What Really Ails American Capitalism
It should be easy for critics of American capitalism to explain what is wrong after a decade where corporate profits and stock prices soared while wages barely rose.
Instead, Sens. Chuck Schumer, (D., N.Y.) and Bernie Sanders (I., Vt.) are going after share buybacks. They say that companies prefer their own stock to the good things society wants, such as corporate investment, higher wages, paid sick leave, better health-care benefits and even worker training.
They have the wrong target. If the political discourse manages to move past the sudden obsession with buybacks, there are plenty of real issues facing modern capitalism that investors should be watching closely.
One obvious area for discussion: The shift of the tax burden away from capital and on to labor since the pendulum began to swing back under Ronald Reagan. Many Democrats might agree, many Republicans—and investors—wouldn’t.
Another: the sway of big business lobbyists in Washington (a bipartisan issue). Or the badly structured incentives many executives enjoy, and whether they are bad enough to justify government intervention in corporate governance (free-market Republicans would disagree; shareholders should pay more attention either way). Or whether global efforts to stop corporations shopping around for the lowest tax rates are too slow (again, bipartisan, and scary for shareholders who have enjoyed superlow corporate tax rates on many multinationals).
Most important, should the government take action against rising corporate monopolies? This is one area where it is possible that buybacks are a result of companies extracting excessive profits from customers—although it is the excessive profits that are the issue, not the buybacks.
Rather than address such questions, the senators’ solution is to ban buybacks unless companies pay a minimum $15 an hour, offer seven days of paid sick leave, pensions and health care, among other things.
This is bizarre. The political argument about a $15 minimum wage is something society should decide on its own merits, not link to buybacks. The same goes for sick pay, health care and pensions. An ill worker at a company that isn’t doing buybacks still wants to be paid when off sick, and everyone wants medical care and to retire eventually.
A lack of investment isn’t the issue either. The basic Schumer-Sanders criticism is that companies choose to hand out profits via stock buybacks to enrich their already-rich investors, instead of putting the money to work. Last year more than $1 trillion of buybacks were authorized, and while they don’t all go through,
estimates more ended up being spent on buybacks than companies invested.
True, corporate investment has grown more slowly than usual in this recovery, despite unusually high profit margins. But so has the economy. Studies from the Obama administration and from researchers at the Federal Reserve and International Monetary Fund found companies were investing pretty much as should be expected given weak growth. No CEO spends money on a new factory if they don’t expect demand for its products, even if they’re awash in profits.
Business investment is a lower proportion of GDP than at times in the early 1980s and late 1990s, and the shift in the economy means more of it goes to intangible assets such as intellectual property, rather than factory buildings. But companies are investing more relative to the size of the economy than they were in the 1950s and 1960s, the pre-buyback corporate golden age to which Sens. Schumer and Sanders hark back. Companies are also spending a record amount on research and development, exactly the sort of long-term thinking that the senators say they want.
There are potentially damaging business consequences of the Schumer-Sanders buybacks proposal. By making it harder for shareholders to demand cash be paid out by companies that have run out of sensible projects in which to invest, the law would empower CEOs to boost their egos by investing in less-sensible projects.
Throughout history empire-building CEOs not being held to account by investors have frittered away capital on value-destroying takeovers, luxurious new headquarters and even golden commodes. Give CEOs a law to justify not handing spare cash to shareholders and one winner might be suppliers of executive bathrooms.
Write to James Mackintosh at James.Mackintosh@wsj.com
Appeared in the February 11, 2019, print edition as ‘Buybacks Aren’t What Is Ailing Capitalism.’