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Pitchfork Economics with Nick Hanauer
Myths That Built Trickle-Down Economics: Shareholder Value (with William Lazonick and Lenore Palladino)
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A
Hi there. I'm Greg, a producer here at Pitchfork Economics. This week we're continuing myths that built trickle down economics with the myth that corporations exist to maximize shareholder value. That may sound like basic business logic, but it isn't. It's a story that helped justify decades of stock buybacks, wage suppression, layoffs and underinvestment. Also, corporate profits could be extracted from the real economy and funneled to wealthy shareholders. The promise was that if corporations focused on the stock market, prosperity would trickle down to everyone else. But workers, consumers and communities have paid the price. So in this episode, Nick and Goldie talk with Lenore Paladino and William Lazenik about how shareholder primacy became a core myth of trickle down economics, why it has caused so much damage, and what it would mean to build corporations around workers, consumers, communities and long term prosperity instead of. We also created our own visual explanation of how stock buybacks became a trillion dollar heist. We'll link you to our free comic Trillion Dollar Heist in the show. Notes. This episode is a reminder that corporations do not exist outside society. They're created by public laws, protected by public institutions and shaped by public choices. So the real question isn't whether corporations shouldn't follow rules. The question is who those rules are are written to serve.
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B
Corporations are people, my friend.
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C
We can raise taxes, of course they are.
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B
Everything corporations earn ultimately goes to people.
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C
So where do you think it goes?
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D
In many companies today, and really across the non financial sector, companies are spending upwards of 100% of their profits on shareholder payments.
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B
Pick your thing. That would be an investment in the middle class. That would allow people to thrive in the economy to grow in a legit way. And it will be a de minimis proportion of the amount of money that we spend annually collectively on stock buybacks.
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D
You know, we should have the power as a democracy to make sure that the rules that govern corporate behavior serve the broader society.
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E
This is Pitchfork Economics with Nick Hanauer.
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B
A podcast about how to build the
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E
economy from the middle out. Welcome to the show.
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F
I'm david goldstein, senior fellow at civic ventures.
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B
I'm nick hanauer, founder of civic ventures.
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F
So Nick, I want to talk to you about the world's dumbest idea.
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B
That must be shareholder value maximization.
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F
Right? So that was the title of a great piece by the investor James Monteer. He called shareholder maximization the world's dumbest idea in 30 seconds.
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B
Why so? Shareholder value maximization is the notion that the only purpose of the corporation is to enrich shareholders. And the idea has a long legacy that you can connect from neoclassical economics and some of the underlying assumptions, Homo economicus and equilibrium theory, to the neoliberal economist Milton Friedman, who wrote a very famous editorial in 1970 where he claimed, and I quote, there is one and only one social responsibility of business to, to use its resources and engage in activities designed to increase its profits.
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F
And to be clear, at the time in 1970, people thought he was crazy because that was not the norm, right?
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B
The norm had been for a long time that because corporations were granted limited liability by the society, they had a responsibility broadly back to that society.
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F
It's a privilege.
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B
It is a privilege. And you know that corporations owed responsibility, of course to shareholders, but after their customers, after their workers and after their communities, that shareholders in fact deserved a fair return, but not more. But Friedman's assertion, and then a bunch of efforts, economists Jensen and Meckling argued that, you know, basically there was only one responsibility, which is to get executives focused on increasing shareholder wealth. And if you did, everything else would
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F
follow because of the invisible hand, more
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B
or less, or, you know, and that it is this magical neoliberal principle that if you just do that, the markets will be very efficient and more prosperity would be generated for all and so on and so forth. And that idea was adopted in a very widespread way, both because no one offered really a compelling counter theory. But you know, being honest, if you are an executive or a shareholder, the idea that you are serving the public interest by narrowly serving your own self interest is extremely appealing. Who wouldn't want to believe that, that the richer I get, the better it will be for you. And so not surprisingly, that view was adopted quickly across the business community and is in fact now being taught in business schools that, you know, they're churning out people from the Harvard Business School who believe that they're only social responsibilities to themselves. What could go wrong?
