Blowback from Stock Buybacks

By JOEL D. JOSEPH

Blowback is a term coined by the Central Intelligence Agency to describe the unintended consequences of policies kept secret from the American people. Blowback from massive stock buybacks this year will exacerbate increasing inequality in the United States and reduce corporate investments in new equipment and research and development.

According to the Wall Street Journal (Feb. 28) corporate buybacks will reach $1 trillion for the first time this year. Leading the buyback parade are Chevron, ExxonMobil, Meta and Goldman Sachs. These corporations are flush with cash because Trump’s 2017 tax cut slashed the corporate tax rate from 35% to 21%. It is outrageous that individual tax rates are higher than corporate rates. I thought that since corporations, according to the Supreme Court, are people, that they should pay taxes at the same rate as individuals do.

Further, many large corporations pay no taxes at all. According to the Institute on Taxation and Economic Policy, at least 55 of the largest corporations in America paid no federal corporate income taxes on their 2020 profits. One of those companies is Federal Express, which is using its tax savings to repurchase billions of dollars worth of its stock. Another tax dodger, Nike, is buying back $18 billion worth of its stock.

Chevron and Exxon are leading the movement to buy their own shares. Chevron is purchasing $75 billion of its stock while ExxonMobil is buying $35 billion of its own shares. These two oil giants earned windfall profits when the price of oil rose because of the war in the Ukraine. Chevron and Exxon should be investing in alternative energy sources instead of buying their own stock because it is obvious that, with electric car sales exploding, the future of the oil business is shaky.

Meta, the owner of Facebook, is buying $40 billion of its stock. At the same time, Meta laid off 13% of its work force. Something is wrong with this picture. With all of this excess cash, Meta should be expanding its business, buying other companies, or doing something more productive than raising its share price artificially.

Goldman Sachs, the investment banking firm, is also buying its own shares while firing 3,000 employees. Goldman is using $30 billion of its profits to buy its own shares. Goldman is enriching its richest employees while firing its poorest ones.

The Harvard Business Review (Jan. 7, 2020) recommended that stock buybacks be banned because, “The investment in the knowledge base that makes a company competitive goes far beyond R&D expenditures. In fact, in 2018, only 43% of companies in the S&P 500 Index recorded any R&D expenses, with just 38 companies accounting for 75% of the R&D spending of all 500 companies. Whether or not a firm spends on R&D, all companies must invest broadly and deeply in the productive capabilities of their employees in order to remain competitive in global markets. Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm.”

The Harvard Business Review concluded that stock buybacks have increased income inequality, employment stability and anemic productivity. When the majority of corporate profits go to buybacks, there is little money left to invest in employees and the future growth of the company.

Stock buybacks help senior corporate executives in the short term buy boosting stock prices. These executives often own large chunks of stock and options, and are acting in their own personal interest, not in the long-term interest of the corporation or of the country as a whole.

A trillion dollars in stock buybacks is a symptom of what is wrong with the US economy. That trillion dollars should be in the government’s pocket and used to pay down the federal debt.

This trillion-dollar war chest could also be used by corporations to enhance paychecks of workers at the bottom of the corporate pyramid, those worker bees who are actually making things. Additionally, the trillion dollars could also be used for research and development to create new products or make better products.

Joel Joseph is an attorney and chairman of the Made in the USA Foundation. Email joeldjoseph@gmail.com.

From The Progressive Populist, April 1, 2023

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