The Silicon Bubble Edition

Summary

Slate Money – "The Silicon Bubble Edition" (August 4, 2018)

Episode Overview

In this episode, host Felix Salmon, joined by Anna Szymanski and Emily Peck, dissect Silicon Valley’s unique—and sometimes troubling—corporate culture. They delve into topics including controversial second acts for disgraced tech executives, Uber’s board shift to an ex-arms dealer, San Francisco’s pushback on tech perks like free lunches, and the macroeconomic effects of corporate stock buybacks on the American workforce. The mood is both critical and irreverent, reflecting a mix of financial savvy and social skepticism.

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Key Discussion Points & Insights

1. Silicon Valley’s "Forgiveness Culture": Mike Cagney’s Rapid Comeback

• Context (02:26–04:54): Mike Cagney, the ousted SoFi CEO, returns with a new blockchain lending startup just months after leaving under a cloud of sexual harassment scandals.
• Investor Mentality (06:39–08:53): Investors seem inexorably willing to back Cagney anew, focusing solely on potential returns and dismissing systemic cultural harm in startups.
• Double Standards for Women (05:48–06:24): The panel highlights the injustice that, unlike Cagney, women harmed by such scandals rarely get a "second act," often forced out of industries entirely.
• Cultural Reflection:

  “There’s this happens to so many women and they don’t actually usually get a second chance.” – Anna Szymanski (06:10) “He poisoned the culture of his entire company … and the fact that these Silicon Valley investors are just there ready to give him millions more dollars … repulses me.” – Emily Peck (04:54)

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2. Uber’s Board Drama: Hiring the "Arms Dealer" (08:53–12:28)

• New Independent Chair: Uber appoints a former CEO of Northrop Grumman as board chair—a role unusual for private companies and loaded with social symbolism.
• Perception & PR:

  “The main criterion you need to be able to be a successful CEO of an arms dealer is you need to be able to divorce the sort of social and societal effects of your company from the financial results.” – Felix Salmon (09:55)

• Board Diversity Lament: Despite several high-profile departures of women, Uber did not select a woman or a person of color for the new chair, missing a chance at real reputation repair.
• Organizational Dysfunction: Uber’s revolving door at the senior level hints at deep-rooted cultural and governance challenges.

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3. San Francisco vs. Free Tech Lunches – The Anti-Cafeteria Proposal (13:46–18:46)

• Policy Proposal: San Francisco officials propose banning free food in tech company cafeterias to push well-paid tech workers out into the city’s economy.
• Arguments For (14:55–15:51):
  • Boost local businesses by ensuring tech money circulates in the community.
  • Break the “hermetic” tech bubbles and spur more urban engagement.

  “I think the idea of getting tech workers out onto the street and supporting local businesses and, and having a little bit of trickle down and also being forced to actually engage with the city that they're working in is brilliant.” – Felix Salmon (14:55)

  • Facebook in Mountain View already agreed to similar cafeteria restrictions.
• Arguments Against (15:08–19:52):
  • Smacks of scapegoating tech workers, who are not universally "evil."
  • Tech companies offer better pay and benefits to cafeteria staff (recent unionization, wage gains).
  • Could harm unionized food service workers inside companies if cafeterias close.

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4. Corporate Stock Buybacks and Wage Stagnation (20:18–35:12)

• Backdrop: A new report shows public companies like McDonald’s, Starbucks, Lowe’s, and Home Depot spend staggering amounts on buybacks—more than enough to grant multi-thousand dollar raises to every worker.
• Analytical Debate:
  • Anna Szymanski’s defense: Buybacks are a neutral tool for returning excess capital to shareholders when no better investment exists; they are not inherently detrimental to wages or R&D (21:26–24:22).
  • Felix Salmon & Emily Peck’s challenge: Buybacks mostly benefit executives and wealthy shareholders, not frontline workers; used as backdoor executive raises (26:04–27:22).

    “These stock buybacks are spending on wages…they go right to the executives and CEOs.” – Emily Peck (26:20) “Stock buybacks are basically backdoor raises to executives at the expense of regular employees.” – Emily Peck (26:54)

  • Tax Avoidance Tactic: Debt-financed buybacks help companies avoid taxes—equity isn’t deductible, debt is, and capital gains (from buybacks) are taxed lower than dividends.

    “The scandal isn't what's illegal, the scandal is what's legal.” – Felix Salmon (30:06)

  • Market Impact: Panel explores—albeit with disagreement—whether raising employee pay has broader competitive ramifications, referencing Walmart and Target wage hikes as precedents.

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5. Numbers Round (35:31–38:55)

The hosts close with a rapid-fire stats segment:

• $20: What a parent paid for a Fortnite tutor for their child, representing the contemporary market for digital coaching. (35:32)
• 79%: The rate at which Chinese students studying abroad return to China after graduation—a dramatic reversal from decades past (36:52).
• 56%: The proportion of college-educated Brazilians expressing desire to leave Brazil amid economic and political woes (37:56).

