adopted by the Securities and Exchange Commission (SEC) in November 1982. This SEC rule gives a corporation a “safe harbor” against stock-price manipulation charges when doing buybacks as open-market repurchases. In many cases, the safe-harbor “limit” can be hundreds of millions of dollars spent on stock buybacks per trading day.


William Lazonick is Professor of Economics, University of Massachusetts Lowell and President, The Academic-Industry Research Network

The longer piece is available from the Institute for New Economic Thinking https://www.ineteconomics.org

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