US stock markets keep hitting record highs – as anyone who follows Donald Trump’s Twitter account can’t help but notice. And “
">August 30, 2018 for those who have “made a fortune” in US stocks, the president promised this week.
The news from the Financial Markets is even better than anticipated. For all of you that have made a fortune in the markets, or seen your 401k’s rise beyond your wildest expectations, more good news is coming!— Donald J. Trump (@realDonaldTrump)
The news from the Financial Markets is even better than anticipated. For all of you that have made a fortune in the markets, or seen your 401k’s rise beyond your wildest expectations, more good news is coming!— Donald J. Trump (@realDonaldTrump) August 30, 2018
But behind Trump’s sunny, late summer disposition, there is growing concern that the principal beneficiaries of Trumpian economic largesse are those like him in the uppermost reaches of the economic scale.
The top 10% of American households owned 84% of all stocks in 2016, according to a paper by NYU economist Edward Wolff. As the markets have been driven higher by an unprecedented binge in share buybacks, boosted by Trump’s historic corporate tax cuts, those gains have disproportionately gone to the very wealthy.
For them – it’s true – there is “more good news” to come. According to a Goldman Sachs report published last month, cash-rich US companies are poised to push $1tn into share buybacks this year.
While the same trend can be observed in the UK, Europe and Japan, nowhere is it more hyperactive than in the US, where companies have spent a stunning $5.1tn buying their own shares since 2008. According to a UBS report in June, repurchases are up 83% year to date, far ahead of the 9% gain in dividends.
And no one loves share buybacks more than tech, with Apple representing about 20% of the sector’s total with $219bn of share repurchases since 2015, according to its website, and stated plans to allocate $100bn more. Led by Apple, tech buybacks have jumped $160bn in 2018, an increase of more than 200% from 2017.
But while shareholders love buybacks, in part because they are often offered at a generous dividend and because they tend to boost stock prices by making shares scarcer, there is growing concern that buybacks are detrimental in social as well as economic terms.
In a key 2015 Harvard Business Review study of share buybacks, Profits Without Prosperity, William Lazonick, a professor at the University of Massachusetts Lowell and a leading critic of buyback practice, argued that stock buybacks are “a prime mode of both concentrating income among the richest households and eroding middle-class employment opportunities”.
This allocation of earnings, popular with top executives, who are paid primarily in stock options and stock awards, are a key reason why, five years after the official end of the Great Recession, corporate profitability is not translating into widespread economic prosperity, Lazonick argues.
The amounts being kicked back to shareholders are indeed staggering. Between 2008 and 2017, he estimates, 466 S&P 500 companies distributed $4tn to shareholders as buybacks, equal to 53% of profits, along with $3.1tn as dividends.
Moreover, Lazonick told the Guardian last week, using earnings to fund stock buybacks on the open market eats into investment capital that could otherwise be used by companies to invest in future production capabilities or to incentivize non-executive employees with higher incomes or benefits.
“The financial markets do not allocate capital investment, companies do, so stock buybacks limit capital formation and reduce the earnings a company needs to attract, retain and motivate people,” he said.
According to an analysis by JUST Capital, only 6% of the corporate windfall from Trump’s tax cuts has gone to workers in the form of pay hikes, bonuses and other investments. “To make things worse, in this low interest rate regime of the last decade companies have been borrowing not to leverage retained earnings but to fund buyback schemes,” Lazonick argued.
A recent report from the National Employment Law Project calculated that McDonald’s could have paid each of its 1.9 million workers $4,000 more a year if it had used the $21bn it spent between 2015 and 2017 on buybacks to reward its workers instead. Starbucks could have given its workers $7,000.
The issue is beginning to attract the attention of Democratic lawmakers.
In March, Senator Tammy Baldwin introduced the Reward Work Act that would ban “unjustified” stock buybacks. Leading financial figures are also voicing concern, including the BlackRock CEO, Larry Fink, who penned an open letter to corporate America in January.
“It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” Fink wrote. “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”
While Trump argues that ordinary Americans benefit from the booming stock market “beyond your wildest dreams” through 401k retirement accounts, only about 52% of families owned stocks directly or indirectly, according to the Federal Reserve.
But according to Lazonick, the stock buyback frenzy is the logical extreme of an ideology – an ideology he describes as “disastrous” – that companies should be run to maximize shareholder value.
“This is nothing that Trump created, but it’s the reason the stock market is booming and why, under Trump, there is absolutely no constraint on taking money out of public companies.”