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Notable Quotes & Moments

• On Cagney’s return:

  “It was just four months after he left SoFi, where he started fundraising again … it’s just such a shocking and short timeline.” – Emily Peck (04:01)

• On Uber’s board appointment:

  “I just don’t see that that is a good look for Uber.” – Felix Salmon (10:10) “It’s really surprising, you would think … they would have put a woman on the board or a person of color or your average, not your same old, same old.” – Emily Peck (11:39)

• On anti-cafeteria ordinance:

  “Of course they should go out and buy their own goddamn goods.” – Emily Peck (15:51)

• On stock buybacks:

  “Buybacks are simply a way to return money to shareholders that cannot be used more productively.” – Anna Szymanski (22:13) “Maybe he didn’t have much soul to search. So it didn’t take him very long.” – Felix Salmon, joking about Cagney’s “soul-searching” (03:58)

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Timestamps for Key Segments

• Intro & Episode Theme: 00:10–01:01
• Mike Cagney and Second Chances: 02:24–08:53
• Uber Board Appointment: 08:53–12:28
• San Francisco Anti-Cafeteria Proposal: 13:46–19:52
• Stock Buybacks Debate: 20:18–35:12
• Numbers Round: 35:31–38:55

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Summing Up

This episode provides a sharp, at times sardonic look at the ways Silicon Valley perpetuates its own power dynamics, at the expense of both internal and societal equity. The hosts challenge the assumptions behind how capital and culture are wielded in tech, and why it matters for everyday workers and city-dwellers alike. The back-and-forth offers robust, sometimes contentious, perspectives—it’s both a master class in financial skepticism and a snapshot of the Valley’s latest soap operas.

Transcript

[A]

Hello. Wow, that was an amazing one. Hello folks. Ah, I feel like my voice is breaking all over again. Welcome, I am your 13 year old host, Mr. Felix Salmon and you are listening to Late Money or Guide to the Business and Finance News of the Week. As ever, we are going to take the biggest story in Business and Finance of the week and completely ignore it because there is absolutely nothing to say about this trillion dollar market cap thing. It's a lot, apparently a trillion is a lot of dollars. Who knew? Welcome Anna Shymanski.

[B]

Hello.

[A]

Who is the resident math nerd and so she can tell us that 1 trillion is a lot of dollars.

[B]

Yes.

[A]

And welcome also to Emily Beck of the Huffington Post.

[C]

Hello.

[A]

Who is here to. I feel like we've brought you in for your dudgeon today because we are talking about Silicon Valley and the rules or the lack of rules or the lack of norms and how they trample over societal norms in various different ways. We are going to talk about stock buybacks, which is a big thing in Silicon Valley and we can talk a little bit about what that means for things like, I don't know, house prices in Mountain View. We are going to talk about the whole question of where do you eat lunch if you work at a tech company in San Francisco? Because San Francisco, if you haven't heard, is the new Silicon Valley. And first I think, well, I mean, I can't do better than what June Thomas put on my piece of paper. I'm not sure if you lovely listeners out there are aware of this, but I get a piece of paper when I record this show every day and it gives me topic names and it says here, topic number one, Silicon Valley's weird and maybe shameful hiring practices, Mike Cagney's swift comeback and Uber's appointment of a 70 year old arms dealer as its new chairman.

[C]

That's a pretty good summary.

[A]

I feel like, I mean, I feel like we've more or less covered it with the, with the summary and we're done. Move on to topic number two. Much so Mike Cagney we have talked about on this show in the past. He was defenestrated as the founder and CEO of SoFi, which is the student loan refinance company, on the grounds of creating a horrible tech bro culture and also having a bunch of affairs with subordinates. And as may or may not come as a surprise to people, he pops straight back up with another, what was it, 50, 60 million dollars of funding from people to do something kind of similar.

[C]

Blockchain loan company.

[A]

More, more Lending, but this time on the blockchain.

[C]

Blockchain.

[A]

And. And his investors are entirely sanguine about. About it. And, and Emily, you found this amazing piece by Peter Rudiger in the Wall Street Journal where he was like, I've changed and I have women in my company now and I'm co founding it with my wife.

[C]

Yes, the story, forgive me, I didn't write down the title, but it was something like, Mike Cagney gets second chance. And one of the investors in the company talks about how he has. The quote is soul searching.

[A]

Soul searching. There you go.

[C]

He's all better now. And it's just such a shocking and short timeline for this person.

[A]

Maybe he didn't have much soul to search. So it didn't take him very long.