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F
Let's talk a bit about how corrupting this is. Because if you are a CEO and your compensation is largely in stock as it is today, and your stock price is largely judged by Wall street in terms of EPS earnings per share. Well, there are two ways to increase earnings per share. One is the old fashioned way to
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B
make better products and services, right?
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F
Increase your company grows investing, growing your company and you grow your earnings. But that's risky because you may or may not succeed at that.
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B
It turns out that's quite hard to do, right?
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F
The other way is, is to buy back your shares, reduce the number of shares, that too will increase earnings per share. And that you just look at a calculator That's a sure fire thing.
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B
It is. It's not very hard. Right. Anybody can do that.
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F
So most CEOs, which one do they lean to?
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B
Yeah, the latter, obviously, because building better products and services is a very difficult task. Buying your own shares back is a very easy task. And there's another element at play, of course, here, which is that in a world where employees, particularly executives, are granted lots of shares as compensation, there's continuing dilution of the overall shares. Right. And what that does is put, puts pressure on the other shareholders. But of course, if you're buying all the stock back, then all the dilution disappears and everybody is happy. And so that's where all this, except
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F
for the workers who have seen their, their wage, has stagnant or declined past 40 years during the era of what? Shareholder value maximization.
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C
Right.
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B
And that's why we call it the world's dumbest idea. Well, to delve deeper into the evils of stock buybacks, today we get to talk to Dr. William Lazonic, who actually really pioneered the analysis of the size of stock buybacks and their effect on the overall economy. All right, so Dr. Lazonic, you are the nation's leading expert on the pernicious practice of stock buybacks, but for our listeners, why don't you, why don't you kind of give a summary? What is it? Where did it come from and how big is it? And so on and so forth.
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C
Okay, well, the companies, when they go public, they issue shares. The market typically the reason they issue shares is so that people who have invested in the company can take their money out and managers can run the company and hopefully grow the company through reinvesting their profits when they make the profit. And traditionally, of course, if you want people to hold shares, you want to give them a yield, they can either get that through dividends, if you can afford to pay them, or through selling the shares at a higher price at a later point in time. And up until about the 1980s, that was basically what it was all about. And they were reinvesting the rest of the money into the company or capital equipment and for people, and which includes giving them employment security, pay raises, benefits. And basically that's how we got a middle class in the United States and an expanding middle class post World War II by what I call retain and reinvest. The companies would make profits, retain their earnings, reinvest. But what changed things was basically Ronald Reagan getting elected on a platform of deregulation, getting a guy from Wall street named John Shad to be the chair of the SEC Turning Change Commission. He believed in Chicago economics and the more money sloshing around in capital markets, that that was capital formation. Well, that was the view that then captured very quickly the FTC. And in November of 1982, they passed a rule, adopted a rule called Rule 10B 18, which said that on any single day, a company could do up to 25% of its average daily trading volume on a single day and not only not be charged with manipulation, but have a safe harbor against being charged with manipulation. Which meant that even if you exceeded that, you weren't necessarily manipulating the stock market, which in fact you were, by the way.
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F
Professor Ozanik, that is the whole point of buying back your stock is to increase your share price.
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C
Yeah. When you're doing the open market repurchases, you're trying to in general, increase your stock price. And that fit also with the emerging ideology that companies should be run for shareholder value, which really only started getting articulated in the mid-1980s after this rule was adopted. But it's not even capital that's being distributed, it's just finance. This also then linked up with ways in which companies were paying their executives, and executives got them at least to buy into this notion of shareholder value and doing stock repurchases. Even though I think, think any executives who knows anything about the company they're running, maybe some of them don't anymore, but anyone who does knows that those shareholders don't matter, that they're just people who are households who are buying and selling shares, some of the very rich, but they have nothing to do with running the company. And that if you're going to run the company, you have to retain your profits, retain your people, engage in learning, which is what innovation is all about, and that this undermines the process. But by putting out this ideology of creating value for shareholders, unlocking shareholder value, calling shareholders, investors, and the whole everything, not only that you hear every minute on a station like CNBC and others, but that most people actually believe that's what has ended up happening.
