Democrats’ flawed hate affair with corporate profits and stock buybacks
Democrats are in a hate affair with corporate profits and stock buybacks. And their misguided obsession could well cause oil and gasoline prices to stay higher than they otherwise would.
You’ve probably heard some ranting recently about “stock buybacks,” the term for when a public company repurchases shares of its own stock on the open market. Democratic lawmakers and lefty pundits have been condemning oil companies (among other firms) for raking in record profits and using that cash for buybacks rather than plowing every available dollar into additional investment.
Why do Democrats hate buybacks so much? The antipathy dates at least in part to the Trump tax cuts.
In 2017, there was a debate about slashing corporate tax rates. Advocates argued that tax cuts would attract more capital into U.S. markets, which businesses would then use to finance new investments in factories, equipment and technology. These investments would make workers more productive, supporters said, ultimately leading to gangbusters growth and higher wages. This miraculous phenomenon was called “capital deepening.”
At the time, some of us argued that access to capital wasn’t the issue holding back investment. Interest rates had been low since the Great Recession, and stock valuations were high. Most companies had little difficulty finding financing. What mattered was the availability of profitable things to invest in. Without stronger demand and additional customers, some of us predicted, the additional cash befalling companies through tax cuts would likely get returned to investors in the form of buybacks (and dividends).
That’s pretty much what happened. After the Republican bill passed, there was no sudden burst in investment — but there was an unprecedented wave of share buybacks. If the goal of cutting corporate taxes was really to encourage companies to invest in new projects (and not a fig leaf for upward redistribution of wealth), then companies using the money to repurchase shares was a policy failure. The government gave up a lot of tax revenue with little corporate investment to show for it.
Somewhere along the way, Democrats lost the plot.
Instead of being merely the symptom of a failed tax policy, buybacks themselves became the villain to many Democrats. Soon, they proposed legislation to ban buybacks. They excoriated companies for returning cash to shareholders early in the pandemic (when some of those businesses could not legally operate), and they’ve done so again since the economy has largely reopened.
Share buybacks themselves aren’t necessarily bad — particularly when the alternative is wasting investor money on private jets, wild parties or terrible acquisitions.
Democrats insist, however, that there is a non-wasteful alternative use of companies’ mounting profits: investment! In a House hearing on Wednesday, lawmakers berated oil executives for (you guessed it) too-high profits and too many buybacks. Democrats complained these companies should funnel their cash into expanding output. This makes about as little sense as when Republicans promised “capital deepening” in 2017.
The issue is not whether oil executives deserve sympathy. (They don’t.) It’s that — as in 2017 — it is hard to convince companies to undertake risky investments they don’t think will be profitable.
Yelling at companies to stop their buybacks won’t cause them to increase investment or oil output. In fact, some policy measures Democrats are considering, ostensibly to discourage firms from returning so much cash to shareholders, would do the opposite.
Progressives have been threatening to impose a tax on “excess profits.” They’ve proposed a “windfall profits tax” that actually functions as an excise tax. This sort of thing makes risky investments look even less attractive, and could cause producers to reduce oil output.
White House officials sometimes appear to understand that energy producers seek greater certainty that they won’t lose their shirts again in a few months if they invest in expanding production. Sometimes, though, the administration joins the populist chorus bashing greedy firms for “profiteering,” buybacks or the like. If they actually want sky-high gas prices to come down, they would do well to stop encouraging the confused populists.