The “Buyback Ban Is a Terrible Idea – Do This Instead

“Senators Shumer and Sanders are dead wrong about buybacks’ impact on workers and the wider economy…”

Last month, senators Chuck Schumer (D-NY) and Bernie Sanders (D-VT) co-authored an opinion piece in the New York Times titled: “Limit Corporate Buybacks: Corporate self-indulgence has become an enormous problem for workers and for the long-term strength of the economy.”

The senators said, “From the mid-20th century until the 1970s, American corporations shared a belief that they had a duty not only to their shareholders but to their workers, their communities, and the country.”

I have to say the senators are right: Buybacks should be limited. They benefit too few people, who already have the advantage.

But the senators are dead wrong about buybacks' impact on workers and the wider economy.

That a bunch of D.C. insiders are wrong isn't news at all. But in this case, I'll show you the senators' prescription for fixing the problem is disingenuous at best, and a command-economy disaster at worst.

The good news is, the problem of buybacks is very fixable.

And my way to do it would not only benefit corporations and shareholders, but regular, middle-class workers and small investors, too.

These Senators Have Rose-Tinted Glasses Bolted On

The co-authors go back to the mid-20th century to make their case that through the 1970s, corporations were dutiful to shareholders, workers, and the economy.

That's hardly true – corporations have been battling workers, sometimes violently, for more than a century. From the 1830s and 1840s textile workers strikes, to the 1870s to 1970s railroad workers, steelworkers, farm workers, newspaper workers, auto workers, aviation workers, hospital workers, and truckers' strikes have marred the relationship between corporations and workers.

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How's that “dutiful”? Corporations have hardly ever felt a duty to workers – other than to keep them working to continue to produce the goods and services management is trying to sell.

Bestowing the kinds of benefits Schumer and Sanders demand corporations lavish on their workers, their communities, and the economy, is not now, nor has it ever been, a primary goal of for-profit companies.

Their primary duty is to their shareholders. And like it or not, their business is making money for their owners, the shareholders. That's what they're structured to do.

The senators said that “over the past several decades, corporate boardrooms have become obsessed with maximizing only shareholder earnings to the detriment of workers and the long-term strength of their companies, helping to create the worst level of income inequality in decades.”

Plenty of corporations certainly boosted their earnings potential by supporting trade deals, like NAFTA, deals that “offshored” American jobs to places where labor markets and worker protections were cheaper and friendlier, countries like Mexico and China.

And that gets us to the real guilty party – folks that, as sitting United States Senators, Schumer and Sanders should be very familiar with…

Their Own Colleagues Are the Biggest Culprits

Yes, I mean Congress. Our legislators – the elected representatives of the people – voted for those trade deals I mentioned.

They aided and abetted corporations' offshoring of American jobs. They helped kill manufacturing in the United States, and eviscerated the middle class; Congress sold their job prospects, their economic well-being, all for campaign donations.

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It's easy to blame greedy corporations, the same way it's easy to blame Warren Buffett for paying less than $2 million in tax last year when he's worth more than $80 billion.

But what they do is perfectly legal. The laws in America are designed by lobbyists who want to make more money and by people of means who don't want to pay a lot of taxes.

It's tough to blame corporations for using the law to their favor.

The senators say, “One way in which this pervasive corporate ethos manifests itself is the explosion of stock buybacks.”

I agree. But again, buybacks are legal. Companies are simply using what's available to them to enhance shareholder returns and management compensation. That's an indisputable fact.

What's not factual is the senators saying, “So focused on shareholder value, companies, rather than investing in ways to make their businesses more resilient or their workers more productive, have been dedicating ever larger shares of their profits to dividends and corporate share repurchases.”

Most companies – though not all, to be sure – engage in share buyback programs with excess profits or with excess cash flow after reinvesting in plant and equipment, after paying dividends, with capital they don't have another immediate- or even near-term need for.

Companies that can't actually afford buyback programs, who borrow to buy their shares back on the open market, are a real problem; though in a way, they're a good problem for some traders and investors.

That's because traders like me research those companies and bet against them, knowing they're leveraging themselves to the hilt. When they do that, they're risking not only future profitability of the company, but the company itself.

Bad for business, but that can make for an outrageously profitable short opportunity.

Right now, there are a lot of companies poised to take huge hits – including some fatal hits – if interest rates rise more, or if the economy slows down (especially if it enters a recession), or if their stock prices fall, which many of them are already seeing.

But that's the free market.

Companies are free to fail, just as they're free to use buybacks to enrich management – if it's legal.

A pair of senators, moreover Congress as a democratic institution, dictating by fiat what corporations should do with the money they earmark for buybacks and dividend payments is mere liberal-tinged populism, calculated to make waves with a political base. As policy, it's a bad prescription – no way to run an economy.

But if you want to talk about changing laws, changing tax rules to benefit workers, shareholders, and the wider economy…

Let's go make some sense.

Here's how the law should really be changed…

Full story at Money Morning