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F
Am I correct in understanding that there's actually, actually a net negative equity flow out of the stock markets, that the amount of money raised in IPOs is less than the amount of money returned in stock repurchases?
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C
Yeah. Money raised on the plus side, the IPOs and secondary issues, which are not all that important. And then on the negative side, it's really three things I think should be in there. Buybacks, cash that's used to acquire companies. Could that take stock off the market and delisting. Anyway, the point that I make out of that is that companies are funding the stock market, not vice versa in aggregate. And of course that's an aggregate because there are companies, I just wrote New York Times op ed on Amazon thing that still now it's going to be what it is by being a retain and reinvest company. And other companies like IBM have gone to downsize and distribute as I call it. And so there are companies within the aggregate that are building up their capabilities. And that's where you see where competitive advantage comes from, potential for higher wages come from, et cetera. But when you look across all the whole set of companies, you see that more of them are much more leaning toward financialization than innovation. That is taking money out and particularly using buyback on top of dividends and not instead of dividends, right?
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B
Literally taking a giant trillion dollar ball of cash and passing it back and forth between company treasuries and Wall street where a bunch of executives make a little bit more and the financial services industry makes a little bit more. But no social utility is created with that money. And all of that money in turn could be used for increasing wages. It could be used for investments in R and D. It could be used for our nation's infrastructure. It could be used for any of these things. It would genuinely increase our productive capacity, genuinely increase our capacity to innovate and to grow, genuinely improve people's lives through higher wages. And it's just this glaring example of grift in the modern, in what passes for our modern capitalist society. And I think that, that, that's the reason, I think that our listeners should care so much about this issue and understand it. So is it stock buybacks are how, you know, the trickle downers are lying that you, you know, everybody is paying
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C
the price for this. So when your listeners pay taxes, you know, the government is to be doing a lot more, but it is investing in infrastructure and knowledge. Companies use it. And if we get a decent tax rate from the companies, then we can continue to do this. We don't have to borrow to do it. But the companies claim they need all this money to reinvest. And then we just look and see what they're doing with the money. And we can look at company level, we can look in your aggregate. Yeah, and then workers, I think, yeah, they're not getting the kind of employment security, the kind of benefits, the kind of wage increases that they could get. And that's where rising standards of living come from. They don't come from shortage of supply and labor on the labor market because companies will find ways to deal with that. They come from actually companies wanting to share the gains with workers. The good companies do this, and then other companies have to figure out how to operate in a higher wage environment. And that's not happening. And that's why even in this boom, with labor markets tighten for low pay, labor wages aren't moving because people are still afraid of losing their jobs. And companies have all the power to do this, and they have no interest in trying to keep their workers happy. No sense of responsibility toward the workers. And, you know, it's not a matter of, you know, just responsibility because you want people to be hired. I mean, people are going to work every day and making those companies productive, and then the money is flowing out to the people who matter least. And of course, there's a whole ideology that's surrounding that. That's what makes up a continuous.
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F
And you, you made this comment earlier, and I think I want to draw out on it. When you say the people who matter least, to be clear, you're saying that shareholders are not investors.
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C
They're not investors in a country like the United States. The stock market is actually not an institution that has ever really been used in the United States for direct investment. It's venture capitalists call an IPO an exit strategy. I mean, it's a way of taking your money out and then leaving people who hopefully can know how to run the company in control. Even going back to the early 20th century, in the separation of ownership control that Berle and Means noted in their classic 1932 book, that was not because companies needed to go to the stock market to get capital. It was because companies had these owner entrepreneurs and needed to get them out of the way so that the managers who they had brought in to run the companies could run these very complicated companies. It's what I work with in the Albert Chandler called the managerial revolution. That's American history. So the stock market has never been a important source of funding for companies. And often when it is a source of funding for companies, like with many biotech companies, which are 15 minutes from where I'm sitting right now, they're going on the market with no product, and it's totally speculative. And the people who are buying and selling the shares are going to wait for a product to be produced. So, but that's not the notion people have of the stock market as being the way you raise capital is nonsense in terms of the actual functioning of the market.
