Why stock buybacks may deepen income inequality

American companies spend trillions buying back their own shares. But that's money they aren't spending on workers or factories.

Posted: Mar 22, 2018 11:49 AM
Updated: Mar 22, 2018 11:51 AM

Democrats in Congress want to rain on Wall Street's buyback parade.

Senator Tammy Baldwin plans to introduce a bill on Thursday that would prohibit companies from repurchasing their shares on the open market, Baldwin told CNNMoney.

While the legislation faces an uphill battle getting through Republican-controlled Congress, it demonstrates a growing backlash against companies using extra cash to reward shareholders instead of sharing it with workers.

Buybacks, which boost stock prices by making shares scarcer, have exploded in 2018 thanks to the huge windfall created by President Trump's new tax law. American companies like Pepsi and Cisco have announced a total of $229 billion of buybacks so far this year, according to research firm TrimTabs. Companies are on track to buy back the largest number of shares in at least a decade.

Critics say this trend is deepening the chasm between America's rich and poor because affluent families own the vast majority of the stocks. They argue the money would be better spent by investing in the future, paying workers more or offering better benefits and retraining programs.

"I fear that if we don't act, the impact on our economy and growth is going to be horrendous," Baldwin told CNNMoney Wednesday. "This very partisan corporate tax bill has fueled a surge in stock buybacks that is hurting economic growth and shared prosperity for workers."

Related: Are buybacks deepening income inequality?

The bill, which is co-sponsored by Democrats Elizabeth Warren and Brian Schatz, would explicitly "prohibit public companies from repurchasing their shares on the open market."

It would also repeal a 1982 SEC rule that gave companies the green light to buy back vast amounts of their own stock. Prior to that regulation, buybacks lived in a murky area.

Buybacks are a bit of a financial engineering trick. By eliminating shares, buybacks inflate a critical measure of profitability.

Nobel Prize-winning economist Robert Shiller recently told CNNMoney buybacks are "smoke and mirrors."

If Baldwin's legislation becomes law, companies would still be permitted to conduct tender offers, which are stock purchases offered to all shareholders at a precise price (typically a premium) and a set date. Buybacks are considered less transparent because they take place over a longer time period at whatever price the stock is trading.

Another provision of the bill would amend current rules to require all US public company boards to have at least one-third of their directors elected by employees.

The White House did not respond to a request for comment on Baldwin's bill, which has the support of the AFL-CIO.

Related: Tax cut scorecard: Workers versus shareholders

Since 2008, US companies have spent $5.1 trillion to buy back their own stock, according to Birinyi Associates.

Between 2007 and 2016, companies in the S&P 500 devoted 54% of their profits to stock buybacks, according to research by University of Massachusetts Lowell professor William Lazonick, who advised Baldwin's office on the legislation.

"This was not good for the US economy," said Lazonick.

He called Baldwin's proposed crackdown "hugely positive," even for long-term shareholders who will benefit from companies investing in something "instead of simply propping up the stock price."

But Wall Street and the business community would surely oppose federal legislation that handcuffs how companies can spend their profits.

Defenders of buybacks argue that returning extra cash to shareholders is better than simply hoarding the cash in overseas bank accounts. And buybacks have long played a key role in signaling financial strength.

"Even for Washington, this strikes me as incredibly stupid," said Jonathan Macey, a corporate law and finance professor at Yale Law School.

"The idea that banning stock buybacks is going to help the economy ignores the fact that this money doesn't disappear. It's returned to shareholders who can spend it," Macey said.

About 52% of all families owned stocks directly or indirectly through retirement plans in 2016, according to the Federal Reserve.

However, the rich own the vast majority of the stock market. The top 10% of households owned 84% of all stocks in 2016, according to research from NYU professor Edward Wolff.

Charles Whitehead, a Cornell Law School professor, said that if companies aren't investing enough in the future, that's a problem for corporate boards to solve, not Congress.

"You're putting up an artificial barrier to try to block what is more of a fundamental systemic issue," Whitehead said.

Related: For most workers, the tax cut windfall will disappear

It's clear that Trump's tax law, which was pitched as a way to create jobs, is playing a key role behind the buyback debate.

The White House estimates that 3 million workers have received one-time bonuses like the ones announced by Comcast, Disney and dozens of other major companies. Other companies like Wells Fargo have raised wages for workers.

However, companies are spending far more on buybacks than on improvements for employees. Analysts polled by Morgan Stanley expect that just 13% of the corporate windfall from the tax cuts will go directly to workers, while 43% will go to shareholders.

