Opinion by Robert Reich
(BERKELEY, CA.) – Trump’s promise that corporations
will use his giant new tax cut to make new investments and raise
workers’ wages is proving to be about as truthful as his
promise to release his tax returns.
The results are coming in, and guess what? Almost all the
money is going into stock buybacks. Since the tax cut became law,
buy-backs have surged to $88.6
billion. That’s more than double
the amount of buybacks in the same period last year,
data provided by Birinyi Associates.
Compare this to the paltry $2.5 billion of employee bonuses
corporations say they’ll dispense in response to the tax law,
and you see the bonuses for what they are – a small fig leaf to
disguise the big buybacks.
If anything, the current tumult in the stock market will fuel
Stock buybacks are corporate purchases of their own
stock. Corporations do this to artificially prop up their share
Buybacks are the corporate equivalent of steroids. They may
shareholders feel better than otherwise, but nothing really changes.
Money spent on buybacks isn’t reinvested in new equipment,
research, or factories. Buybacks don’t add jobs or raise wages.
They don’t increase productivity. They don’t grow the
Yet CEOs love buybacks because most CEO pay is now in shares
stock and stock options rather than cash. So when share prices go up,
executives reap a bonanza.
At the same time, the value of CEO pay from previous years
rises, in what amounts to a retroactive (and off the books) pay
increase – on top of their already humongous compensation
Big investors also love buybacks because they increase the
of their stock portfolios. Now that the richest
10 percent of Americans own 84 percent of all shares of
percent at the turn of the century), this means even more
at the top.
Buybacks used to be illegal. The Securities and Exchange
considered them unlawful means of manipulating stock prices, in
violation of the Securities Acts of 1933 and 1934.
In those days, the typical corporation put about half its
into research and development, plant and equipment, worker
retraining, additional jobs, and higher wages.
But under Ronald Reagan, who rhapsodized about the “magic of
the market,” the SEC legalized buybacks.
After that, buybacks took off. Just in the past decade, 94
percent of corporate profits have been devoted to buybacks
dividends, according to researchers at the Academic-Industry Research
Last year, big American corporations spent a record $780
buying back their shares of stock.
And that was before the new tax law.
Put another way, the new tax law is giving America’s wealthy
not one but two big windfalls: They stand to gain
from the tax cuts for individuals, and
big winners from the tax cuts for corporations.
This isn’t just unfair. It’s also bad for the economy
as a whole. Corporations don’t invest because they get tax
cuts. They invest because they expect that customers will buy more of
their goods and services.
This brings us to the underlying problem. Companies haven’t
been investing – and have been using their profits to buy back
their stock instead – because they doubt their investments will
pay off in additional sales.
That’s because most economic gains have been going to the
wealthy, and the wealthy spend a far smaller percent of their income
than the middle class and the poor. When most gains go to the top,
there’s not enough demand to justify a lot of new investment.
Which also means that as long as public policies are tilted to
benefit of those at the top – as is Trump’s tax cut,
along with Reagan’s legalization of stock buybacks –
we’re not going to see much economic growth.
just going to have more buybacks and more inequality.
B. REICH is the Chancellor’s Professor of Public Policy at the
University of California, Berkeley, and a senior fellow at the Blum
Center for Developing Economies.
served as secretary of labor in the Clinton administration and Time
magazine named him one of the 10 most effective cabinet secretaries
of the 20th century.
Reich has written 14 books, including the best-sellers Aftershock,
The Work of Nations, Beyond Outrage and most recently Saving
is also a founding editor of The American Prospect
chairman of Common Cause, a member of the American Academy of Arts
and Sciences and co-creator of the award-winning documentary
INEQUALITY FOR ALL.