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B
Again, I Think the reason that your research has been so useful is that it makes a lie out of one of the most important sort of fixtures of neoliberalism and trickle down economics. This thing that we have embedded in people's heads, which is that more corporate profits are an unalloyed good. And when companies earn huge amounts of profits, that benefits everybody because those profits are reinvested in growth and wages and innovation and so on and so forth. And again, what your research reveals is that when you add on stock buybacks to dividends, 90 plus percent of corporate profits are simply returned to the richest people, leaving only a few percent to actually be invested back in the country. And so the idea that we can't tax corporations more, tax rich people more, that somehow constraining their after tax income will harm growth, just becomes a ridiculous lie. And that line of research, I think, has been a great service to the country and to our understanding, a real understanding of economics.
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F
Well, thank you very much for your time and your work on this, Professor Lazanik.
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B
So thank you so much for spending time with us. We really appreciate it. Yeah, yeah, bye.
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F
So, Nick, I think it was great to get from Professor Lizani both this explanation of what stock buybacks are and this history of how we got there that it, it wasn't actually the way we always did it. Yeah, but, but for me, the more important explanation from him was making this distinction between shareholding and investing correct. That for most people it's not really the same thing.
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B
Yeah, and I think that's a really good point. Having participated in the stock market a bunch as a company founder, the stock market definitely did create, you know, economic utility for us by allowing us to raise capital to expand the businesses that we created. But once that initial public offering was over, the idea that people who were investing in our company were investing in our company or buying our shares, were investing in our company is simply not true. We don't get that money. Those shares are just swapped between basically individuals and institutions. And when you look at the raw numbers, what you discover, as Professor Lazanik pointed out, is that the stock market really isn't a place that puts money into the economy. In many ways, it's a place where people pull money out of the economy.
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F
Right. As he said, it turns out companies are funding the stock market, not the other way around. There's this big distinction between you and me in many ways, but as a venture capitalist, you're founding companies, you're providing capital to start up a company. When I buy stock in my piddling Individual retirement account. I'm not investing. I'm speculating.
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B
Yes, correct, Right.
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F
Because when I buy Apple or whatever company, they're not getting my money.
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B
You are definitely not helping them open the next factory. Although the market capitalization that the demand for their stock creates does create the opportunity for them to raise money to open factories.
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F
But they don't need to. Well, they're doing 70 some billion dollars worth of stock buybacks a year. They don't actually need to go to.
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B
No, they do not.
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The market to raise capital, as do most companies.
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B
And, you know, there is this really interesting but complex distinction between finance and capital.
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F
Right.
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B
And the distinction between the stock market and the economy. And these two things, they're having less and less to do with one another. That how the stock market does. Has a very small impact on the lives of most Americans. Obviously, you know, when it goes up, it makes rich people richer because they're the ones that owned all the stock. And that wealth, of course, capitalizes a bunch of things that are important in the economy. But, you know, a really profound challenge for the country is to figure out how to distinguish between the stock market and the rest of the economy and to build policies that help people and not just the owners of lots of stock.
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F
And this gets to a theme of this whole podcast in all our episodes, which is why narrative is so important. If you think that the purpose of the corporation is to enrich shareholders, and you think that shareholders are investors, so when the shareholder makes money that just goes back in and makes the economy grow, then you're going to have certain policies that encourage that which we've had, which has led to this growing crisis of economic inequality. But if you understand, as Professor Lazanik explained, that shareholders are actually the least important people to a company. It's their customers, it's their employees, it's their commun that actually make a corporation successful, then you're going to have different policies, different rules, and different norms.
