As US stock markets keep hitting record highs analysis shows just 6% of corporate gains from Trump’s tax cuts have trickled down to workers.
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. 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. 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.
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. 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. 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. 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.
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.
https://www.theguardian.com/business/2018/sep/01/trump-corporate-tax-cuts-benefit-wealthy
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. 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. 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.
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. 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. 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. 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.
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.
https://www.theguardian.com/business/2018/sep/01/trump-corporate-tax-cuts-benefit-wealthy
No comments:
Post a Comment