[C]

I mean, according to the reporting, it was just four months after he left sofi, where he started fundraising again. And it's less than a year since he left that company. And to be clear, like, this isn't. Mike Cagney didn't just. It's downplayed in the Journal article. He admits he did have an affair and he wasn't forthright with his board about it. But it's so much more than that. I mean, the New York Times, which, it sounds like you talked about the story before reported on the absolute frat house mayhem culture of his last company. Someone reported, you know, a male employee reported about sexual harassment internally and was fired. This guy's receptionist, he was allegedly sending her harassing text messages. I mean, this is a horribly run company. And the fact that these Silicon Valley investors are just there ready to give him millions more dollars to run another company just, like, really repulses me.

[A]

There is only, literally only one CEO I have ever interviewed where the internal PR person, before I meet the CEO, like, warns me that he's kind of, like, disgusting and I should be ready for that. And that was Sofi and Mike Cagney.

[C]

I just, I was just at. I was at a conference this in California with all these female executives, and we're sitting down and talking to some of them and they were like, I don't know about this MeToo and all these people getting fired. Like, when are they going to get a second chance? I mean, it's just not, you know, when can they come back? When can Matt Lauer be hired again? And I said to them, like, you know, we're not talking about sending anyone to jail. I said, look, would you hire Matt Lauer to work at your company? And they all went, oh, no. Would you Hire any of those men to work at your company?

[B]

No.

[C]

But meanwhile people are giving them millions of dollars to start new companies.

[B]

It's like, I mean I'm, I, in general, I do think that, you know, I am a believer in like forgiveness at some point to some people depending on what they did, I mean obviously. But I think the thing that like really does bother me about this is that so many of the women who are hurt in these type of scandals and just in whether it's sexual harassment or harassment in general, they tend to leave their companies, they tend to move to different industries and careers are just forever damaged. And there's this happens to so many women and they don't actually usually get a second chance.

[C]

No, they don't get a second chance. And, and like I just said, I'm not saying this guy doesn't deserve to be forgiven and good, good on him for that soul searching of, of several months, but he doesn't get to run a company again. Like, I don't understand the investor. Maybe Felix.

[A]

So, so this is, so I want to, I want to come, I want to talk about the investor mentality because I think the investor mentality is key to understanding what just happened at Uber. And the investor mentality is basically that we live in a world where if you are caught sexually harassing people then I'm going to have to fire you if I'm on your board. If you're not caught sexually harassing people, then I won't. And if you aren't actually harassing people because the company didn't exist five minutes ago, then by definition I have nothing to worry about and I can just keep on as usual because this isn't, because it's not in investors mind actually an important predictor of how successful the company is going to be.

[C]

But I don't understand like, because it's not just in this case, it's not just Mike Hagney a sexual harasser. It's he poisoned the culture of his entire company where a lot, there was lots of sexual harassment going on. There were lawsuits going on. We see now there's these, some boards are now or in mergers some companies are now requiring some kind of like Harvey Weinstein clause where everyone in the deal signs and agrees that there's been no sexual harassment at the company. And if there has been, there's clawbacks, blah, blah, blah. So boards are starting to care about this kind of stuff. It's not about personal behavior. It's about don't investors care if a company is going to Be run well or not.

[B]

Yeah, I mean, I do think key man risk is always, you know, an issue, whether for good or for bad. Whether you're concerned that somebody who's really great is running in a company and then they could leave, or whether you're very concerned that the person running the company is not a good person. That does definitely factor into decisions. I think, unfortunately, what could be going through some of the VC's minds here is that they're like, look, this person has shown that despite the culture, the company itself was successful in many ways. And so they could say, well, look, you're essentially doing a very similar thing over here, but now on the blockchain. And so then. So then they could think, okay, you know, also there's a possibility they could think now that because these things are so public that maybe something could change slightly.

[A]

You see, And I want to bring this around to Uber, because Uber, a little bit like SoFi, was founded by an ODS tech bro and was in many ways successful because of its just, you know, bad ways. I think most people kind of agree that if it wasn't quite as evil, it probably wouldn't have been so successful. And now it has reached a point where. And I think that's part of why investors are happy to Support Mike Cagney 2.0 is precisely because they're like, you know, ultimately, sometimes being evil is a good way of making money, but in Uber's case, they're trying to turn it around and they're very, very much trying to say, listen, there was this ingrained culture. It's very hard to change an entire corporate culture at this stage in a company's evolution. But we're going to try. And in the midst of all of this, trying to change the corporate culture, they appoint an independent board chair, which is very, very uncommon in private companies. They appoint an independent board chair, but the board chair is the former CEO of Northrop Grumman. He's an arms dealer, basically. And the main criterion you need to be able to be a successful CEO of an arms dealer is you need to be able to divorce the sort of social and societal effects of your company from the financial results. And I just don't see that that is a good look for Uber.