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B
Yeah, absolutely. And if you confuse the success of a giant hedge fund that does nothing but trade shares in stocks for the company itself and the products it makes, then you will definitely confuse what the purpose of the economy is and what policies should be to make the economy grow and do better.
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C
Right.
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Bad stories leads to bad economies.
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E
So if this story sucks, let's tell a different one. It takes place here in the US around 1790. Hi, my name's Sara Lebovitz and I'm a producer on Pitchfork Economics. So the revolutionary wars just ended pretty recently, and spoiler alert, we Won.
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C
Hey,
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E
that's awesome. But it also left behind a whole lot of questions on how to run a country, form a democracy. I know you've seen Hamilton, you know how contentious it was in the room where it happened. And one of the many, many choices that new state legislatures were having to make is what to do with corporations. Corporations in the US had existed prior to the Revolutionary War and had, as made sense, followed British rules, which at least from Britain's perspective, were pretty fair. Companies had only recently started to be seen as money making endeavors. Before the 17th century, they had been considered not for profit, entities that did things like build institutions like hospitals and universities, stuff that actually served the public. And when they did those kinds of things, it was through a charter with the local government. That charter would detail out what they were going to do and how it was going to be done. And if they fucked up or stepped out of line, that charter meant that they could be punished. By the time the 17th century rolled around, corporations had made the swap from nonprofit to, well, profit. But the charter had remained, which means that companies still had to basically justify their existence. They were given rules and limitations and had to prove that they were worthy of serving the British public. It just so happened that what served the British public best at that time were corporations that furthered the reaches of colonialism through control of resources, trade, territory, you know, all the stuff that say, some upstarts with ideas about democracy might not be super happy about. So Back to the 1790s, these new legislators are stuck with a decision. Do they hold on to Britain's way of doing things or make it a free market for corporations? And for once, they stuck with Britain because for all it may have sucked for the Americans, it was obvious that those charters did in fact benefit the uk. So companies were formed with specific purposes in mind. They dug canals or built bridges, and perhaps most importantly, they had time limits. A charter lasted between 10 and 40 years. And once their time was up or the task they'd been created for was completed, they were terminated. They also, glory upon glories, prohibited any corporate participation in the political process. Imagine what a time to be alive. I mean, very few people had like real toilets, but still, imagine those charters. So what happened? How did we end up here? Well, as Goldie said, the story changed and pretty quickly too. In 1776, Adam Smith, who's widely considered the father of free trade theories, stated that the pretense that corporations are necessary to better the government is without Foundation. By 1886, a US court had recognized the corporation as a natural person under law. The 14th Amendment to the Constitution. No state shall deprive any person of life, liberty, or property. Which had been adopted to protect emancipated slaves in the hostile south, was used to defend corporations and strike down regulations. And after that, things just kept slipping. Those charters before had meant that even though a lot of corporations admittedly had a monopoly on things like ditch digging or railroad building, they had time limits. They weren't in control of sections of the economy forever, and they had a responsibility to more than just their investors. They had a duty to fulfill to the government and presumably to its people. When the court gave corporations the same rights as people, it shifted the narrative. It switched the focus from how corporations can help us to how we can help and protect them. Because morally, we've always known we had a duty to help our fellow people. It's just a matter of what a person actually is.
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F
So to learn a little more about the scope of the problem and how a bad story has led to bad outcomes, we talked to Lenore Paladino from the Roosevelt Institute about the difference between shareholders and stakeholders. Hello, Lenore.
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C
Hi.
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F
Hi. This is David Goldstein and Nick Hanauer here.
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B
How are you, Lenore?
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D
How are you?
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B
Hunky dory?
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D
Good. Great to meet you. So my name is Lenore Palladino, and I'm a senior economist and policy counsel at the Roosevelt Institute.
