You probably don’t pay much attention to those stories about companies doing “stock buybacks” – that’s when a company decides to buy shares of its own stock, taking those shares off the market with the hope that the remaining shares of stock will increase in price. But if you haven’t been able to get a raise in your low-wage job, or if you’ve had a hard time getting a job at all, those stock buybacks could be a major reason why.
The Washington Post today reported that the 30 companies that comprise the Dow Jones industrial average have authorized $211 billion in stock buybacks this year. That’s nearly three times the amount of money these firms are spending on research and development, according to the paper, citing S&P Capital IQ.
Why would a company do that? It’s no mystery. As the Post writes,
When the number of shares outstanding falls, the value of each one goes up, instantly rewarding shareholders.
The repurchase also lifts earnings per share, an important number closely watched by investors — and by corporate boards in determining executive pay. Of the 30 companies making up the Dow index, all but four list earnings per share in their public documents as a metric used to determine executive pay.
It’s also no mystery what happens to the Main Street economy. Stock buybacks siphon money to Wall Street that could be used by companies to create jobs or do research on next-generation products and services. Ultimately, stock buybacks are one of the culprits in the country’s rapidly increasing income inequality. Stockholders get richer, at the expense of workers.
One September 2013 study by a team of three economics professors at the University of Illinois found that “spending $1 million in repurchases is associated with a $44,000 decrease in capital expenditures, a $36,000 decrease in R&D spending, and a reduction of 91 employees.”
Magnify that even conservatively to the Post’s figure of $211 billion in stock buybacks and it is clear that this practice means that millions of jobs could be created if this capital were plowed back into businesses rather than used to inflate stock prices and executive pay.
One company, Walmart, has authorized $15 billion in stock buybacks this year, roughly equal to its 2012 net income and more than twice what the company did in buybacks in 2012. Demos did an analysis of Walmart’s 2012 buybacks and concluded that if it instead invested that money in its workforce, “these funds could be used to give Walmart’s low-paid workers a raise of $5.83 an hour, more than enough to ensure that all Walmart workers are paid a wage equivalent to at least $25,000 a year for full-time work.”
The added bonus: The workers would get that raise without Walmart having to raise the prices of its goods a single dime.
Using profits to improve wages and benefits for workers, Demos argued in its report, would have done more in the long term to improve Walmart’s profitability than the sugar high of a stock buyback. And even stock analysts who don’t side with Demos’ view of what’s best for workers question whether the prevalence of stock buybacks on Wall Street is healthy for Wall Street.
But stock buybacks are not happening in a vacuum. One reason they happen is that companies perceive stock buybacks to be a better way to squeeze profit out of a company than actually investing to grow the company. In other words, if companies don’t have faith that there is sufficient demand for what they’re selling, they will take their excess capital and spread it upward to shareholders rather than to the rest of us.
It takes a change in our economic policies to change that equation. That’s why we need Congress to enact policies that will increase demand by creating more jobs in such areas as public infrastructure, and increasing the minimum wage so low-income workers will have more money to circulate into local economies. Unfortunately, the budget deal that the House has approved and the Senate is about to enact this week does not take us boldly in that direction. That’s why we will have to continue pointing out the folly of austerity economics and eventually move out of the way its die-hard adherents.