'Massive Share Buybacks' Are Nothing to Fear
I am intrigued by the idea that opinion articles, blog posts and tweets can have “give away” phrases that reveal more bias than the author intends, or perhaps are correlated with errors in economic reasoning. I have a candidate for such a phrase: “massive share buybacks,” or the variation, “massive share repurchases.” The words sound innocuous enough, but such talk ought to raise red flags in your mind.
The background is this: Congress recently passed a major tax reform bill, which included a corporate tax rate cut. Many Republicans are of course claiming it will significantly boost wages, investment and economic growth. I am mostly agnostic about the scope of those claims, and I have mixed feelings about the bill overall. (It brings better incentives but also increases the deficit too much.) As you might expect, there is an army of commentators and pundits determined to make the new bill look bad.
Many of them claim that (a) corporations are being allowed to keep more money, and (b) a lot of that money is going toward “massive share buybacks.” To be sure, both of those claims are true, but in tandem they leave a mostly misleading impression. You might think that “massive share buybacks” are an alternative to boosting wages, investment and economic growth. They are not. In reality, it is an open question how buybacks will affect wages, investment and economic growth, but they do not render the more positive scenarios less likely.
A basic principle of economic reasoning is to think in terms of real resources, not just the first-round flows of money. If a major corporation engages in buybacks, that simply transfers money from one set of hands to another -- from the corporate entity to the shareholders. It doesn’t destroy real resources or determine their final disposition. The money could still go to a venture capital fund, or into private equity or a real estate investment trust, in addition to numerous other undertakings, all of which might boost investment and real wages.
The shareholders could also spend that money, say, buying ice cream cones, but as relatively wealthy individuals they are more likely to invest the money somewhere else. (If they needed the money to buy something, they would have already sold the shares.)
Furthermore, a lot of shareholder spending is on durable consumption that can involve significant investment. What if shareholders took that buyback income and had new homes built, or bid up the prices of existing homes and spurred new construction? That would boost investment, add to the supply of physical structures, create new jobs and drive up wages to some degree. Or buying a Picasso from another art collector actually gives that collector a chance to be the one who makes the new investment decisions.
The key question for whether investment will go up somewhere is whether the rate of return on investment has increased. From the nature of the tax cut, we know it has. Investment in the American economy therefore is likely to rise, even if we don’t always know where or by how much.
Share buybacks simply indicate that investors don’t think those particular companies are the most promising outlets for new investment. In some cases, however, a share buyback may be consistent with a company undertaking more investment. In some theories of corporate governance, investors want a business to raise new capital and pay out funds at the same time. Arguably the payout is designed to force the company back into capital markets, creating a new set of delegated monitors for the company and the quality of its investments.
No matter which way you turn your head on this one, you just don’t arrive at the conclusion that share buybacks, massive or not, are going to pull real resources away from new investment. You might even try suggesting that because most large, publicly traded corporations are relatively cash-rich, share buybacks might be a sign of a new dynamism, or a harbinger of additional unicorns on the way. We just don’t know, but those claims are more plausible than the view that buybacks are pulling resources away from investment and job creation.
By the way, note the slightly negative emotional resonance involved in describing the buybacks as “massive.” Because there are billions of dollars’ worth of buybacks all the time, and U.S. corporations have announced $218 billion in buybacks since December, setting new records, the adjective “massive” is not incorrect. But as the word is deployed, it is wrongly implying there is a “massive” pulling away of these funds from somewhere else.
Words matter, and economists and financial commentators can be as guilty of linguistic bias as anyone.
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Stacey Shick at email@example.com