Trump’s tax cut is fu­el­ing stock buy­backs, not growth

Dayton Daily News - - IDEAS & VOICES - Robert Re­ich He is for­mer U.S. Sec­re­tary of La­bor and is pro­fes­sor of pub­lic pol­icy at the Univer­sity of Cal­i­for­nia at Berke­ley.

Don­ald Trump’s prom­ise that cor­po­ra­tions will use his gi­ant new tax cut to make new in­vest­ments and raise work­ers’ wages is prov­ing to be about as truth­ful as his prom­ise to re­lease his tax re­turns.

The re­sults are com­ing in, and guess what? Al­most all the ex­tra money is go­ing into stock buy­backs. Since the tax cut be­came law, buy­backs have surged to $88.6 bil­lion. That’s more than dou­ble the amount of buy­backs over the same pe­riod last year, ac­cord­ing to data pro­vided by Birinyi As­so­ciates.

Com­pare this with the pal­try $2.5 bil­lion worth of em­ployee bonuses cor­po­ra­tions say they’ll dis­pense in re­sponse to the tax law, and you see the bonuses for what they are: a small fig leaf to dis­guise the big buy­backs.

If any­thing, the cur­rent tu­mult in the stock mar­ket will fuel even more buy­backs.

Stock buy­backs are cor­po­rate pur­chases of their own shares of stock. Cor­po­ra­tions do this to ar­ti­fi­cially prop up their share prices.

Money spent on buy­backs isn’t rein­vested in new equip­ment, re­search or fac­to­ries. Buy­backs don’t add jobs or raise wages. They don’t in­crease pro­duc­tiv­ity. They don’t grow the econ­omy.

Yet CEOs love buy­backs be­cause most CEO pay is now in shares of stock and stock op­tions rather than cash. So when share prices go up, ex­ec­u­tives reap a bo­nanza.

At the same time, the value of CEO pay from pre­vi­ous years also rises in what amounts to a retroac­tive (and off the books) pay in­crease — on top of their al­ready hu­mon­gous com­pen­sa­tion pack­ages.

Big in­vestors also love buy­backs be­cause they in­crease the value of their stock port­fo­lios. Now that the rich­est 10 per­cent of Amer­i­cans own 84 per­cent of all shares of stock, this means even more wealth at the top.

Buy­backs used to be il­le­gal. The Se­cu­ri­ties and Ex­change Com­mis­sion con­sid­ered them un­law­ful means of ma­nip­u­lat­ing stock prices.

But un­der Ron­ald Rea­gan, who rhap­sodized about the “magic of the mar­ket,” the SEC le­gal­ized buy­backs.

Just in the past decade, 94 per­cent of cor­po­rate prof­its have been de­voted to buy­backs and div­i­dends, ac­cord­ing to re­searchers at the Aca­demic-In­dus­try Re­search Net­work.

Put an­other way, the new tax law is giv­ing Amer­ica’s wealthy not one but two big wind­falls: They stand to gain the most from the tax cuts for in­di­vid­u­als, and they’re the big win­ners from the tax cuts for cor­po­ra­tions.

This isn’t just un­fair. It’s also bad for the econ­omy as a whole. Cor­po­ra­tions don’t in­vest be­cause they get tax cuts. They in­vest be­cause they ex­pect that cus­tomers will buy more of their goods and ser­vices.

This brings us to the un­der­ly­ing prob­lem. Com­pa­nies haven’t been in­vest­ing be­cause they doubt their in­vest­ments will pay off in ad­di­tional sales.

That’s be­cause most eco­nomic gains have been go­ing to the wealthy, and the wealthy spend a far smaller per­cent­age of their in­come than the mid­dle class and the poor. When most gains go to the top, there’s not enough de­mand to jus­tify a lot of new in­vest­ment. Which also means that as long as pub­lic poli­cies are tilted to the ben­e­fit of those at the top, we’re not go­ing to see much eco­nomic growth.

We’re just go­ing to have more buy­backs and more in­equal­ity.

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