Why Stock Buybacks Do So Little for Americans
Instead of restricting share repurchases, expand the pool of people with a stake in markets.
Bloomberg, February 07, 2019
Senators Chuck Schumer and Bernie Sanders recently inveighed against corporate stock buybacks and suggested they’d like a law that limits share repurchases to those companies that pay a minimum wage of $15 or more an hour.
This idea, however well-intentioned, would replace management’s judgment on matters of corporate capital allocation with that of Congress’s.
Their argument, however, makes too little of a crucial point: stock buybacks don’t benefit the vast majority of Americans because so many people have little or no stake in U.S. equity markets.1
The senators use data from the research of Edward Nathan Wolff, an economics professor at New York University, who found that the wealthiest 10 percent of households held 84 percent of all stocks.2 In other words, the capital markets, to which readers of these pages devote so much time and energy — and one of the most effective savings and wealth creation mechanisms ever invented — simply don’t matter for the vast majority of Americans.
Yes, there are those 401(k) millionaires, but they are outliers. Heck, something like 40 percent of Americans don’t have the financial flexibility to handle a $400 emergency expense, according to the Federal Reserve. Indeed, the Fed estimates that among those who do invest, half have less than $40,000 invested.
When we discuss the rise in income inequality, wealth-friendly tax policies are certainly part of the reason for the widening gap. But the simple fact that the richest Americans have seen the value of their stock portfolios triple since the financial crisis is surely a large part also. But stock buybacks are among the least of the many reasons why there is so much wealth disparity.
Schumer and Sanders, instead of directing their fire at share buybacks, should instead do more to advance specific clear legislation to address the economic problems of a broad swath of Americans. These might include:
• Minimum wage: The evidence shows that moderate minimum wage increases, phased in over time, are not job killers, as some had warned. What we really should be discussing is a reasonable national increase from the current federal minimum of $7.25 an hour to $9, then $10.50 and then $12 — then index the minimum to inflation3 so those at the bottom of the income strata don’t fall behind.
• Stock-market participation: That so many middle-class families barely put aside money for retirement is astounding, and points to an imminent retirement crisis. There are several things Congress can do to fix this. Start with raising the Independent Retirement Account contributions limit above the current $6,000 ceiling to, say, $10,000. Then, tie the limits to inflation as opposed to the current random increases in the ceiling. This will let more people planning for retirement save enough tax-deferred so they are not totally reliant on Social Security.
• Payroll Contributions: Allow workers to contribute to their own Roth or traditional IRAs via their employer (or payroll provider). These automatic-contribution accounts are a large reason for the success of 401(k) programs. We can also allow companies to establish a tax-free match. Even better, allow all Americans to participate in the Federal Thrift Savings Plan, a retirement program similar to 401(k)s for federal employees.
• Protect investors: We need to follow the recommendations of the non-political Security and Exchange Commission staffers, who proposed a fiduciary rule that requires stock brokers to put the interests of investors ahead of their own. Too often, brokers want to sell what’s best for them, not their clients. During the Barack Obama administration, such a rule was adopted for the accounts of retirement savers, though it has been effectively killed by Donald Trump’s administration.
• Tax reform: The senators suggest that the spike in share buybacks was driven by Trump’s tax cuts4, though it’s more accurate to say they got a bigger boost from the 2003 tax cuts5 passed under President George W. Bush. But both changes in the tax code are symptomatic of something else: For four decades, the guiding credo has been that tax cuts that help the rich the most are good for everybody. This sleight-of-hand now is being seen for what it is: A potent driver of rising wealth inequality. If America’s leadership class can’t find a way to make the tax code fairer for people below the top 10 percent, expect to see more proposals like the wealth tax or a 70 percent top tax bracket or both.
When it comes to legislating economic policies, positive incentives work better than negative ones. Micromanaging corporate capital activities isn’t the way to achieve the stated goals that Schumer and Sanders want. The tweaks above would be a start in the right direction.
1. Schumer and Sanders: “Stock buybacks don’t benefit the vast majority of Americans. That’s because large stockholders tend to be wealthier. Nearly 85 percent of all stocks owned by Americans belong to the wealthiest 10 percent of households. Of course, many corporate executives are compensated through stock-based pay. So when a company buys back its stock, boosting its value, the benefits go overwhelmingly to shareholders and executives, not workers.”
2. Household Wealth Trends in the United States, 1962 to 2016: Has Middle Class Wealth Recovered? By Edward N. Wolff, NBER Working Paper No. 24085, November 2017.
3. The minimum wage is indexed for inflation in 17 states and D.C. See the Economic Policy Institute’s Minimum Wage Tracker.
4.Tax Cuts and Jobs Act (TCJA), Public Law 115-97 (December 22, 2017)
5. The Jobs and Growth Tax Relief Reconciliation Act of 2003, Public Law 108–27 (May 28, 2003)
I originally published this at Bloomberg on February 07, 2019. All of my Bloomberg columns can be found here and here.