From American Affairs Journal:
REVIEW ESSAY
How the Looting of the Business Corporation Became the U.S. Norm and How Sustainable Prosperity Can Be Restored
by William Lazonick and Jang-Sup Shin
Oxford University Press, 2019, 256 pages
As I sit down to write, the coronavirus has completely paralyzed the U.S. economy. At this juncture, most conversations that are not about the plague seem a little off point. But some—like the ones in William Lazonick and Jang-Sup Shin’s recently published book, Predatory Value Extraction—are having their moment, too. Yes, it’s time to talk about share buybacks. Because they are, as Lazonick and Shin argue so persuasively, key to capitalism’s future. When we’re rebuilding whatever it is we have left after this is over, we should probably leave buybacks out of it entirely.
While the book takes aim at an entire ideology of corporate resource allocation, its main argument is the same one Lazonick has been making for years: the American corporation has been looted—legally—via the profligate use of stock buybacks. If you didn’t believe it before, you should have as of March 21, when the airline industry sent a letter to Congress begging the federal government for $29 billion in grants and another $29 billion in loans. If you give us the cash, they said, we will place limits on executive compensation and eliminate buybacks and dividends over the life of the loans. The implication? That they would stop doing the opposite. Over the last ten years, the industry has distributed most of its free cash flow to shareholders via buybacks (and some companies even more than that).
But let’s get back to the book, shall we? If you had acquired a negative point of view about the use of buybacks before the airline bailout, odds are it can be traced to Lazonick, emeritus professor of economics at the University of Massachusetts Lowell and currently president of the Academic-Industry Research Network. His September 2014 essay in Harvard Business Review, “Profits without Prosperity,” pushed the debate about the merits of buybacks into the public square. It was the kind of article that gets you a book contract, and—voilà!—a little over five years later his collaboration with Shin, an economics professor at the National University of Singapore, landed on bookstore shelves.
There’s a sureness to the book’s narrative that makes it clear that Lazonick has told it many, many times. That’s a good thing, because even as the tone from the corporate suite has begun to sound a little more progressive of late, the fact of the matter is that the looting continues unabated. And now here we are, being blackmailed into opening the public purse to the very same people who have just finished looting the corporate one.....MUCH MORE
What is the book’s main argument? During the middle of the twentieth century, America’s largest companies engaged in a retain-and-reinvest strategy; they were value creators. As they’ve shifted, over the course of the past several decades, to one of downsize-and-distribute, they have become value extractors. “[The] relation between value creation and value extraction within major business corporations has become unbalanced,” they write, “and, given the importance of big business to the U.S. economy, this imbalance has affected the entire U.S. economy.”
We’re talking about how we share the “gains of innovation”—if companies reinvest, they share those gains with employees in the form of greater employment security, higher incomes, and greater benefits. When they simply distribute excess cash (or, worse, borrow in order to distribute), they are favoring shareholders above all others. We’ve been leaning that way since the 1980s, but the size and proportions of the distributions are getting a little ridiculous. That’s where buybacks come in. In good times, companies use them to increase demand for their shares in the market, in order to prop up the prices of those shares. That’s drawn a horde of greedy outsiders—primarily hedge funds and institutional investors—who have conspired, not through plotting but simply through their actions—to keep the buyback machine well oiled.
In doing so, they deprive companies of the ability to summon what Lazonick and Shin call “the social conditions of innovative enterprise”—strategic control, organizational integration, and financial commitment. It’s a persuasive story that can be summarized as “if you spend all the money on supporting your share price, you aren’t going to have much left to position the company for the future.” I agree with that. Of course, there is no guarantee that a company that’s trying to innovate will be successful. But I think we can agree that a company that isn’t trying to innovate is unlikely to do so by accident.
Yes, I am aware that this is America, where capital is labor’s king, but Lazonick and Shin are right—things have gotten out of hand. And the size of the theft is so large as to deny our imagination a proper response: how angry should we be that the managerial class has collectively overseen the pissing away of about $4 trillion of corporate resources on behalf of just a single category of stakeholder, the shareholder? Adding insult to injury, it hasn’t just been with organic free cash flow; buybacks are often been paid for with borrowing, too.
Of course, where you stand on this whole issue depends entirely on the altar at which you kneel. Do stockholders deserve more than everyone else? Or are they simply the greediest and most effective interest group trying to get its hands on the fruits of capitalism? Yes, I have read the arguments in support of buybacks. And no, I don’t have time for any of them. They’re all small-ball, taking an unfair system for granted, and asking us to worry that we might kill the patient by taking them off of anabolic steroids and spending the money on healthy food instead. If large-scale public crises are good for anything, it’s that they can provide opportunities to put an end to personal or collective failure. This is one of those times, and buybacks are a collective failure whose time has come....
Our take on buyback's is simpler, perhaps bordering on simplisme:
October 6, 2019
"Share Buybacks and the Contradictions of 'Shareholder Capitalism'”
In the U.S. stock buybacks are just a straight-up tax dodge with the added attraction of boosting shares-based management compensation. If interested see "The Real Reason Stock Buybacks Are a Problem"
The smart kids, members of Phi Scamma Jamma, are still pitching a differential between tax on earned income and tax on capital gains even though the efficacy of capital gains tax breaks in performing their original purposes, investment and job creation, has been declining since the 1970's and is now just an excuse for a loophole. See "TAXES, CAPITAL AND JOBS" for an exceptionally lucid discussion, again, if interested.
And today's headliner, from American Affairs Journal:
In the jargon of finance, America is suffering from a capital allocation problem. The country seems incapable of making the necessary investments to fuel future productivity and growth, or to ensure widespread prosperity. At the government level, public spending on basic research and development as well as infrastructure investment has declined significantly over the past several decades. This trend, of course, should not be surprising, as reducing government spending has been a conscious policy objective for many years, especially (though not exclusively) for conservatives.
Over the same period, however, business investment has also declined. As a percentage of GDP, corporate investment has been in a long-term downward trend since 1980. And this trend is much more pronounced when viewed as a percentage of corporate profits or market capitalization.
This latter fact is particularly problematic for advocates of “free market” policies: if “getting government out of the way” does not lead to more entrepreneurial investment in the private sector, then what’s the point? Indeed, the entire neoliberal/libertarian economic policy toolkit has essentially been discredited by its failure to generate increased business investment in recent decades.....MOREBack in the olden days they were more direct and perhaps more honest about purloining passing property:
Old school rent extraction device
