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  August 21, 2016

How Stock Buybacks Harm the Economy


Former financial regulator Bill Black explains how perverse executive compensation is leading to declines in productivity and prolonging post-recession unemployment
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How Stock Buybacks Harm the EconomyKIM BROWN, TRNN: Welcome to the Real News Network. I’m Kim Brown. You hear a lot about companies doing stock buy backs. What is a stock buyback? Well it’s when a company purchases its own stock, therefore reducing the number of outstanding shares on the open market. Is this a shame for the flim flam? Well we’re about to find out. Today we’re joined by one of our regular contributors, Professor Bill Black. He is an associate professor of economics and law at the University of Missouri at Kansas City. Bill thanks again for joining us.

BILL BLACK: Good to be back.

BROWN: Bill, break it down. What’s up with the company stock buy back? Is this something that is actually good for the average stock owner or is this something that helps insulate those that already have a lot of money?

BLACK: Neither of the above but it does help enrich CEOs in particular. So to put in contexts as people have seen there’s this paradox. We are very close to what economists have traditionally defined as full employment. People like me wouldn’t necessarily agree with that but that’s how the conventional economists would usually say. But at the same time we have many millions of people who have become so discouraged that they have withdrawn from looking for jobs. And therefore they’re not counted as unemployed.

So compared to Europe we’ve had a dramatically better recovery. Compared to past recoveries from serious recessions we’ve had a slow and very poor one, in large part because we gave up on stimulus way too soon. And what we’re seeing is that productivity which is how much a given amount of labor and capital produces is actually been negative, falling. And of course it’s supposed to go in the other direction as we get these technological developments and all these wonderful things out of Silicon Valley that allow us to handle information more efficiently and produce things more efficiently, productivity is supposed to rise and that’s a good thing.

It both brings growth and it brings the ability to have wages rise without causing inflation which is a very sweet spot obviously and could be really good for the working class and the middle class recovering and we’re seeing it go the opposite direction. So the question is why? If you’re a conserved republican, a Trump’n, you would say it’s because of those terrible regulations. And banks are simply not willing to lend.

But here we see a very different story. Because when you buy back stock as a corporation of course you take your own cash and you buy your shares in the open market and that reduces your cash and it reduces your capital. And that’s a pretty strange thing. After all we’ve got this recovery in terms of unemployment, why aren’t we hiring more workers? Why aren’t we doing more research and development so that we could grow in the future?

Get those technological advances. Stop having negative productivity. None of those things are happening in large part because of the stock buy backs. So instead of – in taking this capital and investing it in good things, either new plant equipment, which would of course lead to people being hired and hired for better jobs. Not the part time barkeep type of thing that has been the quintessential job in this recovery. Or better yet, long term thought, research and development the thing that is going to bring us productivity gains over the next 20-50 years. Why doesn’t it happen?

Well in large part because senior executives are paid most of the money they get in compensation on bonuses. And many of those bonuses are tied to stock prices. In any event, most of those bonuses come in the form of stock. So if I’m the CEO, I want the stock price to be higher. Well I could get the stock price higher by running a really good business but that’s hard and it might or might not work. But I control the ability to buy back and they’re buying back hundreds of billions of dollars a year in stock.

Well if I do that of course I’m adding to demand and I, as you said in the introduction, reducing supply of shares and taking them out of the market. Well what’s supposed to happen and what typically does happen at least in the short term, the stock price will – of course the stock price goes up. Hey my stock’s worth a whole lot more and maybe my bonus is triggered. It’s all great stuff for me but it’s ruining America in terms of its productivity.

So we need to fundamentally change executive compensation which is absolutely perverse. Many of our reports we’ve explained in the past how it produces fraud. Even when it doesn’t produce fraud it produces this disaster of declining productivity and failure to have robust expansion of good jobs.

BROWN: Well Bill, we certainly appreciate the latest installment of your report. You should definitely investigate more about stock buy backs and whether or not it is something that is actually good for the American economy. We’ve been speaking with Bill Black. He’s an associate professor of economics at law at the University of Missouri at Kansas City. Bill thanks so much for joining us again.

BLACK: Thank you.

BROWN: You’re watching the Real News Network.

End

  

  

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