The DeX Files: The Great Buyback Boom

Shareholders have been rewarded with $178 billion in corporation buybacks over the first three months of 2018. That’s a record.

“The buyback bonanza occurred during the first full quarter after President Donald Trump signed into law a massive corporate tax cut that was supposed to lift business spending on job-creating investments.

The tax law reduced the corporate tax rate to 21% from 35% and gave companies a break on taxes owed when returning foreign profits. That one-two punch allowed companies to reap huge profits, a sizable chunk of which have been returned to shareholders. Profits had already been on the rise thanks to the accelerating economy.”

“Tax Cut Sparks Record-Setting $178 Billion Buyback Boom” | CNN | Matt Egan & David Goldman | 05/20/2018

1) To have believed that the Tax Cuts and Jobs Act of 2017 would deliver on the promises made by the President and every Republican Congressman or Senator who had a microphone shoved in his face was to believe that corporations would use their tax savings to invest in equipment and factories. That they would hire more workers. That as demand for goods and labor picked up wages would rise and the deficit would fall. To have believed what has been proven a fantasy was to reveal to your friends and neighbors that you had little grip on how late capitalism actually works.

2) Firms are making higher profits, but they’re not re-investing as we were told they would. Share buybacks (corporations buying back their own stock) are up to record levels. And like spice (to evoke Dune), capital must flow. Firms investing more in capital (their own stock) than labor (workers and higher wages) is evidence of low demand. Low demand strangles productivity (also low because many firms aren’t running at full capacity), which limits investment in new equipment and workers.

3) Meanwhile, the 2.6% increase in wages over the last year has been devoured by 2.5% inflation over the same period. Likewise, while (U3) unemployment has dipped below 4%, it’s not clear that the tax cut should get the credit, as wages haven’t risen as promised. Thus it’s also clear that the true frame for the jobs created during the current administration is the same frame for those created by the previous administration—most jobs created since the Financial Crisis have been “low-quality.” They’re temporary jobs, low-wage jobs, or part-time jobs—hardly the kinds of jobs that contribute to the long-term health of the economy.

4) While I’ve covered several factors contributing to sluggish wage increases, if not stagnation, thus far my scope has been narrow. Let’s widen it. The most pernicious reason why wages have stagnated for various lengths of time across different income distributions over several decades is the political and ideological assault on workers as they’ve demanded higher wages from employers. Globalization was the beginning of this trend’s modern phase, particularly the way in which cheap foreign labor facilitated the transfer of wealth from the American middle-class to the American upper-class and the Chinese lower class. Further examples of the war on wages are that there are now 28 right-to-work states, mostly in the south and the west. There are full-time Walmart and Amazon workers who must supplement their 80-hour paychecks with food stamps, even as the current regime is set to stiffen eligibility requirements for government assistance. The Supreme Court recently ruled that corporations can force individual workers to sign arbitration agreements. And 40% of Americans can’t cover a $400 emergency.

5) The promises Republicans haven’t delivered to average American workers, as well as an outright animosity towards improving workers’ bargaining power signals the early stages of an awful cycle. Stage 1: Low-quality jobs and anemic wages become a larger part of the economy. Stage 2: Lower tax revenue from low-quality jobs and tax cuts creates larger deficits. Stage 3: The very people who gave so much to those who didn’t need it get super-pissed when the government services and programs they need are cut. Perhaps by the President for whom they voted. To whom or what would they turn to then? I shudder to think of the possibilities. And I can’t think of a better name for it, so I’ll just call it The Awful Cycle and hope it never happens.

6) The real deal of the Republican Tax Cut is that (like globalization) it’s ultimately a con. It’s a wealth transfer from the American middle class to the American upper class at a time when the top doesn’t need it while the middle desperately does. And yet, this economy needs more and more capital flow to stay afloat. Thus capital is directed to corporations and the rich who would make it flow continuously. As long as capital flows, the “real” economy where people buy and sell real stuff will be sluggish for the foreseeable future. Should we keep following the same policies, at some point, it will get so sluggish that it will barely creep.

Further Reading:

What U.S. CEOs Should Do with the Money from Corporate Tax Cuts | Harvard Business Review

Paul Ryan Says He’s Been “Dreaming” Of Cutting Medicaid Since He Was In College | Vanity Fair

Forget about broad-based pay hikes, executives say | Axios

Five Charts That Show How Companies Are Spending Their Tax Savings | Bloomberg

Monopsony, Rigidity, and the Wage Puzzle (Wonkish) | New York Times


IMAGE SOURCE: Dollar_Flying_Concept_Business_Money_Cash (Creative Commons)

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.