by UnHerd
Wednesday, 12
May 2021

Share buybacks expose the ingratitude of big business

Many corporations are sliding back to the bad habits of the pre-2008 world
by UnHerd
Jamie Dimon, JP Morgan CEO

Build back better. That’s the order of the day, isn’t it? We need to bounce back from Covid by investing in a brighter future. 

Unfortunately, for many big businesses it’s back to the bad habits of the previous decade. Instead of investing in productive endeavour, the corporates are using their spare cash to buy back their own shares. 

According to new research from Goldman Sachs (as reported by the Financial Times and the Evening Standard), US companies have announced record levels of share buybacks — nearly $500 billion during the last four months. 

That’s nice if you happen to own the corresponding stocks (because all that financially-engineered extra demand pushes up the value of your assets), but it’s not so good for the real economy. The last set of US employment figures were disappointing to say the least — but should we be surprised if major employers aren’t investing in job-creating activities?

During the darkest days of the Covid crisis, it took massive government intervention to stabilise the economy; but now that we’re emerging into the light we need big business to return the favour and invest in the recovery.

If it refuses to do so, what can government do about it? Tax reform is long overdue. The burden of taxation should fall more lightly on job-creating and productivity-enhancing  investment and more heavily on useless speculation. 

However, there’s a limit to what this can achieve — and not only because of the technical complexities. If a government goes too far in squeezing share buybacks and the like, then the capital behind such activity will shift to other parts of the world. 

As always, the stick must be balanced by the carrot. As well as disincentivising the wrong sort of investment, government needs to attract the world’s spare cash into the right sort of investment. 

Public funding of things like infrastructure and research is sometimes accused of ‘crowding-out’ private investment. However, in a global economy awash with surplus capital, it’s more a case of crowding-in private investment by using the capacities of the state to unlock opportunities that would otherwise remain out of reach. 

Examples include building shared infrastructure that would be beyond the ability of any one company to provide; or funding the pure research that enables commercial R&D; or providing the technical education so that employers can find qualified candidates to fill new positions. 

Building back better and levelling-up can be criticised as form of ‘pork barrel politics’ — i.e. buying votes in favoured regions. However, done properly, it isn’t just good for the locations that directly receive the investment, it benefits the whole economy by attracting capital away from share buybacks, property speculation and other asset bubbles.  

Join the discussion

  • Buying back shares at today’s P/E ratios sounds like a really stupid idea even if money no longer has value. Buying future capacity and facility upgrades seems a wiser use of free money. Those improvements ought to lead to better earnings which then could lower the P/E and make the shares more attractive. But those efforts in the short term are costs to the business (lowered profit) but have long term benefit. Not sure government can do much about corporate stupidity, but shareholders should be concerned.

  • “That’s nice if you happen to own the corresponding stocks (because all that financially-engineered extra demand pushes up the value of your assets), but it’s not so good for the real economy.”
    First off, the value of your assets does not go up because of “extra demand”. It goes up because there are fewer shares outstanding. That is, your share of the pizza gets larger because it’s cut into fewer slices. In essence, it’s nothing more than a form of returning capital to shareholders, like dividends.
    Second, companies would almost always love to be able to reinvest in new profitable lines of business, but pretty often there are no good ways to do that in a given time frame. (Companies and individuals have zero obligations to engage in money-losing businesses.) Returning capital to shareholders is what they do when the company can’t profitably use the money otherwise in the near future.
    Finally, share buybacks are utterly neutral with regard to benefiting the economy. The money isn’t destroyed any more than the assets of the company are; it’s simply now in the hands of different investors, who on average aren’t any more or less likely than the previous ones to spend it on consumer goods or services, or to use it altruistically. It’s essentially a bookkeeping move about who owns what number of what. Nothing more.

  • They have been doing the share buyback thing for the last 10 years. At least, that’s my understanding.
    The whole thing is a giant racket built on zero interest rates and endless supplies of free money.
    Max Keiser on the Tim Pool podcast was very good on all this yesterday.

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