[B]

It's certainly not a good look, whether it actually was a bad decision or not. Let's. Who knows? I mean, he, he is on a lot of other boards. And look, I'm not trying to say like, yay, arms dealers, but just to say, I mean, the guy does have A very, like, long history in industry. So, yeah, he's on the board of.

[A]

Apple, he's on the board of Chevron. And as I wrote in my piece in Slate, you know, no one really blinked when he gets appointed to those big public company boards. But Uber is not, is not a mature company. It is not a public company. I think the criteria for a board chair at Uber are different.

[B]

Yeah, I actually, I mean, I agree with you on that. And I also think that just in general, when you're talking about a company that partly is clearly doing all of this for, you know, public relations, there's a lot of what they have been doing. It's also to change the company, but.

[A]

Also, I mean, the board is deeply dysfunctional. They need someone who can stop the board from being dysfunctional.

[B]

But my guess is it's possible that he could have the personality and the ability to do that. But the concern, of course, is that just how this appears to the rest of the world who's looking at Uber, which is what they're trying to change the opinion of the company. And this seems to not be the best decision in that way.

[C]

It's really surprising, you would think, in the situation they're in trying to rehab their reputation, they would have put a woman on the board or a person of color or your average, not your same old, same old.

[A]

I want to say the only woman on the board is Arianna Huffman.

[C]

I think you're correct. I'm kicking myself for not looking that up.

[A]

And Ariana, of course, is famous as being like the most loyal Travis Kalanick loyalist on the Uber board. So.

[C]

And they just had. What's her name? Bazama?

[A]

Saint John.

[C]

Saint John. Just left. She was there sort of like for a hot minute.

[A]

She was running something.

[C]

And then diversity highly.

[A]

She got into a big fight with the head of HR and then both of them wound up leaving.

[C]

Yeah. And also this woman they brought in from Harvard Business School, Frances. Help me out, Francis.

[A]

There's been a lot.

[C]

She also left.

[A]

There's been a lot of turnover in the senior executive ranks at Uber and that has not gone away under Dara.

[C]

And considering all these high profile women leaving, you would think they would sort of card in another lady and be like, we are still doing it. So it is pretty shocking that they have. And it's almost, maybe it's really super strategic.

[A]

Maybe they needed some more binders full of women who they could appoint. The other big long standing tech trend in Silicon Valley is that Silicon Valley has expanded north and many, many Companies are now basing themselves not in the valley proper, but in San Francisco. And this never used to be the case. And it has caused major social upheaval. When you have some big tech campus in Cupertino or Mountain View, when you weave yourself into the urban fabric of a established city like San Francisco, all manner of weird externalities start happening. Not least the fact that everyone starts getting priced out and San Francisco starts becoming unaffordable for anyone who isn't a gazillionaire. But Emily, we have a proposal on the table which is going to help solve at least some of these problems. And I kind of love this proposal. What is it?

[C]

Interesting. San Francisco wants to ban tech companies, any companies, from having cafeterias with free food for the employees so that the tech workers will be forced out of their bubbles onto the streets to buy their own lunch.

[A]

Now I love this. I think this, I think this is actually really smart. A whole bunch of people, you know, the kind of what you might call the Twitter conventional wisdom is like, this is ridiculous, overreach. But I kind of, I think it's great. And by the way, just to be clear, no one is proposing banning corporate cafeterias in San Francisco. Although I think Mountain View has actually banned a corporate cafeteria for Facebook.

[C]

Yes. Facebook has agreed not to have subsidized lunch. So people have to.

[A]

Right. The only thing they're banning is free food. So like you can still actually provide food for your employees and they don't need to leave the building. But the proposal is just to ban free lunches.

[C]

I think you're wrong.

[B]

Get it? Yeah.

[C]

Really? I thought forbid employee cafeterias and new corporate construction.

[A]

Maybe there was more than one proposal.

[B]

Yeah, well, okay.

[A]

Yeah, but I think this is an awesome idea. And I think the idea of getting tech workers out onto the street and supporting local businesses and, and having a little bit of trickle down and also being forced to actually engage with the city that they're working in is brilliant.

[B]

I have mixed feelings about this. I'll be perfectly honest that my first thought when I read it was kind of like, oh great, we have San Francisco that creates a lot of bad ordinances that create many of the problems they have now. So now they're going to create another ordinance. Having said that, I do think that if you're looking at the ability of a lot of small companies to compete, if you have this large company that has so much money and, and that can obviously just essentially is actually giving the food away for free, it's clearly impossible for these companies to compete. So if you do want to spur a little innovation, even just the food sector, I think that there's something to be said here that you don't want to allow a company to become such a monopoly over the area that other small businesses can't compete.

[C]

I really just like the idea of forcing these tech bros out of the office in San Francisco and forcing them out on the streets to buy their lunch. I mean, they wanted to be in the city. The city to get these tech companies to move in, offered them a lot of tax benefits and breaks. I feel like the reason they did that was to revitalize these areas. Like, of course they should go out and buy their own goddamn goods.

