What are America’s corporations doing with their record profits, and why are their stock prices rising? The same answer to both: they are using their money to buy themselves.
That is, they use their record profits and cash reserves to buy back shares of their own stock on the open market. Instead of giving their employees raises, building new factories, researching new products, or even paying dividends to their shareholders, they are taking back the shares of stock they issued in the past.
This is a huge loss for the economy. Just last year corporations spent $700 billion, or 4% of GDP, to buy back their own shares—since 2004, more than $6.9 trillion, over half of their total profits. That is money that was NOT invested in people, buildings, research, making their products safer for the environment, customer service, charity, day care, parental leave, community service, etc. Instead, the money we gave them for their products and services they kept for themselves.
They, and especially the corporations’ top executives, are the only ones who benefit, and they do so tremendously. Taking their stock off the market means there are fewer shares to buy, and normal supply-and-demand logic pressures the stock price higher. With fewer shares outstanding, the earnings PER SHARE of course goes up. How are top executives rewarded? Pay packages are tied to increased earnings per share and higher stock prices.
Also, top executives own thousands of shares of their own stock, especially because of the options built into their yearly compensation packages. In the past, they printed so many new shares of their own stock to pay themselves that the stock market stagnated for a decade due to new supply outpacing demand.
But now corporations are buying back even more than they are paying out. It works like this: a corporation’s executives award themselves, say, 100,000 shares of stock worth at issue $50/share. The executives then decide to buy back on the open market 200,000 shares. The price goes up to $55/share. Hooray for the executives! A double win! And even bigger bonuses next year because they are making the stock price rise!
This used to be called stock prices manipulation and was illegal. But that law was one of the hundreds voided in the post-Reagan age of deregulation. Cay Clubs got in trouble locally for many reasons, one of which was to use its income to buy their own promised condominiums from themselves, at high prices to make it seem they were soaring in value. You go to jail for this in real estate, but get rich doing the same thing if you are a corporate executive.
A mantra of the drive to lower corporate and high-end tax rates is that the “job providers” will take their profits and hire more employees for better jobs, expand their businesses, develop new and better projects, and spend generously in their communities. And they don’t need regulations to encourage them to do so.
The facts put a lie to what has become a gold-plated version of Reagan’s “trickle down” fantasy. If corporations had indeed spent their $6.9 trillion on what they promised us when we lowered their taxes and killed the regulations they disliked, what a wonderful world this would be. Unemployment would probably be half what it is, and middle class salaries would be rising. In fact, through the wonderful feedback loop of “high velocity” money being spent, the corporations could have prospered the old-fashioned, Henry-Ford way, by having more customers able to buy their new and improved products.
But no. The money stays owned by the one percent, for the one percent, benefiting no one but themselves. And these are the rules the American people are voting for, so way to go, One Percenters, you got ’em hornswaggled. To the victors have gone the spoils.
Note: the source for the above numbers is unpublished 2014 data compiled by Mustafa Erdem Sakinç of The University of Bordeaux and Academic-Industry Research Network. I emailed Mustafa to see the raw numbers, but he is awaiting publication to share them. This is understandable, as they represent quite a career-making finding; so at this point I cannot verify his accuracy, though I am willing enough to bet that it is generally true to write this column relying on him.