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F
So, you know, Nick has been talking about stock buybacks for the past four years, and sometimes we get pushback. Oh, that's just sour grapes. Or, who cares? What does that have to do with inequality? We were hoping you might be able to explain the connection between stock buybacks and our growing crisis of economic inequality. Sure.
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D
It's a great question. So, you know, stock buybacks are, I think, one of the best examples of the broader problem that we have today of what we can call shareholder primacy. Shareholder primacy is this idea that the whole purpose of corporations is to make as much money for shareholders as possible. The idea is that shareholders are really the only group within this set of stakeholders that make corporate corporations profitable. That matter. Right. So what that means is that there's tremendous pressure to cut all other costs in order to maximize shareholder wealth. So what does this mean for stock buybacks, and what does this mean for workers? That means that companies are spending, as of 2018, upwards of $1 trillion on stock buybacks, which are a simple way that they can raise their share prices quickly without having to invest in attracting more customers or building better products. At the same time, they have to find a way to pay for these stock buybacks. So they're holding down worker pay, they're outsourcing employees and generally contributing to the broader problems of economic inequality that we see today.
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B
So Lenore, what are the most recent figures for the proportion of corporate profits that are now being devoted to stock
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D
buybacks in many companies today? And really across the non financial sector, companies are spending upwards of 100% of their profits on shareholder payments. So shareholder payments is both stock buybacks, dividends, which is of course the sort of longer term way to return money to shareholders. But stock buybacks have been increasing tremendously over the last couple of decades as a way that corporations reward shareholders. And we're seeing in some cases even spending of over 100%, which means that companies are borrowing to actually pay for stock buybacks. And we're still getting the data from 2018. You know, 2018 was kind of a crazy year post the Trump tax reform where companies went on a spending bonanza. So you couldn't read a newspaper without seeing a new announcement of some tremendous amount of money being spent by a company on stock buybacks. And one of my worries is we're seeing all this money spent, but companies can't get it back when there's a downturn, right? So once we see some kind of recession or financial crisis in coming years, companies could have used this money to really shore up their actual businesses for those inevitable downturns or to support workers to become more prosperous, greater contributors to the long term prosperity of the companies. And we're just not seeing that. We're seeing wages stagnant for the last 40 years.
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F
It's ironic because we've heard CEOs complain for years about a so called skills gap. It used to be that corporate America would invest in training and retraining their employees. If they're spending 100% of their profits on shareholders, there isn't that money to close that skills gap internally.
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D
I'll give you one example. Wells Fargo scandal played Company has had really disastrous relations with its customers over the last couple of years. Last year alone they authorized $40 billion in stock buybacks. At the same time they announced that they were going to lay off 10% of their workforce over the next couple of years. So if you look at that and you think this is a company that's been dealing with so many other troubles, they must have a need for, you know, everyone from customer service reps to people to help the banks recover its standing with the customers that it's harmed and the broader public that it's harmed. But instead what it's doing is taking tremendous amounts of cash in order to reward shareholders in the short term, perhaps propping up a stock price that might have otherwise fallen, and then at the same time turning around and laying off 10% of its workforce.
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F
So let's talk about a corporate arms control treaty. Obviously, this isn't the inevitable consequence of an invisible hand. The stock buybacks are a result of the rules and laws we have in place. What kind of solutions can we do to change both the culture and the actual habits of corporate America?
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D
Yeah, I believe, and I know you believe, that what actually needs to happen is a more fundamental reorientation away from shareholder primacy, away from this idea that the whole purpose of corporations is to make as much money for shareholders as possible, Let everything else be damned. And, you know, when I think about the fact that corporations are, you know, they're really creatures of public permission, right? A corporation can't operate as a business with all the tremendous privileges that it has until it gets that stamp on its articles of incorporation from the government right of whatever state it's incorporating in. You know, we should have the power as a democracy to make sure that the rules that govern corporate behavior serve the broader society. And that, I think, includes, you know, being profitable and making money for investors. But it also includes, I think, having a model for corporate decision making and corporate voice where the other stakeholders who also contribute contributions to the prosperity and the success of the corporation are part of that decision making. So I'm very much intrigued and excited by ideas of stakeholder governance, really replacing shareholder primacy as our model for governance.