[A]

And this is the main reason why this ordinance has been proposed. And let's be clear about this. It seems even under the new mayor London breed, that it's unlikely to pass. But the influx of big tech companies like Twitter and Salesforce and Uber has not had the effect that everyone thought that it would have. It has not made San Francisco's street life suddenly much more cool and happening. Because these are kind of hermetic buildings where you enter, enter the building kind of early and leave extremely late and you are pampered from morning to night and you don't really engage with the neighborhood.

[C]

I get free lunch at work and this is a new thing of the past year or two, and it's pretty amazing. And I can confirm that I never buy lunch in the area anymore, but I think that's okay because we're poor journalists and it's. And we're in a thriving neighborhood.

[A]

The other. How's the quality? The other thing is that the, the big difference between San Francisco, like uber free lunch and, you know, Oath free lunch. I'm going to guess here, never having had the Oath free lunch is the. I'll swing by, is that the, the tech companies in Silicon Valley are famous for poaching chefs and providing incredibly high quality lunches, which is very hard for local restaurants and lunch joints to compete with. Whereas if you're in, you know, Astor Place and you're dealing with Oath lunches, I can imagine that at least if you went out, your lunch might be better.

[C]

Actually, what's nice about the Oath lunches, I don't know, I can't believe I'm talking about this, is that they bring in local restaurants to cater. So it's not even really a loss of business for them because they're still making money off of us. And the other thing I will say is that Amazon, Jeff Bezos has talked about the free lunch thing because Amazon does not do free lunch. And he said that's because he wants everyone in Seattle to have some Amazon money. Basically, he said, we have food trucks outside, we have great restaurants. There's no reason for me to keep you all here in the building giving you free lunch. I mean, he's a little cheap too, with the perks. Right? He's known for that. But I thought that made a lot of sense. You want everyone to do well. And I feel like it's good pr. It makes people hate you less, you know.

[A]

So the question is, Anna, like, what's the downside of this? Why. Why would you not do this?

[B]

Well, a few things. One, I wish the discussion of it wouldn't always be like, oh, these evil tech workers kind of thing, because I don't think the tech workers are evil. I know a lot of tech workers, they just tend to be people who are normal human beings. And the idea that they're in these bubbles and they have no idea what's going on in society that isn't, I would argue, not actually totally true.

[C]

But, Anna, what about all those blogs that the tech people write about the. About how they have to step over homeless people and how it's so icky.

[A]

So I agree with you. But again, and the Instagram accounts of like, everyone wearing the same, like, vest.

[B]

Yeah, well, that's also in finance, to the fleece vest is. Is ubiquitous. But I'm not saying that there aren't obviously some people who are like, lousy people. That is true in every single industry. It's just confirm. So I would also say in terms of the potential downsides here, there was an article that brought this up that if you're looking at what the cafeteria workers or the chefs at like a Facebook were being paid, because partly there was a union. And also you're going to have better chefs. It's much more than what the workers at the businesses are.

[A]

And this is, this is new and this is actually a good point, that the Facebook cafeteria workers only recently unionized. I think it was only a few months ago. And then immediately. And this is. We are going to wind up talking about this in the next segment, but immediately they got a raise of $4.50 an hour and benefits, which is awesome. And that. And you know, go unions.

[C]

Yeah.

[A]

Let's talk about stock buybacks and specifically about this new report which started quantifying the stock buybacks at companies which have a lot of employees, mostly in the food sector. And the effects were, I was Surprised. I have to admit, I was surprised at how big the stock buybacks were relative to the wage bill and how much wages could rise if you just spent the same amount of money annually on wages as you do on stock buybacks. And it can be like, you know, to give you some headline numbers here, it's $4,000 a year for McDonald's employees, and there are almost 2 million of those who could really use $4,000 a year. At Starbucks, it's 7,000 doll places like Lowe's and Home Depot, it's $18,000 a year. This is larger than I thought it would be. These are big numbers.

[C]

Anna's very ready to.

[B]

I'm really going to try. I'm really going to. So, so many things wrong with this report. So, one, the way that this report, and I would argue that many discussions of buybacks refer to buybacks is just simply wrong. That this idea that buybacks are either manipulating stock prices or that they are reducing the amount of money that's going into research and development, these things are simply not true. We actually have evidence that this is not true. As buybacks have increased, you've also, at the same time, had tremendous amount of capital investment in R and D. Also, increasing buybacks, at the end of the day, are simply a way to return money to shareholders that cannot be used more productively.

[A]

Well, I mean, that's the question, right? The question is, what's more productive, Returning the money to shareholders or giving it to employees in the form of a raise?