Baldwin called out Kimberly-Clark for repurchasing $900 million worth of stock in 2017 and then announcing plans in January to slash up to 5,500 jobs. The maker of Huggies and Kleenex plans to shut 10 factories, including in two in Baldwin's home state of Wisconsin.

Kimberly-Clark did not respond to a request for comment.

"This exposes the false promise of trickle-down economics in this tax law," Baldwin said.

Indiana Coronavirus Cases

Data is updated nightly.

Cases: 766351

Reported Deaths: 13965
CountyCasesDeaths
Marion1052671804
Lake568691028
Allen42858698
St. Joseph37286568
Hamilton37260426
Elkhart29729470
Tippecanoe23441230
Vanderburgh23153404
Porter19568327
Johnson18807391
Hendricks18059321
Madison13518345
Clark13502198
Vigo12817255
LaPorte12558224
Monroe12529178
Delaware11124198
Howard10654237
Kosciusko9751123
Hancock8734149
Bartholomew8256157
Warrick8053157
Floyd8005181
Grant7349181
Wayne7234201
Boone7173105
Morgan6904142
Marshall6329116
Dubois6270118
Cass6085111
Dearborn600078
Noble597890
Henry5944111
Jackson515677
Shelby509897
Lawrence4914127
Gibson461596
Montgomery457592
Clinton454555
DeKalb453685
Harrison452476
Whitley415345
Huntington414081
Steuben410260
Miami405073
Jasper400455
Knox388091
Putnam384662
Wabash368783
Adams352256
Ripley351071
Jefferson341586
White339354
Daviess3089100
Wells302781
Greene292985
Decatur291693
Fayette285864
Posey280935
Scott278758
LaGrange277172
Clay273148
Washington253537
Randolph247583
Jennings238649
Spencer237931
Fountain234850
Starke229959
Owen222259
Sullivan219543
Fulton207845
Jay202832
Carroll197122
Orange190956
Perry189739
Vermillion180044
Rush177327
Tipton172347
Franklin171935
Parke154816
Pike141434
Blackford137832
Pulaski123648
Newton123036
Benton109615
Brown105943
Crawford105516
Martin92515
Warren87715
Switzerland8328
Union73510
Ohio58311
Unassigned0428

Ohio Coronavirus Cases

Data is updated nightly.

Cases: 1122647

Reported Deaths: 20467
CountyCasesDeaths
Franklin1302911493
Cuyahoga1171502259
Hamilton823481259
Montgomery534491059
Summit488581014
Lucas43734832
Butler39936614
Stark33800937
Lorain25996509
Warren24896312
Mahoning22685612
Lake21457396
Clermont20368260
Delaware19120138
Licking16842227
Trumbull16786491
Fairfield16762207
Medina15832276
Greene15499254
Clark14339308
Portage13417218
Wood13338201
Allen12043245
Richland11726213
Miami10998228
Wayne9251227
Columbiana9196236
Muskingum9119137
Pickaway8738123
Tuscarawas8714254
Marion8703140
Erie8126166
Ashtabula7272179
Hancock7044134
Ross7012165
Geauga6948153
Scioto6679108
Belmont6210179
Lawrence5917104
Union590449
Jefferson5723162
Huron5630122
Sandusky5482130
Darke5436130
Seneca5376128
Washington5362111
Athens526560
Auglaize507087
Mercer490685
Shelby481297
Knox4609112
Madison447266
Ashland443198
Defiance438499
Fulton435775
Putnam4351104
Crawford4110111
Brown409662
Preble3946107
Logan391679
Clinton389266
Ottawa375581
Highland365068
Williams356478
Champaign348360
Guernsey330254
Jackson321254
Perry298350
Morrow294643
Fayette288250
Hardin279165
Henry276967
Coshocton272561
Holmes2725102
Van Wert251665
Adams249258
Gallia249250
Pike244637
Wyandot235257
Hocking222663
Carroll201249
Paulding179442
Meigs151040
Noble137739
Monroe137545
Harrison115238
Morgan111524
Vinton87217
Unassigned03
Fort Wayne
Partly Cloudy
84° wxIcon
Hi: 88° Lo: 64°
Feels Like: 87°
Angola
Clear
82° wxIcon
Hi: 85° Lo: 64°
Feels Like: 86°
Huntington
Partly Cloudy
83° wxIcon
Hi: 85° Lo: 62°
Feels Like: 85°
Decatur
Partly Cloudy
84° wxIcon
Hi: 86° Lo: 63°
Feels Like: 87°
Van Wert
Clear
82° wxIcon
Hi: 88° Lo: 63°
Feels Like: 84°
It's a steamy Wednesday with scattered showers and thunderstorms arriving Wednesday night.
WFFT Radar
WFFT Temperatures
WFFT National

Community Events