The harder you work, the more the boss, and their financiers, make. “Shareholders today aren’t providing capital to the corporate sector, they’re extracting it,” says Nick Hanauer an original Amazon investor. Stock buybacks was worth more than $6.9 trillion worth since 2004, according to data compiled by the Academic-Industry Research Network. Between 2003 and 2012, the companies that make up the S&P 500 spent an astounding 54 percent of profits on stock buybacks. Last year alone, U.S. corporations spent about $700 billion, roughly 4 percent of GDP, simply propping up their share prices by repurchasing their own stock. And much of the rest of these profits has been paid to shareholders in the form of dividends. Over the past 40 years, corporate profits’ take of the U.S. economy has doubled — from an average of 6 percent of GDP during America’s post-war economic heyday to more than 12 percent today. Yet despite this extra $1 trillion a year in corporate profits, job growth remains low, wages are flat-lining. The core claim of the trickle-down economics crowd is that high profits are the principal driver of growth. The higher profits are, the more money we have to “create jobs” and invest. So a fair question to ask is, where did this extra trillion dollars of profit go?
Class warfare is poised to reach a new milestone as this year’s combined total of dividends and stock buybacks by 500 of the world’s largest corporations will exceed US$1 trillion. So large is that figure that, for the second year in a row, the companies comprising the S&P 500 Index (a list of many of the world’s biggest corporations) will pay out more money in dividends and stock buybacks than the total of their profits. A research report by Barclays estimates that those payouts by S&P 500 corporations will total about $115 billion more than their combined net income. 2015 also saw buybacks and dividends total more than net income; the last time there was consecutive years in which this happened were 2007 and 2008.
Although dividends, a quarterly payment to holders of stock, are steadily increasing, the increase in stock buybacks has been steeper. The total of these has tripled since 2009 as financiers and industrialists feverishly extract as much wealth as they can. This is part of why the “recovery” since the 2008 economic collapse has been a recovery only for those at the top. This sort of activity helps buoy stock prices.
In short, a buyback is when a corporation buys its own stock from its shareholders at a premium to the current price. Speculators love buybacks because it means extra profits for them. Corporate executives love them because, with fewer shares outstanding following a buyback program, their company’s “earnings per share” figure will rise for the same net income, making them look good in the eyes of Wall Street. Remaining shareholders love buybacks because the profits will now be shared among fewer shareholders. Wall Street and corporate executives both win!
In 2015 General Motors announced a $5 billion stock buyback. The beleaguered car-maker is appeasing grumbling shareholders by making their shares worth more. Buying back stock limits its supply and therefore artificially drives up its value. To make those purchases, GM is reducing its cash reserves from $25 billion to $20 billion. (Recall that you, the taxpayer, helped prop up GM’s cash reserves with a $49.5 billion bailout in 2009.) The stock buyback, combined with higher dividends, is expected to result in $10 billion for shareholders through 2016. It’s a grand time to be holding GM stock. And a bad time to have been behind the wheel of one of the thousands of defective vehicles for which GM is currently under investigation by the Department of Justice.
Times are indeed good for speculators. Not so good for employees — the people who do the actual work — whose pay is stagnant or declining so that those at the top can scoop up still more. They’ll have to suffer through pay freezes, work speed-ups and lay-offs because the money given share-holder and executive pay and financial industry profits has to come from somewhere.
“Quantitative easing” programs resulte in the U.S. Federal Reserve pumping $4.1 trillion into its three rounds of quantitative easing; the Bank of England spent £375 billion; the European Central Bank has spent about €1.34 trillion; and the Bank of Japan has spent ¥220 trillion so far. That’s a total of US$8 trillion or €7.4 trillion. And the last two programs are ongoing. The supposed purpose of quantitative-easing programs is to stimulate the economy by encouraging investment. Under this theory, a reduction in long-term interest rates would encourage businesses to invest because they could borrow cheaply; and push down the value of the currency, thereby boosting exports by making locally made products more competitive. Interest rates on bonds fell because a central bank buying bonds in bulk significantly increases demand for them, enabling bond sellers to offer lower interest rates. Seeking assets with a better potential payoff, speculators buy stock instead, driving up stock prices and inflating a stock-market bubble. Money not used in speculation ends up parked in bank coffers, boosting bank profits, or is borrowed by businesses to buy back more of their stock, another method of driving up stock prices without making any investments. The practical effects of all this is to re-distribute income upward.
Wal-Mart made headlines by announcing it would spend a billion dollars a year raising the wages of its lowest paid employees — a minor tweak to its low-wage business model. Over the past 10 years, according to data compiled from its public filings, Wal-Mart has spent more than $65.4 billion on stock buybacks — about 47 percent of its profits. That’s an average of more than $6.5 billion a year in stock buybacks, enough to give each of its 1.4 million U.S. workers a $4,670-a-year raise. It is also, coincidentally, an amount roughly equivalent to the estimated $6.2 billion Wal-Mart costs U.S. taxpayers every year in food stamps, Medicaid, subsidized housing, and other public assistance to its many impoverished employees. Wal-Mart racked up more than $16 billion in net income for 2015 and seems poised to better that this year. Sam Walton, owns about half of Wal-Mart’s stock and receive a corresponding share of the billions of dollars in dividends the company pays yearly. It also spends billions more buying back stock annually, an indirect help to the Waltons. This is a company notorious for dodging taxes while paying its employees so little they require government assistance, and is the recipient of vast amounts of government hand-outs. The Waltons make tens of thousands times what their ill-paid employees earn. They certainly don’t work tens of thousands harder — or even work at all, as the billions roll in just for being born into the right family.