[B]

And I would argue that we have a market economy where wages are set by the market. And I, I want to also preface this by. When you start to talk about labor and wages and workers in an economic way, you sound like a sociopath. So I'm going to sound like a sociopath. And I fully recognize that people and machines are not the same. So just want to preface this, but we do have a way that wages are set in the market. And when you start to say, well, okay, I have a lot of extra money that I got this year, so you're going to say, okay, well, I'm just going to increase everyone's wages far above the market wage, all that's going to do is going to make that company less competitive in the marketplace. Now, there's are. There are theories.

[A]

Okay, can you, can you just, like, work me through that? Because I don't understand. Let's say that I'm McDonald's and instead of doing a buyback this year, I decided to give all of my employees a $4,000 raise. This is all coming out of profits. So there's no, I can keep all of my prices the same. I don't need to raise my prices to do that. How does that make me less competitive? Doesn't it make me more competitive? Doesn't it mean that I have more choice of employees and my employees are going to have less turnover and I'm going to be a better company for that?

[B]

Mostly no. So one thing first. When you're talking about share buybacks, you're talking about cash that's on the balance sheet. When you're talking about paying employees, you're talking about expenses that are on the income statement. While these things are obviously related, they're not exactly the same. So I think that's something that is important here. The other thing that's important is, so let's say that you're McDonald's and you did very well this year. And let's also say that you, you have a lot of cash on your balance sheet. You don't necessarily have a lot of NPV positive projects. But you're going to say, you know what, I normally play pay my suppliers a certain amount, but I'm going to double the amount I pay them.

[A]

No, we're just talking about your employees here. Like.

[B]

No, no, but this is why I'm saying that, because you wouldn't do that because it sounds ridiculous. Okay. And no wages can. I just want to finish and then I'll let you and you can. Is that when you increase your expenses and your expenses conceivably moving forward for as long as you have a company, you are not necessarily going to increase productivity. Now there's a thing called efficiency wages, which is the idea that if you pay a little bit more, you can reduce turnover and all of that. And if you, that efficiency wage does result in increased productivity, that enables you to still be making more money, more value off of that employee than what you're paying them, then that can work. That often doesn't work.

[A]

Right. So what you're saying is you might make fewer profits and we're all agreeing with that. You would make fewer profits.

[B]

No, I'm not saying you'll just make fewer profits. I'm saying when you're, when you're considering how much you pay for wages, you're considering the marginal value of that employee is the value that that employee is adding to productivity or offsetting what you're paying them. And if they're not, you're not going to employ that person. And if you do, if you start really increasing the amount you're spending on wages, you are now going to be in a less competitive position compared to your competitors.

[C]

So first the reports from the Roosevelt Institute and the National Employment Law Project, both progressive groups, we can agree. And one of the headline findings was 60% of profits that public companies make are go to share buybacks, which is astounding. The fact is, while that was happening, I think over the past decade and a half, CEO pay is up 937% and wages haven't gone anywhere. The simple fact is these companies should pay their workers more, and they do.

[A]

Pay their workers more. If those workers are senior management. And this is the thing which I really, which I don't think the report was nearly clear enough about, is that these stock buybacks are spending on wages.

[C]

Yeah, they go right to the executives and CEOs, they go.

[A]

So basically every single, the way that every one of these companies works is it doles out enormous stock grants to its senior executives. And those stock grants naturally dilute the shareholder share base, the number of shares outstanding. And so in order to offset that dilution, they buy back the shares in the market. And so basically, effectively what they're doing, if you give out stock to your senior employees and then buy back the stock in the market, that's the same as just giving that money to your senior employees.

[C]

So just stock buybacks are basically backdoor raises to executives at the expense of regular employees who are toiling away for, in the case of McDonald's or some of these other companies, minimum wage. Minimum wage which hasn't been raised in, I think over a decade, which you cannot even live on. Meanwhile they just got this huge mind blowing tax break from the government. Of course, what you're saying possibly makes.

[A]

Rational sense, perhaps if your job is to maximize profits.

[C]

But it's interesting to me that also stock buybacks were illegal in the, before Ronald Reagan.

[B]

It was ridiculous that they were illegal.

[C]

Though, but I don't think it was because what we're seeing now is all this value going to basically really, really rich people. Excess profits going to the CEOs, the executives and you know, the people who own stock.

[B]

Which I just want to say one thing because I think we are confusing a lot of things here a little bit. So I agree with you that if you can show that the employees who are being paid in stock based compensation or who are being paid very high salaries are not adding that much value to the company, then I think it's fine to argue that you know what they are, they're being overpaid. Now, when you're talking about CEOs, and this is why I do sometimes criticize the way CEO pays compared to worker pay is because if a CEO is doing a good job, they can add so much value to the company that they can pay to themselves, pay for themselves multiple times over. That doesn't always happen. Sometimes you overpay your CEO, you end up with lower value, and then clearly that CEO should be fired. So that's just one thing there. Also, if you're talking about the amount of share buybacks and what this was one thing they actually mentioned in the article and didn't seem to quite get, what that meant is that was actually more than a lot of the money they were making. And the reason for that is, yes.