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F
So what might that look like?
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D
It would look like perhaps workers and even other groups of stakeholders. You could imagine customers, suppliers, representatives of the public voting for the board. It looks like changing the board's fiduciary duty to run to all stakeholders, which just means that boards have a duty of care and loyalty to think about how the decisions they're making are going to affect their employees as opposed to just thinking about how the decisions are going to affect their shareholders. It could mean, as folks are exploring in other countries, really reshaping the idea of corporate purpose. So the corporate purpose has to include a materially positive effect on society. Now, how you measure that, how you litigate around that, you know, I think there's incredible questions about what this model would mean in the 21st century, but we know that shareholder primacy isn't working. I think it's driving further and further not only economic inequality but all of the social upheavals, all of the, you know, disasters of climate change, so much of this is driven by this core idea that we need to maximize shareholder wealth and not care about the rest of the impacts of business. I think it's really time to move on to a better model. And I think there's a tremendous moment right now where a lot of different people are raising this idea. So you have everyone from Senator Elizabeth Warren's Accountable Capitalism Act, Martin Wolfe in the Financial Times, you have worker organizing, worker justice groups around the US who are challenging shareholder primacy in a new way. So I think we're in this sort of wild political moment where bold ideas are able to emerge in new ways. And I really think that challenging shareholder primacy and replacing it with a better multi stakeholder model is going to be one of those ideas that emerges.
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B
The one thing I do love about stock buybacks is that it is the thing that gives you permission to believe that almost everything good for the middle class you could pay for if you wanted to. In other words, in other words, it would cost about $100 billion a year to make college affordable.
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C
Less than. Less than that.
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F
About 60, $70 billion a year to make college public. Community colleges and public universities tuition free.
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B
Okay. I believe that the infrastructure deficit in the country is in the range today of $4 trillion a year.
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F
We could handle that over a decade or two.
- [39:52]
B
Yeah, four years. And you've basically rebuilt every bridge, road and airport in America. You know, pick your thing that would be an investment in the middle class, that would allow people to thrive and the economy to grow, grow in a legit way. And it will be a de minimis proportion of the amount of money that we spend annually collectively on stock buybacks, which are creating essentially no value whatsoever in the country other than enriching the few. And so, you know, in that sense, it is a very handy thing to be able to point to, to say, no, actually we can afford to do that. We just have chosen to spend all this money in this different and much less value creating way.
- [40:35]
D
Yeah, And I've taken that also down to the, to the level of the particular corporation and been doing some calculations just to look at how, if you took how much companies are spending on stock buybacks, what that would actually mean for workers. Not that, you know, if we ban buybacks tomorrow, companies will benevolently simply, you know, grant all that money to workers, but to try to grasp the scale of the problem exactly as you're saying. I looked at Walmart, for example, because it's our largest private employer in the country and its workers are notoriously low paid. If you took for example, 10 billion of the authorization of 20 billion that they made in late 2017, and you divided by the 1 million hourly workers, that translates to a raise of $5.66 an hour. Now for a full time worker at Walmart, they're making right now about 19,000 a year, give or take. Going from that starting wage of $11 an hour to almost $16 an hour takes them up to almost 30,000 a year. For a working family in America, that's a tremendous change. Going from 20,000 a year to 30,000 a year.
- [41:46]
B
Now you don't need food stamps and other public subsidies.
- [41:50]
D
Exactly. Yep. So they're horrible drain, really, on the ability of working people to, you know, live decent lives, to be able to participate in this moment of great economic prosperity. If you happen to be a wealthy white household who owns a lot of shares, things could be different. And workers contribute, you know, employees contribute so much to the firm's growth and ability to make profits and that it seems crazy to say that they as a group shouldn't participate in what the firms are creating, what the companies are creating.
- [42:24]
B
Or more to the point, in most states in the country, the biggest recipients of food stamps and other public subsidies are Walmart workers because they're very low paid. And it seems self evident to me that no corporation should be allowed to do stock buybacks if any of their employees are on the dole. Right. Or are getting public assistance, taxpayer assistance. It's just the most egregious example of parasitism that you can imagine. And for my own part, you know, I remain fully committed to capitalism, but I really do believe that a minimum standard for an industry or a company is to operate in a, a way that makes sure that every single person who works for you can live in economic security and dignity without getting public assistance. And you know, honestly, if as a company you can't figure out how to do that, then you should probably go find another line of work.
- [43:29]
D
Well, and I think we have to look at who's benefiting from stock buybacks because obviously the general argument is that they benefit from shareholders, and that's certainly true. But in some cases, though not all, it's corporate insiders, you know, the executives, maybe even directors who are benefiting personally.
- [43:48]
B
Yeah.
- [43:49]
D
From the buyback programs that they institute. And so that's in some ways the most perverse result of these. The justification for them is all about shareholders who invest. But Shareholders don't actually know when the buybacks are actually taking place. It's only the people inside the company who are sending the email to the broker to execute the buyback that know when it's actually happening. Yeah, and we should know too that the US Is an outlier in terms of the rules that govern buybacks. We have this sort of crazy regulatory regime around them. But most other advanced economies have much more, what I'd call sort of sensible rules that limit them to a certain level, don't allow insiders to benefit personally, and they have consequently much lower levels of buyback. So even, and I think in the very short term, there's straightforward policies that can be put in place to really reign these things in.
- [44:41]
F
Well, thank you for your time.
- [44:43]
B
Yeah, this was great, Lenore, thank you. Thank you so much for joining us.
- [44:47]
D
Thank you so much.
- [44:48]
B
Okay, we'll talk soon.
- [44:50]
D
Great.
- [44:50]
B
Bye.
- [44:51]
D
Take care. Bye.
- [44:58]
F
So, Nick, a trillion dollars a year, almost 100% of corporate profits going back to shareholders in the form of stock buybacks and dividends. That's a little distressing.
- [45:10]
B
It is distressing, but it's an extraordinarily important thing for people to know because again, one of the anchor claims of trickle down economics and neoliberalism is this idea that the more profitable corporations are, the more jobs that will be created and the better off everyone else will be and the more investment that's created. And there is this sort of enduring idea that the lower taxes are in corporations, the more money they will invest and make everyone better off. And all of that turns out to be bullshit. Just a straight up lie that in fact what most companies are doing is simply enriching shareholders and executives with the profits that they're making. And it's super important for people to recognize that so that they see that when policies ask corporations and rich people to pay more in taxes or more of their fair share, that actually isn't going to crush the economy. What it may do is make the price of Picassos go down a little bit, but that's about it.
- [46:21]
F
So I think that gets to the good news from our conversation is that while we've been doing things, things wrong for 40 years, there's. It was actually a choice. This is not. We didn't always run corporations with the idea that their only purpose was to enrich shareholders. And we don't have to continue to run corporations like that. New ideas lead to new policies.
- [46:46]
B
Correct. And we certainly didn't used to devote most of the profit of corporations to stock buybacks and all of this could be reversed. We could reestablish reasonable laws and norms and start building an economy that worked for everybody again.
- [47:08]
C
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to follow, rate and review us. Wherever you get your podcast, find us on other platforms like Twitter, Facebook, Instagram and Threads. Itchfork Economics Nick's on Twitter and Facebook as well. Ickhanhower for more content from us, you can subscribe to our weekly newsletter, the
- [47:28]
B
Pitch over on Substack, and for links
- [47:30]
C
to everything we just mentioned, plus transcripts and more, visit our website, Pitchfork economics.com as always from our team at Civic
- [47:37]
B
Ventures, thanks for listening.
- [47:39]
C
See you next week.
- [47:41]
D
Sam.