[C]

They borrowed money to buy that.

[B]

But I want to explain why that that's actually kind of important, because what really then is happening there is this is a decision by the CFO to often alter the capital structure of the company. You want to increase leverage in the company because rates are super low.

[A]

Right. And I want to jump in here and say, you can call it altering the capital structure. I can call it tax evasion or tax optimization or something. What you have here is two different things which are basically both trying to avoid taxes. One is raising debt rather than equity, because debt is fully tax deductible and equity isn't. So what you do is you borrow money, you raise debt, and then you buy back your stock so you have less equity. And then the second thing is you return money to shareholders in the form of buybacks rather than dividends, because buybacks are generally reflected in capital gains, whereas dividends are income and capital gains rates are lower than income tax rates. So in both cases, what you're doing is basically reducing the tax that you pay to the government and ultimately to society as a whole. So, you know, it is tax evasion.

[B]

In the same way that you could argue when I buy a home and I'm getting the mortgage interest deduction versus renting, that's I'm tax evasion, if you want to call it that, that's fine. But my. When you're talking about the decision, that's avoidance. That's called avoidance.

[A]

Yes. The scandal, as we always say, the scandal isn't what's illegal, the scandal is what's legal. And I think this is the reason why buybacks were illegal. It's because, like, there's no reason not to just pay a higher dividend or declare a special dividend or something. Like that the only real reason to do it via a buyback is to do like these backdoor pay to senior executives and, or to avoid taxes, pump.

[C]

Up the stock price to get to a trillion dollar valuation.

[B]

Yeah, it's not actually pumping out.

[A]

Well, it does, it does.

[C]

Of course it does.

[B]

No, no, no. Okay. This is actually, it gets really complicated when you start to talk about the actual effect of stock buybacks on either. If you're talking about earnings per share now, to a certain extent, the math just seems very similar. Like, well, of course it's going to increase this, it's going to increase that, but you aren't taking into account a million other things such as the fact that now you actually have less cash on your balance sheet. You've now, if you've increased leverage, you've also increased risk at the company. There are a lot of things that go into this. It is not as simple as, and there's actually a tremendous amount of evidence that shows that this is not as simple as people state. And this again, I want to.

[A]

Well, I've seen, I've looked at, I've looked at the evidence and the evidence seems to show that if you spend a billion dollars on buy buybacks, your market cap does not go down by a billion dollars. It goes down by about $880 million. And you've actually increased your market cap. You've actually increased the value. You've created value.

[B]

Why is that happening?

[A]

Million dollars. So like you are increasing the stock.

[B]

Price to a certain extent. Often, yes. But part of the reason that the stock price is going to go up is because the shareholders are saying, well, you did not have anything more profitable to do with this cash. So instead of wasting the cash on empire building activities or wasting it on.

[A]

Raises for your workers.

[B]

So okay, I, I want to just, and I'm not, I'm not going to try to repeat myself here.

[C]

One company that I wanted to get this in because I found it very telling. One company, I think mentioned either by Annie Lowery in her story in the Atlantic or in the report, Caterpillar is planning a billion dollars in buybacks and has, is also laying off hundreds of workers.

[B]

Caterpillar also hired a number of workers last year. The reason, interesting, the reason that Caterpillar is doing that is because Caterpillar has been going through reorganizing of their company since about 2015. And what they're doing is there are a number of divisions that they're kind of closing or they're moving to other plants. So it's not just as simple as.

[A]

All right, if we're not going to do Caterpillar, can we do Kraft Heinz? Because that's, that's the, you know, that's the 3G, you know, slash and burn, ultra capitalist, you know, Warren Buffett, bank backed Brazilians who are coming in firing a whole bunch of people and spending billions and billions of dollars on buybacks. And it's just, it's, you cannot find a purer encapsulation of capital benefiting at the expense of labor.

[B]

So I actually had a relative who worked at Kraft Heinz during the 3G. So I'm a little biased on this one. So I'm not a fan of what 3G did. Not. Because theoretically, but in terms of what they actually did, I think that they're not making very wise decisions. And this is to, when you're talking about buybacks, it's not that a buyback is always good. A buyback is good if that is just like any corporate finance decision, if that is the best way to use your company's capital. And when you're talking about the way wages are set, I know it sounds horrible and it sounds like, well, I don't understand. You have more money, why can't you just increase wages? Because you're also going to be skewing the market in a lot of ways.

[A]

What market are you skewing?

[C]

If you raise wages, your competitor kind of has to raise wages. That's what happened with Walmart and Target just recently. So why wouldn't this.

[A]

Yeah, I mean, or let's say, I guess what we might be seeing here is that this is the kind of skewing of the market that we could use a bit more of.

[B]

Okay, so let's, let's do a little thought experiment here. So I'm a company and I've decided that I, instead of using my cash in the way that might be most efficient, instead I'm going to give significant increases in wages. Now giving some increases in wages might make sense. I'm going to give significantly, much higher than the prevailing market, which. Okay, so what's going to happen? Well, I'm a company that exists in a market where I have owners of that company who may not be super happy that now I have, I have increased my expenses without increasing productivity.

[A]

So your share price goes down.

[B]

It's not just a matter of my share price going down, it's that they won't do it.

[C]

Yes, that happened to Walmart. I think when they raised wages, their.

[B]

Share price, that's certainly part of it. But it's also going to be that I am now in a less competitive position. I have increased my costs without increasing my revenues. So then, okay, you could say, well, you know what? So all the workers want to work for my company. Okay, so I get. I get the best pick of workers. Now. That increases productivity a little bit. That's great. Is it going to increase it enough to offset. Unlikely.

[A]

No. I mean, this is exactly what we're saying is that maybe you're not as competitive. Maybe your share price does go down. And in this world where managers are accountable to shareholders rather than to workers, you can see how they wind up doing buybacks rather than. Wait.

[B]

The reason they're. The reason they're accountable to shareholders is because shareholders are the owners of the company.

[A]

Well, we can have that conversation in a different episode, but I don't think that's true. Let's have a numbers round. I feel like we haven't had a numbers round in a whole week, so. Emily, do you have a number?

[C]

I have a number.

[A]

What's your number?

[C]

$20. That is the amount a man in Texas named Nick paid to have his son tutored in the video game Fortnite.

[A]

$20.

[C]

Just flat $20 an hour. That's a low rate for two hours per month for video game tutoring. I'm talking about a story in the Wall Street Journal by my former colleague Sarah Needleman about how parents are hiring tutors to teach their kids to play this game, Fortnite, which is like the hottest online video game.

[A]

I mean, honestly, if I wanted to be able to play Fortnite, I could use a tutor because I'm really bad at those things.

[C]

I just, I found it the most jaw dropping Wall Street Journal story of just parenting gone totally awry.

[B]

Well, but, but just let's, let's think about this for a second, though, because.

[A]

Oh, wait, wait. I want.

[C]

Oh, come on.

[A]

The Anna Szymansky contrarianism is now we are reaching peak Anna contrarianism.

[B]

This is probably true. This is totally accurate. I'm just gonna say that, like, look, if you, you pay someone to like, to coach someone, you might pay someone to have a coach to teach someone how to hit a ball. How is playing a video game necessarily any different?

[A]

No, you don't pay a coach to teach other communities.

[C]

You do she base. That's a quote in the Journal piece. Basically, another parent.

[A]

Yeah, and you shouldn't do that either. I'm going to. I'm going to jump in here with my China number because otherwise I'm, you know, I'm pretty sure that Anna wouldn't use this one, but it's a good one anyway. It's 79%. This is the return rate of Chinese students who study abroad. If you're, if you, if you're from China and you go off to foreign university outside China, there's a 79% chance in 2017 that you would then after graduating, go back to China. 10 years ago. In 2007 it was 30%. In 1987 it was 5%. It's just gone. It's basically gone from 0 to 100 in the space of 30 years.

[C]

Why?

[B]

It's amazing what a market economy can.

[A]

Do because that's where the opportunity is if you're Chinese. The, you know, the opportunities in China to graduates are amazing. Also, you know, places like the United States don't make exactly very easy to stay in the country.

[B]

Yeah. My number actually though also has to do with people coming or leaving a country. It's 56%. So 56% of college educated Brazilians report wanting to leave Brazil. 52% of high income Brazilians report wanting to leave Brazil. So Brazil was for a number of years this kind of great time series here.

[A]

Like how does that compare to what that number has been historically?

[B]

Significantly higher. And actually also the based on, compared to 2011, the amount of people who are actually filing paperwork to leave has increased by. It's three times higher. So this is a significant increase, which isn't surprising considering what's happened in Brazil both from the Lava Jato scandal and now you just have tremendous amount of violence. The economy is just stagnated. You have high taxes and almost all the taxes are going to pay for pensions. So it's really pretty lousy for young workers. But this is also a potential brain drain which could be really bad for the country.

[A]

On which uplifting note, I think that's it for Slate Money this week. So thank you for listening to Slate Money. If you are a Slate plus member, you get to hear us talk about CBS and Les Moonves and Oto's analysts. Otherwise, thank you for listening to Slate Money. Keep the emails coming. It's slatemoneylate.com our producer this week is Laura Flynn and we will talk to you next week on Slate Money.